BARGAIN HUNTING IN THE DARK

The precise moment of midwinter occurs tonight in the wee hours. For me this is always a very important moment and I delight in the thought that the hours of daylight will now start to increase and summer is on the way. On the other side of the equator the position is reversed and perhaps this explains the huge bear activity as they prowl the markets fattening up for hibernation. There are, I think, no true southern hemisphere bears. Except for me, of course.

No one can deny that the JSE is also in a bear market. The market index that excludes the mining and resources shares has lost almost 10% in just over a month. Another move like this and it will be threatening to break below the lows it attained in January. The All Share index, which is heavily influenced by the heavy hitters in the mining sectors is down a comparable 7% or so in the last few weeks but the difference is that the January lows in this index are still a long way down. Anyone glancing at this chart might think that is has not been too bad on the JSE and begins to wonder why their portfolio does not echo this observation. The simple reason is that most prudent portfolios do not have the index weighting in these big gorilla shares. This is one of those times when I remind myself that attempts to categorise and average shares and prices in the stock market is not always useful. Sometimes the behaviour of the mavericks overshadows the index.

The message that the price of oil is terrifyingly high and that it will impact every corner of everyone’s life is now sinking in fast. There is a growing acceptance that fuel prices will not fall anytime soon and people are beginning to try and work out what changes are going to happen to the economic landscape. Even mainstream newspapers are carrying articles about people altering their spending patterns. It seems unreasonable to expect that almost any company will be immune to these seismic shifts and the trick of course is to decide which ones, if any, are likely to be beneficiaries. Low end food stores might well see increased traffic. They would be advised to dim the lights to decrease the possibility that you are recognised in the aisles by your friends. I wonder how the luxury car market is really doing at the moment? There are certainly plenty of pre-owned models on offer. And office talk often dwells on housing price horror stories (for sellers that is).

So the electricity price negotiations between Eskom and the unfortunately named Nersa have come to an end. I suppose that third significant figure in the percentage increase was tacked on to try and fool consumers into believing that the bargaining was so tough that even a half percent was fought for. Almost the first response from Eskom has been to reassure the country that not all the extra loot will be funnelled into executive bonuses. Some of us are sceptical about this. We are also unimpressed by the seemingly never ending squabbles that are being fought both at the national broadcaster and in the ranks of the judiciary. In both cases what we the public want is for these matters to be dealt with speedily and cheaply in a way that leaves both institutions more fit to carry out the tasks we have assigned them. Their internal disputes are boring.

Almost as boring as the lists of excuses that are offered as to why this nation of almost 50 million can not find 11 men capable of putting a large ball in the back of a net on a regular basis. I am looking forward to the clash of the previous and current ‘bok coaches at Newlands tomorrow.

James Greener

20^th June 2008

BANKING IGNORANCE

I think the most significant development in the markets this week has been the amazing strength of the US dollar. Not only is it now worth more than several  billion Zimbabwe dollars and more than eight South African rand but cash has been flowing steadily out of every major currency into the greenback. I am mystified why people want to own the currency of the world’s most indebted nation as it battles with recession. In what markets are they are they expecting to earn a return? Interest rates in the money market are below the inflation rate – even if you believe Helicopter Ben’s hint that he might raise them – and bond market yields are climbing. The unconvincing little bull that slouched into the equity market in March seems to have been sent packing. And while there are many cheap and empty properties coming on the market it seems likely that there are plenty more to come. I suppose that there must be some very profitable export businesses in the US which are rather cheap but understandably the Americans get twitchy about foreigners owning too much of their capacity.

Back home of course the important news was that Governor Mboweni sold the market a 200bp dummy pass and stepped inside to score under the posts with a mere 50 bp hike. The share and bond markets reacted with a knee-jerk bounce of relief which does, however, look to be short lived. The rand hated the good news and slumped.

I am intrigued by the stories that the oil exploration business is now the employer of choice for science and engineering graduates. For many years, people with number skills have been invading the investment industry and confusing genius with a bull market. Now that the bull is growing tired and it turns out that investment is really just about the fiendishly difficult job of buying cheap and selling expensive, the  disillusioned “quants” are drifting off to look for places to dig holes in the ground. I should declare my own interest here and admit that I was one such escapee from the mineral exploration business many years ago. I have seen a few bear markets too. And I think that the development discussed above is just more evidence that the golden age of banking is heading into one. Yet another bank has admitted that there were some nasty skeletons in the cupboard and that it would like shareholders to send some more money please. Everyone is losing confidence in the trustworthiness and worse, the integrity, of the financial industry. Belief in their skill not to get involved in bad business disappeared long ago. On the JSE, the financial sectors are leading the way down as investors begin to note that the era of steadily growing earnings and dividends is under threat. The fact that the bank index pe ratio is now below 7 is more than just a temporary pricing anomaly.

