FLOWERY BEAR

You will not be surprised to learn that the “pain index’ that I calculate for JSE market from time to time is soaring way up towards record highs. This indicator tries to quantify the losses that could be suffered by a short term trader who managed to get the intra-day and day to day market moves utterly wrong. In the past ten trading days there have been seven with a range in the All Share index of more than about 500 points. The first day of August bared its teeth with a massive 986 point range. These are huge and savage moves, especially when superimposed on the absolute decline of almost 2500 points that has hurt even conservative investors. Fortunately, only the insanely unlucky punters will have suffered all of the pain but there have still been enough injuries for the stretcher parties to have been needed here and there. We have yet to see any local reports like those emanating from the US where funds have told their clients not to bother asking for their money back as there isn’t any left!

I think that neither these bouts of massive volatility nor the sharp declines are over. This is the reason for my reluctance to suggest that anyone commit large amounts of new money to the market at this time. Just be patient and wait for the better values that will certainly reappear in due course. Existing portfolios that have reasonably balanced holdings in well-managed dividend-paying companies can sit out this storm. Inevitably investors will see valuations fall for a while but probably not below where they were even two years ago. In my view there is little merit is trying to get too clever and sell off large chunks of the portfolio with the intention of buying it back when the bear has done his worst. Firstly, I note that perfect timing is probably impossible and secondly, capital gains tax and dealing costs are eager supporters of frequent trading strategies! If you are convinced that the market is going to plunge a long way and would like to benefit from that move, then there are derivative products on the JSE that allow you to place that bet. And betting is what it amounts to.

While watching a program about China’s preparations for next year’s Olympic Games I began to wonder why had not yet seen any speculation about will happen in that country when it is over. Down here in SA, we have already expended acres of newsprint and gales of hot air on fretting about post-2010. Might the global slowdown begin when the flame goes out in Beijing next year?

Local slowdown, however, is not evident as the reporting season hots up and double-digit earnings growth rates are being trumpeted by all sectors. Construction company growth rates are even threatening to get into treble figures!

I do not expect to be able to send you Tidemarks for the next three weeks. Firstly, in unison with most of the nation, I have decided that the Women’s Day public holiday next Thursday would be discriminatory unless accompanied by a Man’s Day on Friday. I will be using that long weekend to carry out an experiment into the travelling qualities of Castle lager by transporting several cases to the Umfolozi. This, however, will not be the end of my self-indulgence. Immediately thereafter, I shall be off to Namaqualand. With luck, the spring flowers will be in bloom and shares will be far from my mind. Please keep good care of the markets during my absence and ensure that there will be something for me to write about when I return.

Keep safe.

James Greener

3^rd August 2007

RIDING AND A FALL

Well that’s July done and dusted. The JSE’s month-end runs will take place tonight and portfolios are going to have a rather tattered look to them. The All Share index has retreated more than 2 000 points in the last few days as substantial selling has taken place. At last, people have noticed that huge amounts of the US debt mountain are either already in default or likely to go that way soon. Several major borrowers this week have had to rethink their plans when they failed to find lenders. Suddenly cash has become scarce and those who have it have become rather careful about where to place it. Even here in SA, we have had the rather unexpected sight of a new listing failing to raise all the cash it required. On the other hand, there has also been one that was many times oversubscribed, so it is not yet an undoubted bear market as defined in the Bear Market Control Act of 1969 (amended 1987).

Talking of legislation, did you notice the near hysterical reaction of the tax man to the rather appealing suggestion that house owners should deduct the cost of their security installations from their tax payments? As one who has recently shelled out large sums for just these things, the idea looks good. However, SARS had no hesitation in warning that this sort of criminal act was far more severe than the assaults and robberies that I am trying to prevent happening in my own home.

I have always enjoyed watching the Tour de France on TV, mainly for the simply wonderful views and panoramas that one can glimpse in the background. The caravan of cyclists, motorbikes and cars weaving through the landscape can also be very exciting. For several years, I felt a special affinity with the race leader as he too had managed to defeat a dread disease after a year of rather toxic drugs. My particular chemical regime, however, did nothing to improve my cycling skills. But nowadays, it seems that virtually all the participants are in need of continuous medication. But because this is against the rules, the judges have been waving decks of red cards and the field of competitors has been thinned almost every day. Pretty much anyone who turns up on the Champs-Elysees on two wheels on Sunday will have a good chance of hoisting a trophy and getting a bouquet to toss at the photographers.

The other good news is any prize money that the lone South African rider, Mr Hunter, may pocket,  will be now be worth a lot more back home than it was when the race started. The rand has suffered very badly this month especially against sterling and the euro, a factor which has also helped foreign investors take a dim view of the JSE and the bond market. Gold too has stopped taking the steroids it was on earlier.

