BEARS CITED FOR UNDERPERFORMANCE

So that’s the end of the month and the third quarter. Was that storm last night a cover-up for Santa’s practice laps around the circuit? The All Share index is skulking around its all-time high and a total return in September of nearly 5% looks likely. That nasty little 15% “correction” that scared us in August has been completely erased along with the credibility of us bears who thought we had spied the beginning of the end.

I was interested to read that the official view on inflation is that it will be tamed only next year. As this statement is so clearly an optimistic wild guess (sorry – considered carefully researched opinion) I wondered why it was offered. Perhaps they too have noticed the sharp upward spiral of commodity prices – especially oil and wheat – and also conclude that bad inflation news is inevitable. Now the approved (but in my opinion, incorrect and ineffective) official weapon in this fight is the cost of money. I think we can expect it to be increased at the next meeting of the MPC in two weeks time. The present strength of the rand may also be anticipating such a move.

The end of September sees the first step in the changes to the way that the tax man seizes a portion of the money that companies pay out as dividends. The rate for the secondary tax on companies (STC) will fall from 12.5% to 10%. In principal that should be good news. Shareholders ought in future to get the loot that in the past was flowing to the National Treasury. Maybe this is one reason for the particularly frisky nature of the bull on the JSE of late.

However, the variable-dividend preference share market would appear to be reacting in the opposite way to this change in the tax. Prices of those shares have softened noticeably in the past few weeks. I am puzzled by this move. This class of pref shares undertakes to pay a specific amount of dividend (related to the prime overdraft rate) per share per year to the shareholders and issuers have had to adjust their prospectus conditions to cater for this tax change. If that amount remains unchanged despite the tax rate decrease, why should the prices now fall? The average implied dividend yield of the shares in this category is now well above 10%pa. Maybe it’s the expected repo rate rise they are anticipating and nothing to do with tax.

I never realised that it was necessary to apply for a job as a member of a provincial sports team. I thought that if you were any good at the game someone would tap you on the shoulder and invite you to pop in for a try-out or something. So I was surprised to see the ad in the paper placed by Western Province Rugby (Pty) Ltd who are apparently in need of a tight-head prop. Perks of the post include a blue and white hooped jersey with your name and the number 3 tastefully embroidered on the back. Perhaps the most surprising part was that the ad felt it necessary to state that academic qualifications are not essential but great natural strength would be useful. My CV will stay in the file.

We can’t be certain that the ‘bokke wont again take the long way round to beat the USA in Montpellier on Sunday evening. It is not easy to watch this sub-prime sort of stuff. And then I suppose we will wake up on Wednesday morning to learn that one of the chaps has been cited for an alleged and unseen misdemeanour just minutes before the cut-off time. Unsettling. Someone out there fears the ‘bokke almost as much as the two McLaren drivers distrust each other.

James Greener

28^th September 2007

IS A PERMANENT BULL MARKET OUR HERITAGE?

Even though the All Share index has not yet set a record high this week, its impudent younger brother, the Top 40 index, has done so. Once again, bears are sporting egg- splattered faces. The main reason offered for week’s bullishness is that Governor Bernanke chose to drop US interest rates and surprised everyone with the aggression and style of the move.

This is the first time since taking over the job that Helicopter Ben has tugged on the big lever in the corner of his office at the Federal Reserve. He is the man who is on record as saying that dropping dollar bills from a helicopter is also a feasible central bank strategy for addressing monetary problems. He must have been sorely tempted to invite his predecessor Sir Alan for a short chopper flight this week. The aging alleged guru has been seizing the limelight with unhelpful commentary and a book of criticism about his former bosses. Tacky.

Another unappealing idea has turned out to be the system of quasi-government so-called Education and Training Authorities (SETA). Dozens of these things exist and each one feeds on levies raised from real businesses within different industries and sectors. Naturally, the quality of staff running these leech-like entities is highly variable and all too often stories of incompetence, corruption and larceny reach the news. One example appeared recently when the dullards that run the Transport SETA announced that they had written off their R252m investment in the disgraceful Fidentia Asset Management outfit that collapsed. Fair enough, anyone can make a bad call, but firstly to slip into the announcement that a further R2m from an internal fraud was also gone and secondly to claim that the Authority would still be able to meet all its commitments despite this shortfall is breathtaking arrogance. If this is true, why did they need so much money in the first place?