So what sectors should one think about buying? Areas where the state is spending money seems a good idea. Once again the Gauteng Provincial Government provides the opening by calling for proposals from organizations that can teach municipal councilors on subjects such as Leadership, Management & Governance and Ethics & Public Management. Why should taxpayers have to foot the bill for teaching these people how to do their job? But I suppose it is our fault for electing unsuitable candidates to run our cities, provinces and country in the first place.

I have been sleeping in front of these interminable soccer games from Euro 2008 wondering when they will use a TV ref to banish those players who can make a missed tackle look like a multiple fracture with head wound complications that is cured by an icepack.

James Greener

Friday 13^th June 2008

WONT WATCH THE BIRDIE

So Governor Mboweni is becoming camera shy? That’s cute. He believes (probably correctly) that photographers and picture editors are always looking for an unflattering moment to plaster across the front page with an appropriately droll caption.. We shall be watching you on TV even more intently that usual on Thursday, sir. If you carry out your threat to raise rates by a large amount nothing will save you from the ire and mockery of the nation.

There were plenty of market-moving events and speeches this week. A talking shop in Cape Town has allowed all and sundry to stand in front of The Mountain and offer us their opinions. In the written word I was intrigued by the reported offer to buy the second worst fixed line phone company in the world for a price much greater than its market value, provided the company first disposed of its most valuable asset! Odd stuff that. Then, despite the evidence on the roads to the contrary, it seems that very many fewer cars and trucks are being sold than a year ago. I was alarmed by the following phrase in a hardware supply company’s report:”... sudden and dramatic reverses in the building industry.” I was even more distressed to learn that the state hands out R5.5bn per month in aid to 12m benefactors. That’s a quarter of the population! Taking this information together with the figure which shows that growth in tax receipts is slowing quickly, it’s little wonder that the bond market is bear-infested.

Keep an eye on the US dollar / Euro exchange rate. There is a growing consensus (not yet shared by me) that the dollar has seen its worst and is on the way back to world domination.

I was really very saddened by some of the stuff that appears in the prospectus for the so-called Sasol Inzalo share offering which is open to Black People only. The offer is of course a response to the state’s deeply misguided attempt to interfere in the allocation of resources through its appalling BEE program. The prospectus echoes some of the stuff that I used to find deeply embarrassing and indefensible when  I was a student in England in the early 1970s and my accent betrayed my homeland. In those days my accusers would brandish the annual report of which ever South African government department decided how many people needed to be reclassified from one race group to another. Now, in this prospectus, we find phrases such as “: …citizens who were regarded as Coloured before 27 April 1994, but are of Chinese origin.” Equally offensive is the need to refer investors to a definition of who qualifies as a Black Person. This is outrageous, demeaning and totally contrary to what I thought we as The Rainbow Nation were striving for. By the way, the offer appears to be very generous and worth taking up despite the trading and listing strictures that will prevail for a couple of years. Get a prospectus from any post office.

And still on this theme might I suggest that the only difference between racism and what is being called xenophobia is that one of those words is more difficult to spell.

A warming Leek and Dragon soup will be served in Bloemfontein tomorrow, and the Grand Prix from Montreal will be on screen at very awkward times and is there really enough level ground in the Alps to host a soccer tournament?

James Greener

6^th June 2008

TRYING TO BURY A BULL

There must have been a fair bit of rushing around at the Reserve Bank yesterday when Governor Mboweni’s remarks about wanting to raise rates by 200 basis points hit the headlines. Clearly whoever his minders were the previous day, had allowed him to get out of sight, and were unable to stop him putting his foot firmly into his mouth. Obviously the governor utterly failed to appreciate that the prospect of money becoming very much more expensive would have such a dramatic effect on sentiment. Presumably he was trying to frighten the inflation monster into joining all the other unfortunate visitors and board a bus for Maputo or Mbabane. Actually I don’t think that the monster was even listening, as his present primary residence appears to be somewhere out there in the world’s commodity markets.

You have to feel a little sorry for the governor who is required to spend his time in a huge office high up in Pretoria with just a single large dial on the wall and a lever set in the floor next to the door leading to the executive washroom. His job description is to pull the lever whenever the needle on the dial rises above 6. It is now at over 10. His speech this week was merely a warning that he was taking his job seriously.

The problem is that there have now been 9 tugs at the lever since the middle of 2006 when the needle on the gauge was at 3.5. Might I respectfully suggest that the lever appears to have no connection to the reading on this dial? It is time to issue the man with a new job description. Any more lever tugging and we are in real trouble. Already some banks have issued statements that reveal that the business of lending money to consumers is becoming increasingly unprofitable. Any increase in interest rates is going to make things even worse. Maybe the already cheap banking sector is going to get even cheaper?