The next scheduled interest rate decision by the Reserve Bank is less than three weeks away. All the tired old reasons for and against a hike are being taken out for an airing. I am interested by the quiet reappearance of the practice of disintermediation. This is when borrowers and lenders negotiate directly and leave the banks out of the deal. It sometimes is an indicator of high rates. We shall have to wait and see what it means this time.

Have a safe weekend and remember not to use any of the copyrighted phrases, words and numbers when referring to the sporting event that will take place at the southern tip of Africa in the year after 2009 between 32 international teams of 11 men, each selected for their desire and/or ability to propel with their feet a spherical bladder into a net.

James Greener

27^th July 2007

CAN ANYONE ELSE HEAR THAT NOISE?

A new reader of Tidemarks has suggested that I should devote more space to good news. Well, I suppose so, but it is difficult when I have to start by noting that the All Share index did not set a new record high this week. The market was very patchy with no particular trend or sector yelling for attention. However, the rand did manage to strengthen quite considerably against the US dollar. Some commentators suggested that this might be because of the strong rumour that the suits from Standard Chartered in London were down the Rivonia Road measuring Nedbank headquarters for curtains. If this were true, would not the rand improve versus sterling as well? This it certainly has not done. This is the time of year when there is a dearth of company reporting and it leaves the stage clear for any number of one-act wonders to tread the market boards. At least we have been able to tune the dealing room TVs to the cycling (how about the good news there?) and of course the golf (where we are ever hopeful of good news )

Did you note the Guateng MEC who explained that “only 2% of municipalities managed a clean bill of (financial) health” and that this hinders their access to commercial credit? By this, he presumably means the banks won’t lend them any money. However, he cheered himself up with the observation that Joburg had managed to place several bonds with the private sector recently and that this seemed an excellent source of funds for the cash-strapped local authorities. By this, he presumably means that fund managers are a soft touch and are quite inclined to consign their client’s money to never-never land. He may be surprised.

I wonder why the main news media are not devoting more time and space to the quite amazing amount of value that appears to be vanishing from the US housing and credit markets. Even Governor Bernanke’s brow is said to bead up when he is asked to comment about this area of the financial landscape. Maybe they don’t want to frighten their readers. Or perhaps it is that they don’t grasp the nature and the implication of it all. I think it must be a bit of both. For a start, there are these confusing units of millions and billions and now even trillions. Without even fretting about the now very boring issue of whether they are the trivial English billions or the other proper kind, these are all impossibly big numbers. Most folk, and especially journalists, get mightily confused with any sum that they haven’t themselves actually handled. One can see breathless stories of outrage when someone spends their own money on a suspiciously extravagant indulgence while on the opposite page the disappearance of tens of billions is passed over with scarcely a mention. Maybe the nonchalant way that the official who announces the event, will airily dismiss the loss as “unlikely to impact earnings/the budget/our policy” is successful and puts people off the scent of the real scandal. Sadly, despite my reader’s request, I must reiterate that I think that the situation unfolding in the US will be extremely serious for financial markets. You just can’t ignore the elephant in the room forever. Especially when his tummy starts to rumble.

I suggest that the department of Home Affairs should immediately set up desks at all the holes in the fence along the Limpopo and in return for a set of fingerprints and a photograph, issue everyone with an ID Book and a tax number. Lets face it, these fellows aren’t going back home anytime soon so, let’s catch them up in the system as soon as possible. Oh, yes, and give them each a R200 note, so they don’t immediately have to come and take mine.

James Greener

20^th July 2007

POISON PEN

“There is no news so bad that the market will not get bullish over it.” This remark says it all. The bad news items that the markets are currently ignoring include the rapid fall in the value of a US dollar, the entirely predictable and predicted sub-prime mortgage melt-down and back home, the calamity that is Zimbabwe. Traditional wisdom – which is proving as useless as any other sort – would have us believe that investors should be terrified by these and other events and would be selling at least those shares which appear to be exposed to these kinds of events.

Not a bit of it. The All Share has broken above 30 000 and the hottest investments in Wall Street are the shares being offered by the listing of Private Equity Firms and Hedge Funds. The former businesses specialise in buying companies cheap, shuffling the assets, and then selling them expensive. Surely, their strategy is no different when it comes to selling their own company? Hedge Funds have caught the public imagination with the mega billions in fees they have extracted from their clients. Now can it be that the hedge fund whiz-kids have been seized by a fit of altruism and are going to share that income with shareholders? I doubt it. Rather I think that the clever lads and lasses are exiting the game at the time when they see those fees collapsing.

One of the great luxuries that I enjoy these days is the time to read and think. And I read a great deal. I visit probably upwards of two dozen websites daily. Of course, not all of them concern the markets. I found a wonderful explanation of the mechanics of knitting yesterday. And then I enjoy the sites that are devoted to trashing antipodean rugby referees.