The notable feature of the futures close-out yesterday was that the JSE systems pretty much handled the massive volumes without any serious calamities. No particular price trend emerged during the event and I guess that traders were more focussed on domestic practicalities of getting the deals done than watching the overseas screens for news to panic or exult about. That came later in the day when the Proteas slid ungracefully from the Twenty 20 world cup event. I suggest that we get our money’s worth from these well-paid young men by assigning them to stadium security duties for the rest of the tournament. They should not now be permitted to withdraw to their golf-estates and watch on TV as the Aussies lift the darn trophy. With now only one sports team left in a world cup tournament, SA Breweries are probably correct in their forecast that the country will not run short of beer in the next few weeks.

More bad news for taxpayers appeared this morning in the form of a R70 000 advertising bill to allow the Department of Health to scold us for not appreciating them or their minister enough. Just do the job lads and you’ll get all the appreciation you deserve. And I hope that the Home Affairs department has noted that the Chinese are reportedly solving their problem of jobless rural citizens moving to the cities by sending them to Africa. That’s OK. Just don’t send the planes back empty please. In the markets we call it the switch trade.

The ‘bokke really should be able to make our Heritage Day long weekend and national braai day reasonably happy. Can anyone actually find Tonga on a map?

James Greener

21^st September 2007

SHOW ME MY MONEY

There’s a photograph whizzing around the internet today which shows an orderly but lengthy queue. The line begins inside the London City branch of one of Britain’s largest mortgage lending companies and winds down the street. This morning the company was reported to have been turned away empty-handed from the Bank of England when it asked if it could borrow a few quid. I doubt that the people in that and other queues reportedly forming elsewhere outside other branches of the company are rallying round to offer bundles of cash to the beleaguered institution. I would rather think they are trying to do the opposite and leave the premises with folding stuff that they will pop under the mattress for the time being. These are amazing scenes. That allegedly “small and contained” sub-prime debacle in the US is spreading its tentacles.

It is now quickly dawning on people who actually have money that considerable numbers of  their fellow citizens who have been borrowing it are really unable to meet the interest payments. More seriously, they are also not in any position to repay the principal amount either. This is because in the worst cases they have consumed it or because the assets they “invested in” have plunged in value. The intermediaries in this whole sorry mess are now suspected of being rather too cavalier in their promises to the lenders and rather sloppy in their evaluation of the borrowers. The fact that many of  those intermediaries have been seen to be standing up to their navels in fees and commissions during these last few years of alleged plenty is not improving tempers. The fear and greed pointer is sliding towards the F word.

In the US, the problems for the savers and investors is compounded by the fact that the dollars themselves that they are extricating from the ruins are falling in value against oil, gold and other currencies. The demand for “safe” US treasury paper has been so large that interest rates have been pushed down and that too is putting pressure on income. It is a mess.

I do believe that I am not being naive and complacent when I claim that domestically in SA there is no crisis of comparable size or severity lurking. Nevertheless, the banking shares on the JSE are being smashed and are leading the whole market away from the local peak it attained this week. The September futures “close-out” event takes place on Thursday afternoon and may be seen as a reason to ratchet up anxiety levels a notch or two. These are exceptionally interesting times.

Only the largest three gold mining companies of the dozen or so that are listed on the JSE seem actually to be making any money. This week I saw news of another one that hopes to get permission to reopen the ancient workings that used to define the southern edge of Johannesburg city. Mining is not for pessimists or sissies.  But I suppose this is another of those opportunities to “Unleash Your Investment Potential’ – whatever that might mean.

As well as trying to cope with unfolding events in the markets there are at last two international sporting tournaments clamouring for my attention. Now let’s get this straight. If England beat Australia this afternoon then the Aussies go home early. Come on England! But tonight we need to beat England ourselves so we don’t meet Australia in the semis. Whew! The marketing geniuses down at SA Breweries have replaced the old six-pack with the eight-pack. Not a moment too soon.

Have a wonderful safe sporting weekend and may your teams win (but not against us).