The All Share index return for the month is going to be in the region of 5% but this is wildly unrepresentative of the overall market. About half a dozen of the heavy weight resource and mining shares have done all the work and any portfolio without overweighting in these counters will look disappointing compared to the index.

Some commentators believe that they can see the prices of resources starting to decline and perhaps even the US dollar regaining some dignity. Given the incredible exponential rise in some of the former without necessarily any similar growth in demand or fall in supply, some big price pull backs would not surprise me. I am less convinced about dollar strength, I will, however, concede that the undoubted recessionary conditions that are spreading across the US must be revealing some very tempting and under-valued assets priced in dollars. It would be ironic if the Americans woke up one day to find that the Russians and the Middle Eastern oil producers owned them.

Back home, if there is anything good that might emerge from a recession it is the hope that falling tax revenues will see a substantial thinning of government payrolls employing people to do things like calling for tenders to conduct a status quo analysis of the Gauteng Funeral Undertaking Industry. The successful bidder will also be required to “identify socio-economic opportunities, gaps and challenges that are within the industry”. Once again some buffoon thinks that public money will discover opportunities that private entrepreneurs are too stupid to identify. Why does this idiot have a job?

Lions for the 2009 Super 14 trophy? Bafana Bafana to qualify for the 2010 World Cup?

James Greener

30^th May 2008

STRIKING A CHORD

Eskom’s Chairman Moosa has reportedly complained that since it is the country’s high income earners who use the most electrical power then they are the ones to blame for the present shortage. I beg your pardon? So now it is the consumers who are responsible for the supply being inadequate? That’s a high-grade piece of idiocy! Whatever he gets paid to sit in that chair it is far too much. Rather he go now please.

In contrast, I watched an interview with the boss man at Shell who explained that he and his industry actually had no explanation for the current soaring price of oil. While demand was certainly growing, there are no observable disruptions in the supply chain. I have not yet seen anyone else raise my own point which is that the oil suppliers have discovered that the volume sold is apparently unrelated to the price and so therefore why worry opening the taps wider -- assuming of course that they can. Furthermore, a dollar no longer buys as much as it used to, so getting a few more of them for every barrel you produced, comes in mighty handy. I forecast that the move towards pricing commodities in currencies other than US dollars will gain momentum.

Also gaining momentum is the level of debt worldwide as folk make the choice between paying the bank and putting food on the table. So far, no local lender has yet reached the point where they have had to reveal that their lending books are in as bad a shape as their share prices suggest that investors believe they are. PE ratios of 7 and less are starting to appear against some big names in the sector and bargain hunters are getting itchy fingers. The assumption is that there can surely be no local bank that could report halved earnings or reduced dividends. I don’t know, but I am content to wait and see.

It comes as no surprise to me that some of the ratings agencies overseas are starting to mumble about their valuation models being broken when they were assigning AAA status to instruments which were merely recycled toxic waste. The fascination of the markets is that not only is the impossible likely but also that so many people will actually assume large positions against that fact.

For example, the desperately worrying and utterly sad outbreaks of unrest in this country that are being explained away by copious use of the X-word, has had rather little effect on the currency. On the week, the UK pound and the US dollar are just 65 and 30 SA cents more expensive respectively but the rand is still way stronger than most other times this year. Nevertheless, the continuing surge in global commodity prices enabled the All Share index to be pushed to a record high by the resources shares. There is no evidence of significant foreign investor flight.

Governor Mboweni has told everyone that he is definitely going to do what he can to keep the money down here on the southern tip by cranking up interest rates whenever he gets the chance. Life for inflation marksmen armed with just a single weapon is very simple. In anticipation of this promised tug on the lever, interest rates on everything from call to the long bond have been ratcheting upwards already.

I was surprised by the headlines that suggested that the situation in the national soccer side had reached the point where one of the world’s masters of the guitar riff had been appointed coach. Investigation revealed that the fellow who has accepted the poisoned chalice is one Joel Santana and that Carlos was the previous incumbent’s name. Joel wisely opened proceedings by “not promising to stay”, until presumably of course he had banked a few of those rather tasty pay checks.

James Greener

23^rd May 2008

MILE AFTER MILE OF BULL

All it needed was for some dealer to miss key the price of one of the big shares by a few cents this morning and the All Share would have cleared 33 000. It now looks as if we shall need to wait for a new week before that barrier is breached, although the gold price is all perky again and the resources shares never lie down until the closing auction finishes at 5 pm. This bull is determined to demonstrate that he is fit, healthy and strong. Companies, on the other hand, while reasonably fit and moderately healthy are certainly not as strong as they were last year. The terms of the equation are not surprising. Pretty well anyone labouring in the formal markets where invoices are prepared and bank accounts reconciled is aware that customers are fewer and have become more picky as the prices of all commodities including money have risen.

