BEAR SIGHTED IN THE BOND MARKETS

 Slowly it is dawning on investors that lending money to the US government at 2%pa may not be so smart. Interest rates there – and elsewhere, including SA – are moving up and this might be the most important and significant indicator of the moment. As rates increase, the value of bond investments fall and among the notable investors in US Treasuries are the Chinese and the US’s own central bank – the Federal Reserve. The misleadingly named Quantitative Easing program required the Fed to buy US government bonds – lots and lots of them – and it must be alarming to watch the value of these things sink. The Chinese will also not be thrilled, although they did do much of their buying a few years ago when rates were higher, but another story of the week is that maybe economic data from that country are not as trustworthy as is normally expected when making investment decisions.

It seems that fewer than 400 out of the 2800 people who the tax man has identified as being the “super rich” of SA have bothered to register as tax payers. Reportedly, the criterion for this classification is income of at least R7m or assets of R75m. A swift calculation based on these numbers suggests that Minister Gordhan is forgoing around R10bn a year in tax collections from this secretive band of evaders. This is a big number and well worth pursuing not only for reasons of fairness. However, the pledge to hunt down and scalp these folk is heard every few years and obviously fails to have much success. Undoubtedly the cash economy is absolutely huge and much of it is simply not recorded in the usual formal records. A good example of this is the large discrepancy in employment figures provided by the official statisticians at Stats SA and those published by private sector analysts who mine and interpret all kinds of alternative data sources. The analysts doubt the Stats SA figure of only 8.4m employed, earning a total of R364bn a year and maintain that both are too low. Why does this better news draw such bitter rebuttals? Does it not suit government policy?

Even the Economist magazine believes that recovery is taking place, especially in the USA. A common conclusion from this view is that equity prices have upside since growth is therefore on the way. Another spur for share prices in the US might be the migration of investment from the now unattractive bond market. Neither argument has a proven track record, however.

In SA a big impediment to growth is the terrifying rise in officially regulated and administered costs. An unusually long car trip over the public holiday provided this insular and sedentary scribe with a sharp reminder of fuel and toll prices. Many JSE listed companies have complained about the cost of transport and when those looming toll gantries around Joburg get fired up next month, matters are only going to get worse. Inflation is unlikely to slow down, despite the excitement about the recent tiny downtick, which was hailed by overexcited analysts as proof that there is no need for Governor Marcus to wear her rate-raising raiment next Thursday.

An interesting fact has emerged from the toll versus fuel levy debate about how to pay for all those new roads in Gauteng. Seemingly there is no regulatory means to earmark specific revenue for allocation to specific expenditure. All government money gets dumped into the kitty from where a separate exercise allocates and spends it. This therefore exposes as false those political threats and promises to impose taxes on the pleasures and enjoyments of the rich in order to compensate for the woes and hardships of the poor. So the increased duty on Johnny Walker Blue Whisky can not be used to repair a broken water pump in a rural slum. More likely the money will be used to restock the minibar in the presidential jet.

Like the early start GP races, it is hard to get excited about cricket tests that begin before dawn. Nevertheless the NZ series is helping to uncover some talent that will be useful when The Proteas tour England later this year. I especially like the policy of bowling on the wicket!

James Greener

23^rd March 2012

BYE LION

After the dreadfully violent wars and conflicts that dominate the Middle East regions, perhaps the next most significant events to watch are the US presidential elections and the Eurozone financial fandangles. Neither makes any sense to anyone expecting reasonable, logical and civilised behaviour from erstwhile role models for such things. Words and concepts like faith and science and honour and debt and promise and trust are being misused and devalued to the point where they convey no meaning. Similarly in one recent but small incident in our industry a big cheese has resigned from a well known investment bank with an open letter that spills the beans on the way things sometimes work in some of those businesses. Sadly I can confirm that he is not making that stuff up. Greed scores way above integrity with just enough people for the rest of us in or around this industry to feel embarrassed and uncomfortable when we admit what we do.

The bull can also see nothing to be scared of (that is the nature of bulls of course) and the All Share Index attained another new high this week, propelled there by rises in most of the top big caps. Main attention grabber, however, is the sharp up-tick in US long bond interest rates, followed somewhat by our own. No credible explanation for this behaviour has yet been offered but it is worth watching.