James Greener

14^th September 2007

SUMMER IS A’COMING IN. LOUD BLOW THE REF’S WHISTLE

I was not terribly reassured by the news that the banks’ own industry association had paid a quarterly subscription to the wrong organisation. Apparently it took four months before the R360 000 error was discovered. In the meantime, the rightful beneficiary had not noticed the shortfall and the lucky recipient had spent the unexpected loot. Requests from The Banking Association for the cash to be returned have been ignored.  It comes as no surprise that the free-spending outfit is run by politicians, and it is gloriously ironic that it is an organisation which, amongst other things, lobbies against high banking charges. I guess that charges will soon go up again chaps. There’s a loss to cover.

But the theme of carelessness with other people’s money is very strong and widespread at the moment. One fund after another all over the world has been telling their customers that they really should not call up and ask for their money back. It is only when the fund needs to sell their “investments’ in order to pay out those whining customers that everyone learns the awful truth that many of the bits of paper they hold are worth very very much less than they were being valued at. Oh dear.

That “pain index” measure that I have told you about before has recently been dropping back from the record highs it reached at the end of last month. However, this afternoon the USA released some data that has caused panic to break out and the bulls to flee. That number has the unromantic name of “non-farm payrolls” and today’s statistic suggests that Americans are losing their jobs. Now an unemployed American is undoubtedly less able to go shopping or pay off the mortgage and this is bad news for a world that has become dependant on the American population doing both those things with enthusiasm. Markets have swooned, the dollar has tanked and the gold price has broken above both $700 and R5000 per ounce. The pain index is definitely on the way up again. Traders on the wrong side of this move will be thronging the bars tonight seeking comfort in the bottle.

Investors now have a full weekend to absorb and digest this news and I would guess that the market weakness will continue on Monday when they do make that call they have been told not to make! Even conservative good quality portfolios here in SA will fall in value as speculators race for the exits. However, there is still no evidence that good companies are cutting or skipping dividends and so cash flows should remain healthy and can be accumulated for the excellent buying opportunities that I am sure will turn up, but  probably next year only.

Why did it take so long to confirm that the otherwise unprepossessing one and a half kilogram piece of stone was in fact a diamond? As I recall, the country’s first diamond find was confirmed when some clever chap in Grahamstown scratched his name on a windowpane with the gem. Nowadays one probably doesn’t have to travel to Lower Albany to find a suitable window, but the principle remains the same. Now we can look forward to so-called celebrities fighting over who is going to be able to afford to hang this particular bauble around whose neck.

At last, tonight the rugby world cup gets underway. It is a long haul from here and hopefully we will have interest in it right up to and beyond the final whistle. The warm weather has at last returned and the fridge is stocked. What more can we hope for? That the ‘bokke survive the Samoan encounter undamaged?

James Greener

7^th September 2007

THINGS ARE GETTING OLD AND SMELLY

I have had lots of fun catching up with all the market activity that took place while I was away. Prices have been all over the place haven’t they? As expected, the stories from the US of A tell of rapidly growing piles of rotting investments although amazingly, so far, not too much has been unearthed in their equities markets. I am, certain, however, that the soft and nasty stuff is there and will stink all the worse for being left so long in the dark. Nothing especially bad in any market here in SA has yet been reported and hopefully we are in better shape. I do, however, think that we are being rather naïve about our currency.

For several reasons, most of us focus on how many rands we need to buy a US dollar and it has been around the level of just over 7 for so long now that it sort of feels “right”. Against other currencies, however, there is no cause for such misplaced and benign complacency. The rand is a runt.

Although ridiculed by more sophisticated analysts than I, the behaviour of the price of  a well-known metal called gold provides an interesting and frightening measure of what has happened to our money. These days you need more rands than ever before to buy yourself some of this gold. In fact something like R153 000 per kg (and you thought biltong was expensive!) Smart folk will ask why you would want to and my simple reply is that 18 months ago, a kilo of gold cost just R100 000, and it was half that price when we were welcoming the new millennium. Now before you race out and fill your boots with the metal, I should point out that the stock market has performed even better than that in this time. That of course is the same as saying that the JSE has provided a positive return after inflation. This note is just an illustration of the falling worth of our currency.