I recently spent a few happy hours learning about the structure of the US mortgage industry and the array of complicated investment products that it has spawned. I was delighted to discover the existence of “toxic waste”, the value of which is certainly a whole lot less than what is shown in the portfolios of the funds that own the stuff. The general idea is that everyone acknowledges and recognizes that within the vast credit industry there are certain to be loans that will not and cannot be serviced. However, the plan is that these worthless credits are mixed thoroughly into a bouillabaisse of other (allegedly) better quality loans. This soup is then ladled into the savings funds of widows and orphans. In theory the risk of default will now be spread so thin so as to go unnoticed! Aiding and abetting this fiction is the whole industry of “Rating Agencies’ who (for a fee, naturally) anoint the gruel with a code that denotes their judgement of the risk that the investment will not pay the promised interest or the principal amount. I have always fretted about the way in which a simple binary “pay’ versus ‘not pay” situation can be captured by a spectrum of symbols ranging from AAA to D with + and – signs sprinkled in for added value! Sadly, now, fund managers and their clients are discovering that their investment grade investments are filled with rather more of that toxic waste than they thought and the rating agencies are not very interested in this development (except, presumably, that for another fee they will downgrade the original rating). I await the next chapter of this story with interest. I think it will not be a comedy.

I am also not finding any humour in this long and deep cold spell. Thank you Mother Nature. You have made your point about climate change. Now please can we have our temperature back? It would also be nice if the All Blacks exhaust themselves with the haka tomorrow morning.

James Greener

13^th July 2007

A BIG SPORTS DATE

There is almost as much nonsense being written about tomorrow’s triple seven date as there is about the market. My view is that it is merely one of the few occasions when we agree with the USA on how to write it down. In years to come people on this side of the Atlantic will wonder what happened in New York on the 9^th November. One day too there be a time when we look back at the time that the big bear market of 2007 or 2008 or ? began and recognise with perfect clarity the warning signs. Right now, of course, every possible warning sign has turned out to be wrong. Interest rate hikes, declining confidence, imploding housing markets, messy wars, strikes and snow on the highveld have all failed to stop the buying. The All Share has not quite yet returned to its habit of setting record highs each week, but the June scare seems to have gone away. Even the rand has been lurking below 7 to the USD which might indicate that overseas buyers are returning.

The market is also the scene of several large corporate actions that are sewing dismay and confusion among shareholders as the prices of old favourites seem to drop suddenly. In most cases, what has happened is that the holding has spawned shares in a newly listed company. Although these are commonly recognised as unbundling transactions, the investment advisors are scoring points and big fees by dreaming up all sorts of different names to describe the events. Adding to the mess is the fact that the registration system fails to allocate shareholders the new shares immediately they are created and so portfolios seem to be out of balance. I wonder if this rash of disposal of so-called “non-core” assets to shareholders is a sign that the directors feel that now is a good time to pass them on because the future as they see it is not so rosy.

The SABC, Telkom and the government are spending public money to encourage us all to vote for Timbuktu as the sole African site to be one of the seven wonders of the world. I have no view on the appropriateness of this candidate but suggest that there are other amazing things on this continent that deserve nomination. Like SA’s crime statistics, or Zimbabwe’s inflation, or Nigeria’s fuel shortage or even the Gautrain.

Last week’s letter brought the greatest response that I have ever enjoyed. I was very touched to see how many people were concerned that I am joining the flow of refugees leaving Joburg. I assure everyone that there will be phones and computers where I am going and that provided people don’t mind dialling a different number and using a new email address it is my intention to carry on my client friendships and relationships unchanged. For some of you the trip to visit me will be a bit more onerous and the view from the office will be different. For a large number of reasons I don’t think the move will take place until early next year, so we all have lots of time to see how things might work out.

The first weekend in July is always packed with sporting event to supervise from the armchair. The only certainties are that the opening stage of the Tour de France will be won by a man on a bicycle, the Durban July will be won by a horse and that both winners will be tested for suspicious substances. I guess that rain at Wimbledon and Silverstone is a good bet too. But most importantly, it would be especially gratifying if the ‘bokke give the Wallabies a hiding, after all the nasty things they have said about us.

James Greener

6^th July 2007

COLD AND UNHAPPY

There is a small but nevertheless rather savage bear roaming the markets suddenly. Whether he (or she) will grow in size and ferocity, we do not know. But even so, quite a few portfolios have been placed on the danger list and even some hedge funds overseas (and one local one) are reportedly mortally wounded and will never be seen again. I am sure, however, that the pull back is not yet sufficient or developed for any irresistible buying opportunities to have emerged. I am also confident that prudent and conservatively constructed portfolios of dividend paying shares will be able to ride out the storm without the need for any panic selling.

