GO BIG OR GO HOME

This has been an astonishing week for the markets. It is not as if anything especially material happened except that a larger cast than usual of politicians, central bankers, analysts and other assorted talking heads chalked up some satisfying headlines. This obviously encouraged many people to think that the bear market has ended and on Thursday the JSE challenged all kinds of records for turnover, points rise and other statistical trivia. Mind you they did have to make up for Monday when The JSE systems failed completely for most of the day. I trust the suits in Maud Street took note of the little fracas that erupted at the Pakistan Exchange when investors used rocks to express their opinion of developments in the market.

 Among the more spectacular local stories was nothing more than a reheat of an old chestnut that the official inflation figures are incorrect. This time the twist was that they are too high. Most of us are probably unable to judge accurately if the annual increase of the pain in our pocket is 10% (the official number) or 8% (the suggested number). Actually, my inclination is that even the higher number is missing the target. I suggest that a test of the analyst’s work would be for his employer to demand that he immediately refund all previous salary and bonus increases that they have paid him in excess of the adjusted inflation rate that he has so carefully calculated. His biggest challenge may come when he explains to his wife and children about the revised housekeeping and pocket money amounts.

Traditionally, yields on the bond market are supposed to be sensitive to inflation. The way the yields fell in response to the news of a possible glitch in the numbers was rather startling and means that this supposed relationship might be less precise than many would like to think. The owners of hundreds of billions of rands worth of bonds substantially revalued their portfolios following a suggestion made in a single report. What will take place when an opposing opinion is published or the first chap admits to making an error?  Curious.

Fed Governor Bernanke spent a tedious couple of days telling the US legislators everything except the truth that it is now time for the US to accept that there are very large debts to be repaid and juggling with interest rates will do little to make them go away. Market commentators sifted through the tens of thousands of words for anything that might be taken as bullish and for a while succeeded, but the underlying reality remains that the country and its currency are facing some big financial headwinds.

Back home again, any number of organisations have been queuing up with hard luck stories and demands that unless taxpayers money is forthcoming, a dire future awaits the country – or at the very least their staff and management. The national airline, the electricity generator and the trade union movement all had something – in fact a great deal – to say, but my favourite idiocy of the moment came from Safety & Security Minister Nqakula. He told parliament that the recent wave of economic prosperity had resulted in many more cars being bought, which in turn simply provided more targets for the hijackers and thieves and hence the increase in these crimes! A close contender, however, was the fund manager who told his audience that “It is not time to panic on the markets”. This may be useful advice but does seem to imply that eventually there will be such a time, presumably only after he has first taken a graceful exit.

Last week’s ‘bok victory in Dunedin was magical and a follow through in Perth would be fantastic. The Protea captain on the other hand seems to like “follow ons”.

James Greener

18^th July 2008

ALWAYS BAT FIRST

It seems to have been a week of denials, doubts, warnings and excuses. There is a great deal of bluster about how difficult it is to understand what is happening at the moment and how hard it is to forecast what is going to happen. Therefore it is exactly like any other week when as usual we have no idea why the market did what it did and equally no idea of what it will do next week. I will admit that being the dry season for any kind of company reports does leave us sucking air for facts to hang a story on, There have been the occasional trading statements with what seem like outlandishly excellent expectations for business and earnings but it will be a week or two yet before the big boys start to let us in on their secrets. Right now, I suspect the accounts departments will resemble the witches scene from Macbeth with the eyes of newt being hunted up to bring a lustre to results.

The largest topic of disagreement is obviously about whether or not economic activity is slowing down. I think it matters little to people who are struggling to meet the bills that most significant economies have not yet to reported two successive calendar quarters of negative growth and are therefore technically not in recession. People are less well off than they were a short while ago and that feels pretty darned recessionary to them. Similarly, the argument about whether or not the JSE is in a bear market is academic to those folk who have seen more than 15% wiped off their portfolio values in less than 2 months. That’s bear enough for me. And I don’t think it is over yet because there people around who are trying to buy the bottom. Reportedly, true market bottoms are signalled when there are absolutely no buyers for weeks and months on end. In other words it is marked not by a price or a percentage but by a sentiment.

The news from the US continues to terrify and amaze me in the extent and severity of its awfulness. It seems as if at last the Freddie Mac and Fannie Mae time bombs have reached zero on the clock and the already technically bankrupt US government will need to mount a heroic rescue with money borrowed from their taxpayer’s grandchildren to rescue that nation’s largest housing lenders. Our own Landbank’s problems with missing money are trivial by comparison. The world’s once greatest car maker may be about to go under along with another Wall Street bank. Their bear market too is not yet out of nappies.

Denials and excuses have also flowed from the Gautrain management after a large crater appeared in Oxford Road, exactly over the route of their metro train tunnel. Apparently “adverse geology” is the culprit and astonishingly, no danger or delay will result from the presence of the hole. Aggrieved road users and residents have been unable to locate any of the hordes of camera-friendly champagne-drinking hard-hatted worthies who flocked to witness the start up of the tunnelling process a few months ago.

Here in Durban the effects of the COSATU stay away in protest at high prices were very marked, but as usual what their leadership failed to explain is exactly what remedy they would offer for this global problem of soaring resource prices. The carping on about the alleged cases of price collusion between suppliers is irrelevant to this debate. My advice to anyone who moans about companies who appear to make too much profit is to boycott their goods but buy the share.