Talking of stuff that has gone down the drain, what are we to make of the Gauteng Government’s call for tenders to provide a Status Quo Analysis of the Municipal Sewerage Treatment Plants (sic) Capacity? Don’t we have anyone working for those municipalities who can do that as part of their job anyway? Can’t they be trusted to tell us the depth of ordure we are in?

One of the cell phone network operators reported this week and the fact that they have 13.5m subscribers in SA alone is not entirely good news. You may have noticed that the bureaucrats got their way and phone FICA is upon us. In what we are assured is a move to bust crime, every cell phone owner will have to provide the usual nonsense of certified copies of ID, address (so the crooks will know where to go to get which model phone) and doubtless other guff. Chalk up a plus for photocopier and paper and storage suppliers, but a huge minus for the time and cost of this stupidity. Can’t you just see the mess when you take your papers to one shop only to be warned months later by some call centre in India that they have been lost and your phone will be blocked! Who believes this will have any effect on decreasing crime? Not me. In fact I predict an increase in the assault of cell phone shop staff.

Also in need of  some firm clips around the ear are the buffoons who scheduled the Twenty-20 Cricket World Cup at the same time as the Rugby event. Circus Cricket hadn’t even been invented four years ago so could it have been all that hard to have glanced at a calendar and picked something different from 2007?

The trip to see the Namaqua flowers was a great success although it was a bit alarming to look around at one fellow tourists and realise that this trip is a sort of rite of passage for greying empty-nesters!

James Greener

31^st August 2007

DEAD WOOD, BOUNCING MARKETS & INTERESTING TIMES

I did warn that my leave commitments in August would probably mean a lengthy break in the production of Tidemarks. However, there is so much happening now that I could not resist popping in to the office to jot down a few thoughts.

Naturally, the premier story is about the markets where eye-popping price moves have seized everyone’s attention and some people’s wallets. It seems that my long-standing suspicions that things were going bad in the US housing and debt markets are turning out to be correct. I am a bit embarrassed to admit that I am really enjoying the stories and reports of astonishment, anguish, apoplexy, and arrogance that are increasingly coming to light. Unfortunately, there are innocent victims at the end of the food chain who are now finding out that they had been paying too much attention and far too many fees to investment “experts” who knew no more than anyone else what the future held in store. In an alarming number of examples, it seems that investors were being encouraged to buy instruments of such dazzling complexity that no one knew what they were or especially what they were worth. Almost nothing is the answer to the last question in most cases. And my greatest glee is reserved for those asinine comments from glib spokesman who assure us that the $20bn loss that they have (so far) admitted to have taken in this or that department will have no impact at all on their overall business. If this is so, why were they involved in that area of activity in the first place?  

These announcements display the same level of contempt for their audience that our own state-owned airline did with the news that they would in future not serve any alcohol to passengers on domestic flights before noon. This move, the statement smoothly assured us, “was aimed at improving customer service and comfort”. I beg your pardon? Just how does the denial of a comforting service improve that service? That outfit is doomed.

Why is it that innovative investment instruments are launched in the market at the very moment when most investors are thinking about running away? In the next few weeks, two interesting new Exchange Traded Funds (ETFs) will be listed. One will track the SA Listed Property Index (J253) and the other the Dividend Plus (J259) index. One can spend an unprofitable few hours researching the construction and behaviour of these indices in order to decide whether they suit your portfolio, but the reality is that they will pretty much deliver what they promise. Readers know that I rather like these things, with the proviso that there are occasions when one would choose not to increase exposure to the markets in any way at all. There is an opportunity to climb aboard these funds at their launch and so avoid dealing costs. This is always a tempting offer but should not prevent you first thinking if now is when you want to buy them. For me, the Dividend Plus is the more intriguing of the two, but its price will still fall if, as I think, the present market corrections are still far from over.

Before leaving on my trip to view the living and vibrant spring flowers on the West coast I invite you to consider the following challenge thrown down by a political group yesterday. It concerns the invitation to identify “untouchable deadwood” within the cabinet and “to provide evidence to any dereliction of duty by any deceased or current serving minister.” Might I be so bold as to suggest that any deceased minister is no longer doing a good job and is undoubtedly deadwood? Don’t get me started on the living ones.

James Greener

15^th August 2007

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