I am not the only commentator to be amazed by Eskom’s very relaxed acceptance of their requested 26% price rise being pared back to 16%. The CEO even remarked that this would not derail any projects or affect its financial sustainability. What? Really? My disappointment is that the regulator (who must find it hard to feel businesslike and dignified with a name like NERSA) did not look after us consumers and shoot back with a second offer of 0%. The trade  might have settled at 8% or thereabouts.

The KZN provincial government have kindly provided me with a full-colour glossy pamphlet detailing their plans for spending R83.6bn in the new fiscal year. Only R2.3bn of this sum is collected by the province itself with all the rest being distributed from National Treasury. This does, however, mean that the surprisingly modest R59million earmarked for the expenses of The Royal Household places no burden on the rest of the country. We pay for our own royalty down here.  In the scheme of things this is not a great deal of money but perhaps we should expect a bit more work from them. As long as it makes no further impact on the leopard population it would be nice if our King and his family could be persuaded to appear in traditional regalia for photo ops and other suitably harmless activities like opening stuff and waving at commoners. Travel in open horse drawn carriages would be quaint but perhaps even more disruptive to traffic than blue-light flashing car convoys.

The general secretary of an outfit that operates under the name “The Black Business Council” is very offended that it has been accused of being racist. Many of us who believe we understand language but obviously don’t understand politics are puzzled why this and several other similarly-styled organisations, with membership apparently determined by physical characteristics, are deemed appropriate, legal or indeed necessary.  The fact that the accuser is someone who would himself be eligible for membership of that very council provides an irony that we South Africans delight in and love to pour scorn and ridicule upon.

To divert attention from the fact that here in the southern hemisphere we are almost half-way down the slope towards midwinter, comes the start of the Grand Prix season. These early ones start too soon in the day to provide background noise for the post Sunday-braai snooze. Nevertheless it will be fun to see the new cars and what rule changes have been dreamed up to quell the excitement. Banning the mid-race refuelling stops was disappointing for those of us who enjoyed fuel nozzle uncertainties and the occasional pit-side conflagration. Rugby will not be mentioned this week. The Lions have a bye.

James Greener

16^th March 2012

WATCH MY BEER. I’M JUST STEPPING OUT FOR A SMOKE

The company results that are coming out here at the rump end of the December year-end reporting season appear to be somewhat less stellar than those who crowed earlier on. Some doubt has crept into the mind of the 4 month old bull calf and the All Share index sauntered off briskly below that 34 000 level. It was certainly a nice run up until then and largely missed by us bears who like to do most of their buying at historically tempting valuations. The last such opportunity was in 2009. The next one will be in…Well, who knows; but it isn’t here.

The really interesting instrument is our currency which is fast recovering from the slump it suffered in the third quarter last year. There are more buyers of rands than there are sellers and this can’t be all because folk want to collect samples of the old “Big 5” currency notes before they go extinct. Neither can lower imports versus exports be the reason as the exact reverse is happening with a vengeance. The 12 month rolling trade balance is now at a 2 year high deficit. We are sucking in the imports – largely iPads by my observations! It must be that foreigners are coming back and buying anything that isn’t nailed down. And perhaps some stuff that is.

Up in Greece meanwhile everyone is getting ready to play a round of debt swap. Whatever this means exactly, when it is finished there will still be some winners and some losers. The winners are those who pocketed the loot, no questions asked..  The losers get to lend Greece even more money. In these days where the buzz word is “sustainable” – that model doesn’t sound as if it is.

In the light of faintly hysterical and foolish waffle about SA and Nigeria fighting to be the continent’s economic giant, it is useful to note that here on the southern tip we are gently and happily showing what matters most. The two largest listed companies on the JSE are now a cigarette manufacturer (BAT) and a brewer (SAB Miller).. The days of mining and industrial behemoths dominating the Johannesburg boards are fading away in a haze of tobacco smoke and beer froth. Standard Bank, our largest financial sector share has a market cap just one third the size of SAB and Sasol, that unique and outstanding all-South African energy business, is also just one third the size of BAT. I wonder if the medical sector is undervalued?

An important election looms for us South Africans. It is to choose the Team SA mascot for the London Olympics. Cast your ballot by magazine and cell phone. Isn’t democracy wonderful? Once that is out of the way, an even more worrying matter is the design of the opening ceremony outfits. The committee hopes that 100 or more athletes and an unannounced but probably larger number of officials will need to be clothed. A very dodgy forecast calls for as many as a dozen medals. That too, however, is causing headaches since the committee has yet to find the R50m required for incentives for the medal winners. Apparently in 1996, gold medal winners each received a R1m present from the tax payers.  Well good luck anyway to those focussed and dedicated souls who are putting their all into qualifying in their chosen sports. You are welcome to anything you can wring out of National Treasury. Most of the rest of us cant.