I believe it was the great Len Hutton who said that any captain, who won the toss and had any thoughts of fielding first, should think again and then bat. Please will someone read this advice out to our man leading the Proteas into the Lords quagmire?

James Greener

11^th July 2008

ALL SHARE ALL BLEAK

It is getting fairly nasty. July is just four days old and already the All Share has shed around 6%. The collapse has been pretty evenly spread throughout the market sectors with perhaps some of the resource shares bleeding just a bit more than the rest. When measured in local currencies, the JSE has declined further than most other markets in both the developed and the emerging markets. The astonishing side to the story, however, is that the rand has in fact strengthened against all the major currencies this week which might indicate that if there is any appreciable amount of foreign selling then they are not taking their money out at the same time.

We bears are also measuring the damage against the all time highs set by the indices in May. From there the fall of the overall market is about 15%, but from that peak it is the financial sector that has suffered a disproportionate amount of the selling. The major banking groups will start to report their half-year results from only next month, but it certainly appears as if many investors share my fear that we could be treated to a number unsettling but yet unsurprising tales of how folk are unable to cope with servicing their loans and are either rescheduling or are giving their car keys back to the bank. Vehicle sales figures are sharply down and second-hand car lot areas are sharply up.

I have seen a number of schedules of the fierce rise this year in the dollar prices of most commodities except, oddly, pork bellies! Add to those increases the more than 10% weakness of the rand versus the US dollar since Christmas and it is obvious that there must be a very significant adjustment happening in the spending patterns here on the southern tip. Spare ribs in place of turkey then?

No one is immune and with the second month in a row of state expenditure being greater than income it seems likely that the government borrowing program may need to be beefed up a tad if all our civil servants and MPs are not to go hungry or miss out on a trip to the Olympics. My suggestion that we might dispose of at least a quarter of them and feel no difference in service levels has not yet received a reply. More unfortunate encouragement for Governor Mboweni came from the European central bank which raised their price of money by a quarter of a percent this week. Interest rates at both end of the yield curve are under pressure to move higher. Neither of these developments is good for company earnings and in turn for share prices.

A few exceptions can always be found, however. For example if you are a manufacturer of “corporate merchandise’ – meaning hats, shirts, bags and pens carrying a logo – then the firm that has the monopoly in pumping water from Lesotho to this country would like to hear from you. Presumably without their name being constantly in the public eye, we might all be inclined to do without the stuff. The water that is.

I have been uneasy all day. It is not the winner of tomorrow’s big race in Durban which will, I am sure, be won by a horse that is troubling me. Neither is it the possibility of drugs being discovered in the duffle bag of a cyclist in France, but rather the terrifying matter of the tri-nations meeting against the All Blacks. It could be a bad start to the weekend. Go ‘bokke.

James Greener

4^th July 2008

THE BEAR EXTENDS HAPPY HOUR

The All Share is down about 6% this month and unless Monday is a belter, this will be one of the worst months for the JSE in a long time. February’s record up-run is now a distant memory. This bear is looking all-powerful and he is certainly international. Sellers seem to dominate most markets at the moment. In the face of all this we should be pleased with the rand holding at better than 8 to the US dollar.

There were two especially bad pieces of news that caught my attention this week. Firstly our own Governor Mboweni received praise and congratulations from Sir Alan for how he is carrying out his duties. This worries me a lot. The Governor will at this very moment be thumbing through back numbers of Central Banker Weekly absorbing the fact that Sir Alan was the man who took 2 years and 17 steps to raise US rates 425 bp. Given the bad piece of news about producer price inflation leaping to 16.4%, the camera-shy one is undoubtedly already ordering that the “Rates Up” lever in his office be greased and polished. Once again I have to tell you that I still don’t understand why ruinously expensive money in South Africa will make Saudi oil sheiks drop the price of oil.

I thought that the idea behind a “happy hour” was that it was a marketing ploy by the bar keeper who discounted the price of drinks for 60 minutes, to entice customers who might then stay on when normal prices were resumed. I am therefore puzzled to read about the insults that were allegedly traded at the Armscor “management board happy hour”. Presumably the price of booze at these shindigs remains at zero for much longer than an hour since it will almost certainly be the shareholders (i.e. taxpayers) who are picking up the tab.

Apparently the slick and professional way in which Gautrain have told its financiers (i.e you and me) that the bill for the train set will be far higher than the last R25bn estimate has deeply impressed an outfit called the International Association of Business Communicators who live safely in New York. They handed over a “Gold Quill Award of Merit” to the chaps who manage the media strategy for this hole in the ground. I guess they will be parading it from a topless bus through the streets quite soon.

Not due for a Gold Quill anytime soon are the fellows over at the post office who deny all knowledge of the wholesale theft of items in the mail. Reports suggest that there are some members of their staff who are impeccably dressed in very expensive shirting and who have compiled an extensive library of books and discs. Presumably if an investigation were ever to uncover the larcenous crooks they would employ the tactics offered by the MPs who were found in similar circumstances and claim that they were “forced to confess”.

The South African Wine Investment Trust is complaining that expert evaluation of the current discounted value of a R170m the loan they made to the Phetoga Consortium  would cost about R30 000. Aside from the fact that the source of their funds seems to be primarily the KWV and that the money was used by the consortium to buy shares in that company, it does seem a lot of money for someone to do a simple compound interest sum. On the other hand why not sell the shares which have more than doubled in price, and plan for a “happy hour”

I like the flair of the Spaniards. I hope they lift the cup.

James Greener

27^th June 2008

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