It is less clear that there is a similar slowdown in the informal cash economy. I watched in awe at the municipal offices yesterday as the person ahead of me settled an R18 000 electricity account with a huge bundle of grubby R100 notes encased in a cocoon of rubber bands. In our business which is closely regulated by the JSE and the FSB, we are understandably and correctly forbidden from accepting cash payments for even a tenth of that amount. Surely, a local authority treasury should equally be obliged to reject such obviously dirty money. The teller accepting this payment was busy for quite a long time and the queues became long and testy.

Minister Erwin’s latest outburst of socialist idiocy had me shooting another email off to SARS asking to be taken off their mailing list. Comrade Alec feels that it is the tax payer’s duty to fund the state to start and run businesses that the private sector will not. He refuses to grasp the simple fact that private entrepreneurs will eagerly and gladly operate any enterprise that makes sufficient money to pay its way with a bit left over for boring stuff like electricity bills. If there is no one already filling those business niches then you can be certain that they are not profitable and you can be even more certain that any government’s attempt to fill them will be a calamity. It is obvious, to me anyway, that there currently is no sustainable demand for all those goods and services he thinks he would like the government to supply.

What idiot in the Joburg city council places an advertisement calling for ideas on City Improvement Districts when that same paper is filled with pictures and stories of violence and hatred which is currently tragically consuming at least one district in this so-called world class African city. Please send the whole council department responsible for this program to join those incredibly brave policemen trying to restore order and calm. Oh, yes and reduce their pay to police levels too please.

During two long car journeys this week I tried to work out from first principles just what the ideal broker’s letter should contain. It is very simple really. An investor requires nothing more than an accurate forecast of share price movements. Pages of economic, financial and business analysis would add no value compared to that list of price changes. In tacit recognition of the impossibility of compiling such a list, however, broker’s reports usually try to avoid making outright predictions and bury the author’s opinions and views in words and phrases which approach total ambiguity. The bald truth is that the broker merely requires an order. Even if, as is often the case, it goes against the report recommendation it matters little and often provides a welcome opposite trade. After 1200km I could still see no way to change Tidemarks.

So I therefore forecast a Lions win over the Stormers tomorrow.

James Greener

16^th May 2008

SHOULD THE BULL CARRY A WEALTH WARNING?

The All Share index sliced through the 32 000 barrier without a backward glance. As usual just about any news was taken as a spur for the bull and in fact, some of it, probably actually was mildly bullish. The rand has been showing spells of strength and commodity prices are confident that Chinese demand will never slacken.

On the other hand, how can one possibly be impressed when the biggest bank in the biggest economy in the world announces that about 10% of its assets are not as wonderful as the previous management had promised? Therefore, they would be pleased to hear bids starting at $500 bn for the lot? South Africans thinking about this deal should note that this sum represents well over half of the total value of all the shares on the JSE.

Great store was set by the view from sage Warren Buffett that the worst was over in the US. If anyone gets to hear the inside story first, it has to be that man. The sight of a crowded dealing room with blinking screens and screaming traders is familiar to anyone who has by accident flipped all the way up past the sports channels. Those banks and ranks of flat-screen monitors deliver a soulless and ceaseless flow of information, opinion and conjecture pretty well simultaneously to anyone anywhere on the planet. This is very pleasing for the regulators who blather on about level playing fields. What makes them incandescent with rage, however, is the suspicion that the important news first travels on the phone lines and even worse, on the mobile phone links where call recording is very difficult. Anyone who walks briskly away from their desk with a cell phone pressed to their head is obviously in contact with a trusted source, a saucy tryst, or a steaming spouse. If markets really were transparent and fair and efficient they would not be fun nor deliver profits and would not have much reason to exist.

The headlines that Health Minister Tshabala had become “tough on booze” sadly lead not to a heart-warming tale of self-discipline but to an example of political hypocrisy. Despite the utter failure of printed health warnings on cigarette packs to reduce consumption, it has triumphantly been decided to tell the liquor industry to follow suit and place warnings on their labels. This announcement was accompanied by dark threats about what would happen if the youth failed to heed this stern government action. What’s to fear? Allegedly, even lovable drunks can attain ministerial heights.

I wish that the folk at the SABC would realise that no one cares who sits in which chair and holds what title within that rather nasty organisation. The vicious battle that apparently has broken out amongst the so-called managers and executives of the national broadcaster is of no interest whatsoever to anyone else. In fact, the fewer non-creative people on the payroll of that business the better. All we viewers and listeners want is entertaining and truthful content delivered for a competitive price to our TVs and radios. Would they also please note that not even the shortest clip or sound-bite of any politician what so ever delivering an opinion or lecture qualifies as entertaining or truthful.

My tendency for self harm has no limits. I shall be going to Ellis Park tomorrow to see the Lions, if not in action then at least on the field in person. If you are bored enough to tune in you will easily spot me. I will be half the crowd on the first level of the eastern stand.

James Greener

9^th May 2008