It is not that long since the Lions smashed the Sharks and claimed the Currie Cup, so feelings are running rather high down here in the kingdom as the two sides meet in the Super rugby fixture this weekend. My Christmas present of a Lions Cap will get its first official outing and based on what I saw at Newlands last week the Sharks are set for a hat trick of losses. I may have to buy my own drinks at the bowling club this evening.

James Greener

9^th March 2012

SEND US YOUR MONEY

Minister Pravin Gordhan must be one of the finest finance ministers anywhere on the planet. He is probably the best that this country has ever had. He is startlingly free of any political waffle and spin. His budget this week was undoubtedly savage but undeniably focussed on where the money is. Unsurprisingly the writer and the readers of this letter are among his targets and are now dolefully contemplating a future where we will all pay more tax and try to drink less booze.  Minister Gordhan appears to be unaffected by the ranting redistribution rhetoric of his colleagues and simply accepts that only some people can afford to contribute but that encouragingly that cohort is growing. He may be a tad naïve, however, to claim that SA’s culture of tax compliance is way better than “the Mediterranean nations”.  His intelligent and pragmatic approach must drive the majority of his keen communist cabinet colleagues into a frenzy bit as he explains that one can’t simply loot the bank account of anyone suspected of being too rich.

Nevertheless he has arranged for them to be able to spend over one trillion rand in the coming year  and on his own numbers this means that the state will occupy an alarming and record-setting 32.1% of the country’s economy (as measured by GDP). This is the bit that I really don’t like; especially when you see that he expects to collect in tax only R85 out of every R100 that his colleagues will get through. The balance will naturally have to be borrowed and in the coming year the interest bill on all the state’s loans amounts to R89bn which after the R152bn earmarked for Basic Education is the second largest single category of expenditure.

The budgeted borrowing amount almost exactly matches the so-called Social Protection department expenditure of R158bn. Social Protection is the kindly phrase used to describe grants to the aged, the disabled, the military veterans and the child bearers and carers. This “hand-out” of 17.5% of the tax take is a thorn in many a side but it appears that this is the only idea that the government has for eliminating poverty. It is not a very good or effective one.

So far the impact of the budget on the stock market has been surprisingly benign despite several unfriendly imposts, including increasing the dividend tax by half just before it is implemented. The Capital Gains tax increase and the forthcoming changes to the Securities Transfer Tax will definitely reduce many investors’ desire to trade. Is there any industry which these darn socialists do not want to control and set prices for?

The number of good and very good company results among the flood that were announced this week easily outweighed the poor and the disappointing. The skills that are being put to work  keeping industries and jobs ticking over and even increasing in these tough times are awesome and praiseworthy. Just imagine what would happen if those managers and owners did not have to spend so much time filling in forms, ticking boxes and hosting inspectors looking for nits to pick. Absent the cold and clammy hand of bureaucracy and things would fly so much faster and further. Unless of course you are the state owned airline which its Minister claims deserves more state support because “SAA operates in a very competitive and liberalised environment”. If that is sufficient reason to get ones hot and sticky paws on public loot then where does the queue start please minister?

At R6.4bn the recreation and culture expenditure vote is one of the smallest and yet the politicians and bureaucrats who feed at that particular trough are able to cause considerable damage and unhappiness. The conference schedule for the suits is long and punishing and little money is left over to support the actual players and performers. The SA women’s hockey team is surging brilliantly towards Olympic qualification but any second now some functionary will begin to fret about them being non-compliant with some charter or other. I don’t know how much of that budget is allocated to the fools who believe that race defines sporting proficiency, but you would think that season tickets to the Lions at Ellis Park would buy them off.

James Greener

24^th February 2012

BEWARE THE PINK BULLS

In the past six weeks or so the JSE has steadily ground its way mostly upward in steady but unspectacular fashion. Compared to most other markets, especially our so-called BRIC “peers” we have been very pedestrian, however. In what way will this resolve? In a burst of upside enthusiasm to bring us in to line? Or will we just lurk here ready to join the others when reality bites and the bear returns. Certainly there have been a number of good statistics about jobs, inflation and growth, both offshore and here. In the US a familiar bubble is inflating around the worth of two men and a dog computer program ventures that have shorter track records and fewer real assets than any paddling team currently in the “Duzi” canoe race. And the storms rage wider and stronger in euroland with almost every country there now deemed to be less able to pay its debts than a few months ago. The old adage about “neither a borrower nor a lender be.” must be gathering fans.

