JUNK TOPICS

Reportedly there is real panic in some of the shorter corridors of power where those who know what’s happening have their offices. It’s all to do with looking for things to sacrifice in order to appease the mighty Ratings Agencies and stop them declaring that our nation’s fiscal state is Junk. This “junk” thing is actually way more important than it deserves to be. It is a harsh term for an arbitrary level about two-thirds of the way down a subjectively constructed ranking table of an organisation’s (including countries) supposed ability to pay interest and repay capital on its borrowings. Actually the payment versus non-payment of monies due is pretty much a binary thing as anyone with experience of debt will know. However, the agencies have constructed a very tidy niche for themselves from where they proclaim a range from “Definitely” to “No Chance” with many degrees of “Possible” and “Probable” in between. Their record on these matters is not without severe mistakes in both directions.

Nonetheless many investors still place great store by these rankings and will sell off any holdings which fall below the junk level. Furthermore, organisations and nations with a junk rating will normally have to pay much higher interest rates for any money they borrow. The panic is therefore understandable. Regrettably the remedy which is to reduce government interference quickly and drastically is unpalatable to a leadership dominated by communists and socialists who always know better than markets.

The news that our president has changed his mind and has offered to refund the taxpayers the costs of some of the upgrades to his private home in the heart of Zululand, raises even more questions than before. Even on his reported official salary of almost R5m a year before tax and the demands from of a flock of wives and children, JZ would find it hard going to make any real dent in the R300m odd that the public protector thinks he ought to pay back. This will be a challenge for his current personal financial advisor.

Once again it is necessary to follow the money in this dreadful business of the Eskom coal supply contracts. A colliery, which faces a heavy fine for delivering under specification coal to an Eskom power station, has been sold. The seller claims to be unable to make a profit at the agreed contract price. The new owners, who have good friends in high places are presumably confident that they can do so. Just how that friendship can raise the standard of the coal as well as allegedly the price, remains to be seen.

A real mystery however, is why so many people have applied for tickets to attend next week’s State of the Nation Address (SONA to the cognoscenti) to be delivered by Number 1 in parliament. Historically his formal speeches are soporific affairs but presumably applicants are willing to risk being caught on camera dozing in the chamber in order to flaunt their talents for the gaudy and gauche on the red carpet outside before the start. It’s a far cry from the olden days when all there was to marvel at were the selection of frocks and hats. And doubtless there will be excellent catering on offer in the parish hall afterwards.

It’s the time of year when the Super Rugby coaches with the biggest problems tend to made the wildest claims about their prospects for the season. It seems likely that several SA teams will languish near the foot of the overall log all season. We simply don’t have the players to field six competitive franchises whatever the suits and the politicians claim about our “depth of talent”. We are also apparently battling even to pay them. It’s also looking grim in the Proteas camp especially in the bowling department. Another case for the term junk perhaps. Losing to England in Bloemfontein was terrible even if it was because of collusion between Lewis, Duckworth and the weather.

James Greener

Friday 5^th February 2016

PRESS # TO SPEAK TO A REAL PERSON

It must be something of a let-down when, a few weeks after your appointment to be Governor of the Reserve Bank, it dawns on you that there are only two things you are allowed to do. Either raise the repo rate. Or drop the repo rate. At first you enjoy prowling the huge office with private lift and exotic wood furniture. The view out over Pretoria is stunning. The computer has lightning fast connection to Facebook and Twitter and there are some very nifty games loaded, but as soon as you try to boot up anything that looks like work all the keys except the up and down arrows are disabled. This week to alleviate the boredom you gave the up key two firm taps and gratifyingly, a few things like the rand and the JSE perked up. But now there’s two months before you can do anything again. Perhaps you will be invited to make a speech explaining why you and all your predecessors believe that making money more expensive will make other prices less so.

Somewhat unexpectedly, except of course by the permabulls, the JSE all share has staged a very valiant comeback and by month end (that’s 5 pm tonight) could even deliver a January total return figure around -3%. Astonishing and rather annoying for those of us awaiting single digit pe ratios before topping up our portfolios. Since the rand has also perked up a wee bit, this suggests that at least some of the buying has come from offshore. When viewed in other currencies the price of many South African assets must be mouth-watering. Let’s just hope the foreigners don’t just crate them up and take them home though!