I note with despair that the politicians have again managed to fix something that was not really broken. The new Credit Act may have laudable and understandable motives of trying to protect naïve and ignorant folk from the clutches of the unscrupulous. However, stories are emerging that the Act has resulted in the virtual seizing up of a huge range of potential credit transactions. As usual, the main beneficiaries are the suppliers of paper, photocopying and certification services. This latter service seems to be the main duty of at least one constable (or perhaps even an inspector) at my police station. His conversation with his colleagues continues unabated as he steadily works his way through the piles of paper alternately mashing each page with a large rubber stamp and then flourishing his signature across the imprint. This process converts the photocopy into a sacred document willing accepted by compliance officers across the land, so that they can tick a box and be ready for the dreaded inspection. What I have yet to discover is the risk that this silly process is attempting to mitigate.

It would be so much better if that policeman was freed up and motivated to get out and catch the real criminals like the ones who earlier this week burst into the home of our friend and neighbour. She was bound, gagged and harassed for six hours before the assailants left in her car loaded with all the electronic goods, jewellery, cash and liquor. During her ordeal, she was told by the thugs that the ruling party’s failure to provide them with jobs and income was the reason for their criminal career. I doubt this is really true but it does reveal an interesting attitude among those who have realised that crime does pay these days. This is the second appalling criminal incident in three months that has been endured by a close friend who lives in our suburb. Our own recent brush with a burglar who smashed a large sliding glass door to get into our house took place fortunately while we were not at home. But it is enough, and we are making plans to leave this city.

Ever the analyst I was intrigued to hear that the thieves made off with our friend’s Digital Satellite TV decoder. Because of the encoding and enabling protocols required to make these things work I had always imagined that there was little incentive to steal them. However, with most soccer broadcasts soon moving to the pay channel the criminals must have found a way to overcome the blocking process and so hence the demand for decoders.

Tidemarks is early this week as I am taking a long weekend to go and see the snow. And to look for somewhere else to live.

James Greener

28^th June 2007

ALL PRESENTS NOW POLITICALLY INCORRECT

MPs may now accept gifts to a value of R1500 without the need to declare them. This amount is perfectly rigged to ensure that a presentation pack of Johnny Walker Blue with matching crystal glasses will slip beneath the radar. This gift price ceiling was last set in 2001 at a mere R350 which demonstrates that the actual as opposed to official rate of inflation these past 6 years has averaged 27%pa. What poor timing to reveal this information as the civil servant’s strike continues to bicker about single digit percentage wage increases.

At least two other organisations made the papers this week with their own sob story about not having enough money. Unlike the teachers and nurses, they both fail to make a convincing case for their existence let alone deserving any more cash, particularly and especially from the taxpayers. Both Business South Africa and Proudly South African seek membership subscriptions for most of their income and clearly their members have come to realise that they were not getting value for money.

THE national broadcaster has been handed a few hard lessons on this topic of value for money recently. In the finest tradition of snoozing and losing which they attempted to disguise with arrogant bluster they failed to acquire broadcast rights for the country’s popular domestic soccer matches. This will not have escaped the attention of the big spending advertisers so I guess a TV licence fee increase won’t be far off. No mention of saving money by firing the hopeless sports staff.

Continuing in the vein of matters which I think are interesting and scary but which the markets are laughing off as irrelevant, comes the USD3.2 bn loan that Bear Sterns (not the most propitious name for a finance house) is borrowing from Peter to pay Paul. This cash, they hope, will prevent Paul from running down to the market with a basket of bonds to see if there are any buyers for the bonds and if so, at what price. Bear Sterns obviously feel that this trip is unwise. The basket might turn out to be worth more than its contents. And if the market hears about this then quite a few houses of cards, might fall down. One of these houses is a hedge fund named “The High-Grade Structured Credit Strategies Enhanced Leverage Fund” that has reportedly already lost wads of money for its investors. Frankly, they really should have known better than to invest in something with a name like that. Watch this space.

During the 100 minute long close out event on Thursday, JSE turnover was running at around R3bn per hour. This rate is more than double the average normal rate and thankfully the systems seem to have survived. I suppose that one really ought to take this as a sign to load up on shares in the JSE itself, but I personally have a few prejudices about this particular monopoly and furthermore it is dreadfully overvalued already. The All Share did indeed set a new high during the futures close-out but has now gone to sleep as the aftermath of the close-out party and the advent of half term and tomorrow’s test match in Durban has cleared many dealing rooms.

As well as being the venue for a Botha family reunion, the test match will be an exciting event. Let’s hope that none of the crowd chooses to repeat history and pop down on to the field and attempt to adjust the ref’s attitude. Did you see Chairman Blatter and the SA Soccer  worthies beaming at the world from beneath their shiny and personalised hard hats at the site of a stadium this week? There didn’t seem to be any construction yet above knee height, so just what was the headgear for? Flying pigs?

James Greener

22^nd June 2007