Have you noticed that our leaders have suddenly become quite concerned about the weather? A few weeks ago they proposed legislation that could send to prison anyone forecasting bad weather without getting official permission. Then there was a General Notice specifying a tariff for “Aviation Meteorological Services”. This seems to introduce a price for providing a weather report to any pilot of a plane above a certain size. The actual cost depends on the square root of the mass of the plane. Presumably the logic is that larger planes use slightly more of our weather than smaller ones. And this week “deputy minister Ms Rejoice Mabudafhasi together with the South African Weather Service (SAWS) has embarked on a weather awareness road show” with the theme “power our future with weather, climate and water”. Attendance is presumably free but raising money is clearly important for the department since the dear old weather bureau’s own website carries a light-hearted yet gruesome cartoon on the perils of not subscribing to their early warning system for lightning strikes. It is all rather sad as there are already plenty of free weather reports and forecasts available on the internet. Not even the “official” one is ever always correct!

The JSE has entered the investment analysis business by proclaiming that a number of listed companies are publishing reports and accounts which do not meet certain standards of accuracy, self-consistency and transparency. This is not news to professional (and probably many amateur) investors who understand that any company publication is a trade-off between concealing things from the tax-authorities, competitors and employees while revealing things that will make them look attractive and smart to shareholders and investors. If a company really told the whole unvarnished truth of what it had been doing in every dark corner of its business the investment decisions might be much easier. But life is never like that.

I have some sympathy with Telkom over the incredibly large fine imposed on them by the Competition Commission. (Another example of revenue raising?) The company is undoubtedly inefficient and corrupt but making them sell assets to meet a fine seems foolish. Telkom should sell assets only when they can no longer manage them to provide an economic return, perhaps because of regulation. Dismantling these huge government-instigated monopolies is proving tricky all over the world.

Sports teams enjoy the sometimes quite substantial income derived from the sales of replica kit. Will the Blue Bulls ever sell any of their new, hideous and dreadful zigzag patterned pink jerseys? Fortunately the blue-blooded faithful of Loftus will never have actually to witness in the flesh their team prancing about in pink as these abominations are for away games only – presumably to induce the opposition to laugh themselves out of the game. My guess is the marketing team from the supplier included several good looking young women dressed in these shirts who distracted the board long enough until the chairman signed the order.

James Greener

17^th February 2012

POPPING EVERYONE’ S BALLOONS

Most people already have a pretty good idea of the state of the nation and so had no interest last night in watching the President make more promises that have little chance of being fulfilled. Those of us who repaired to the pub instead felt vindicated by this morning’s news reports which proved as soporific as the event itself.

Have any of you fellow tax-payers had word yet from the Free State Health department about the outcome of the lab test they were about carry out on the condoms that they ordered for the ANC centenary celebrations? It was never explained why it was appropriate or even necessary for the state to provide a million of these johnnies for the party shindig in Bloemfontein. However, it was revealed that they were suspected of being substandard. Hence the scheduling of a lab test and my interest in finding out if I paid for substandard goods. Let no one accuse this place of being boring and predictable.

The Mining Indaba seems to have been rather similar to the Greek tragedy. The Principal players talked past each other while a chorus recited well known laments and commentaries in the background. The odd flickers of common sense and hope were soon extinguished by torrents of scorn and derision. Politicians remain convinced that most mining companies are generators of super profits that deserve savage taxation. The term Resource Rent Tax was bandied about. Ugh. Year after year, almost all the small cap mining shares on the JSE report losses. This strongly suggests that digging useful stuff out of the earth is a very difficult business that requires lots of capital and skills. While the state has the former (thanks to the tax payer) the country as a whole is very short of the latter and no benefit will accrue form further meddling by the bureaucrats.