NECSA is (or rather should be) a quiet, unobtrusive enterprise dabbling with nuclear physics. Despite being totally state owned the South African Nuclear Energy Corporation seems to have a successful market for their product range of glow-in-the-dark type materials used often for medical purposes. One would assume that the staff would be mostly white-coated nerdy types managed by ruthlessly safety conscious suits. However, there are deep and violent upheavals going on at NECSA which are hard for outsiders to follow. Undoubtedly there must be considerable sums of money at stake, and the source of so much mysterious moolah is quite likely to be one of our president’s new best friends. That will be the one who is going to get a very secret and egregiously overpriced contract to fit us out with nuclear power stations. Hence the (very nasty) musical chairs going on at NECSA to get a seat nearest to the trough? An interesting aside to this story is that the obvious acronym, SANEC, was already in use by those nice people from the Netherlands who want to do business with us. This suggests that the rebranding process from the previously named Atomic Energy Corporation was rather slapdash.

Equally alarming is the corporate bloodletting taking place at the Receiver of Revenue’s office. SARS is already very good at tracking down any loot that we citizens try to hide so it is puzzling that some officials there are trying to effect a major reorganisation in that agency. There is abundant speculation that next month’s Budget speech will have to announce even more and painful ways to squeeze revenue from the population. Could it be that cronies and backers of Number One have been whispering in the presidential ear that they would be much obliged if SARS manged rather carelessly to delete their files. Hence the need to place obedient and trustworthy cadres at the coal face. Just saying.

The dodgy government project which seems to have been set up both to buy votes and reward loyal manufacturers and distributors of set-top boxes for terrestrial digital TV has lurched back into prominence. Taxpayers are now funding layers of lawyers to defend the government’s decisions not to encrypt the SABC TV broadcasts and also to give away 5 million boxes free. This unwarranted delay in migrating viewers away from the old analogue broadcasts is partly responsible for the country lagging woefully behind its peers in internet connectivity measures. Priorities are terribly awry.

So if the Proteas dominate the pyjama games will they give us back the Test mace? I doubt it.

James Greener

Friday 29^th January 2016

RAIN AND SNOW

Number One, plus a pretty large retinue of countrymen and women, were in Davos this week to show off their sponsored fur-lined clothing selections. It is doubtful if any of our official delegates at this annual World Economic Forum were able to make many useful contributions to the theme of this year’s jamboree which is “The Fourth Industrial Revolution”. It’s not at all certain that we down here on the southern tip have even completed the first three.

Somehow JZ must have dodged his minders and managed to seize a microphone and podium to assure everyone that the South African economy was not only open for business but was also “resilient”. His understanding of that word seems to be in the same league as his command of large numbers and commodity price drivers. Poor. Most talking heads think that our sad drought-stricken country will fail to grow by even 1% this year. Although great rains are forecast to arrive soon, it’s already too late for grain harvests and prices of most foodstuffs are setting all-time highs. 

What undoubtedly will not be poor, however, is the catering arrangements at the parties which take place as a reward for attending the conference sessions. Squadrons of economists, politicians and head honchos take it in turns to show off their Power Point skills and score points for how many in the audience stay awake. The talking heads stand in the snow and ask silly questions in front of the cameras. The real story at Davos is networking to Olympic standards.

It is doubtful that any of our financial markets have reached their nadir yet. That is the rand can still weaken further, share prices can fall lots more and interest rates are certain to rise. The few special situations like the Breweries deal do provide the odd spark of light halfway down the tunnel but it looks as if the All Share index is headed for a really bad monthly decline of well below -5%. Several sectorial indices are already into double digit declines. Fairly shortly the December year end companies will start to publish their results and the extent of the damage will become clearer. Already the aggregate price earnings ratio of the 100 largest market cap shares on the JSE has fallen to around 13. A decline in earnings of only 10% by most of those companies could see that ratio fall to single figures – a much more interesting level for buyers.

A consequence of the very weak currency is that the rand value of offshore held assets has grown pleasingly. This is exactly what a rand-hedge strategy is designed to achieve. However, this means that the percentage of offshore assets compared to total portfolio value can exceed the limits imposed by the Reserve Bank’s foreign exchange department. The sole but alarming remedy would be to sell offshore assets and repatriate rands – a process which seriously prejudices the local portfolio owner’s interests. This is a development to watch and those managers with capacity for further offshore investment could well see inflows.

Just three weeks into the year it is very dispiriting to be a South African sports fan. Without saying another word about the cricket where only the politicians could be satisfied with their efforts, even the forthcoming Super Rugby season looks bleak. Not least of all is the uncomfortable conference structure foisted upon us as a result of both New Zealand and Australia telling the suits to leave them alone and billet the Japanese and Argentinians elsewhere. And there’s a different bonus point system to be implemented this year. Add to this the fresh claims for the disappointing but somehow inevitable revelation that no sport is immune to financial inducement for a particular outcome. Perhaps even the women’s Beach Volley-Ball at Rio will be rigged. But I have no idea where they tuck their bribe money.

James Greener

Friday 22^nd January 2016