It seems like a good idea. The government is going to create and operate an insurance fund that will cover the banks if their customers fail to repay their mortgage loans. Initial capital will come from the taxpayer (where else) and thereafter borrowers will pay a premium into the fund. Well, if they don’t pay their mortgages will they pay their premia? I hope the scheme works but examples of successful state interference with creditworthiness are very rare. Usually this sort of system is mostly about buying votes by getting folk into houses they really can’t afford. Fannie Mae is the delightful name of a similar scheme in the USA that has run into loads of trouble and has required oodles of taxpayer bail-out money.

Hopefully the press report has got the story about the proposed legislation on insider trading wrong. It suggests that it will be an offence for you as a broker to take an order when you know (and hopefully yourself have) an equal and opposite order in the same share at the same price. For years this “bookover” trade was a very appealing situation for a stockbroker who was thereby able to provide quick execution, create two happy clients and, of course, claim double brokerage. The latter aspect has been much eroded since “big bang” by negotiated commissions and principal trading but how on earth can it be criminal to match a buy and sell order? When will the socialists grasp that business profits generate the tax revenue that they wish to distribute to the needy (beginning, naturally, with themselves). And then there’s the rather nasty squabble about whether house prices are going down or up. Anecdotally it seems that it is quite hard to sell a house these days but usually that can be solved by dropping the price and surely there is no shortage of people in this country in need of a home?

Williams’ new F1 car has been unveiled and it appears that the left front air spoiler is sponsored by an anti-dandruff shampoo. That’s a bit low rent for a glamour sport isn’t it? Despite my interest in seeing a renaissance in Eastern Province sport, the idea that the Southern Kings could be SA’s sixth team in the Super Rugby tournament seems dodgy. Not only is the country’s talent spread even thinner but the competition will have to run until nearly Christmas time.

James Greener

10^th February 2012

LITTLE SPORT BUT LOTS OF GAMES

Of the 20 or so important local company and economic announcements and updates this week, about only three or four could be rated as disappointing. These would includes Impala’s dreadful labour debacle, Murray and Roberts’ sizable rights issue and Eskom’s woeful attempt to put a positive spin on the fact that their planning remains dreadful and power shortages are likely. The top good news item would probably be Sasol’s update that their earnings will be nearly double last year’s figure. It is not hard to see why the bulls have been prancing about around goring great big holes in the 34 000 All Share ceiling. I still don’t recommend a full-on buying program but it is probably a time to reduce liquidity levels a bit. (Translation: if you have lots of cash on hand, buy some shares with some of it.) (Wealth Warning: Whenever a life-long bear says buy there is probably something really bad about to happen!)

The sort of bad things to fear would be statements from the likes of Minster Shibangu who castigated the country’s mining companies with being “obsessed with a bottom line approach at the expense of national objectives…” This obsession, which creates wealth and jobs, is  far less dangerous than the government’s obsessive loathing of the business (and incidentally tax-paying) sector.

Internationally the fascinating news was the planned IPO for Facebook. What is little more really than a computer program that allows people to tell the world about themselves has created a very deep and valuable mine of personal data about tens of millions of individuals. It seems this mine may now be worth around $100bn. That’s a lot. The actual listing of that share in New York later this year could well be one of the more entertaining rocket launches of the season now that the Shuttle has flown its last.

The headline that said some accountants were going to introduce an “Insomnia Index” at the forthcoming Mining Indaba was quite misleading. What seemed like a brilliant idea for scoring speakers on their potential for sending the audience to sleep, turned out to be a much less fun attempt to identify which latest government stupidity was most likely to keep managers awake at night. Pity. I stopped going to conferences when my personal Insomnia Index fell to zero the moment anyone dimmed the lights and clicked onto the first Power Point slide.

South Africa’s candidate for the top job at the African Union failed to win a majority and her staff came up with an ingenious excuse for why this was just as good as winning. I was more interested in the surroundings in which all this was taking place. The Chinese have very kindly and generously presented the continent with a $200m glass and marble palace in which to hold their deliberations. African officials insist that they were not being manipulated by the Chinese. Oh really? Just try selling your minerals to our other new best friends in the BRIC.

Even if SA does not get to host the Square Kilometre radio telescope Array, there is really exciting news from the fellows at Joburg City Power. They are planning to use “low pressure solar water”. Sadly I will never learn exactly what this scientific revolution is since the explanatory document for persons wishing to tender for the supply and installation of this wonder costs R2000 (non-refundable) One would have hoped that the discovery of water on the sun would have raised more interest.

At least more than the African Cup of Nations is raising. How’s that idea for a white card in rugby ?

James Greener

3^rd February 2012