THE SMELL OF WET DOG

So that’s another week that saw a 3% trading range in the All Share index. The low point almost wiped out all of this month’s gains. This kind of back and forth behaviour in a market always reminds me of a Golden Retriever shaking himself vigorously after climbing out of the water with a stick firmly clamped between his jaws. The water drops fly off in huge arcs and everyone nearby gets soaked. In my analogy the investors are the water drops desperately trying to cling on but getting dislodged by the shaking shaggy dog of a market. The folk getting soaked are the pundits and analysts trying to pick the winners. The dog feels nothing and waits for someone to toss the stick back into the water.

It seems to have been a bad week for personal freedoms – or a good week if you believe that authorities know what is best for everybody else.

Firstly, we had the Financial Services Board complaining that not everyone had collected their FAIS licence certificates. These lax businesses would therefore be unable to display them on their wall and so would be breaking the law. Just what we need  – bureaucrats as interior designers.

Then the JSE proudly announced a renaming of the Insider Trading Levy as the Investor Protection Levy. Despite a welcome reduction in the rate of this levy the fact remains that it is designed to take money from honest citizens to mitigate the losses of those who deal with dishonest ones.

The scariest event of the year is taking place in Addis Ababa where 100 participants are attending the Forum of Value Added Tax Administrators in Africa. Reports emerging from this Forum suggest that this rather Euro-centric tax needs to be “adapted to the social, economic and cultural norms, values and levels of development of African countries”. What this means, is unclear but it is doubtless bad news for the diligent and honest.

Also bad news is that parliamentarians share President Mbeki’s concern “that the best land close to the best facilities was always available to the rich”. Just how many of those “norms” listed above are challenged in this piece of foolishness is hard to say.

Several things happened this week to suggest that interest rates will indeed not go down again before going up. All the various inflation numbers are starting to tick up as the petrol price makes its presence felt. And the second quarter GDP growth rate was published as 4.8% pa. This rather impressive number is one of the highest seen in a long time and suggests that the economy doesn’t need any further stimulus from cheaper money. One has to wonder if the growing acceptance of this belief is not the reason why some heavy bouts of profit-taking have wracked the market twice this month. Of course we are now deep into the dividend season and some sellers are reluctant to jump until they have seen the shares go ex-div. Maybe the big thumps will be felt only in October once all these tasty special dividends have been pocketed.

Early tomorrow we will be urging the ‘bokke on to squash the House of Pain myth. After watching the day traders this week I am ready for all the violence it may need.

James Greener

26^th August 2005

* I have written a short article about this GDP growth number. Please email me if you would like a copy. It will be sent as a .pdf file that will need the Adobe reader program to open it.

BEAR ALERT LEVEL INCREASED FROM PINK TO ORANGE

A frisson of excitement roused us bears this week, as the All Share index swooned more than 3% between Tuesday morning and Thursday tea time. But the cheering and smugness came to an end pretty swiftly. At the time of writing it looks as if we will end this week better than where we started the last one. No one knows where all the selling came from but, if they are to be believed, the JSE statistics suggest that the foreign investors have, for the moment at least, stopped buying. Mind you, in the past 12 months they have spent net, almost R60bn in the equity market and around R10bn in the bond market. This is record-setting stuff.

I was pecking at the computer keys this week and came up with the market capitalization of the JSE at something like R2 630bn!  More pecking suggested that in the last 12 months the listed companies have reported earnings of about R180bn and paid dividends of R73bn. Long suffering readers will know that my ignorance and suspicion of accounting methods makes me wary of that first number and that I prefer to concentrate on the actual cash distribution figure. I am concerned that it converts to an average dividend yield of just 2.8% pa. This is rather low, especially given all the special dividends being dished out these days. I have to conclude therefore that the market is too pricey – but I have been doing that all the way up through this bull market. So best I shut up now.

This would be good advice also for the poor souls appearing on the TV screens around the dealing room this afternoon. In the absence of any Ashes cricket (where the big question is which side do we most want to see lose) and in the presence of a very quiet market, the sets are tuned to a station showing wannabe pop stars all of whom are definitely not tuned. Dire stuff.

The oil price continues to be the dominant number in forming most people’s view of the future. It has easily outstripped the price of that other commodity – gold – which also has been rising. The ratio of these two prices is a wonderful currency-free parameter that works wherever you are. Current value is almost 14oz of gold per 100 barrels of oil. This record high is about twice what it was at the beginning of last year and deserves a moment’s thought – especially if you are aware of how much effort goes into extracting the yellow metal from miles below the surface. It takes just a couple of months to drill a well into an oil reservoir and with luck the stuff flows to the surface under its own pressure at a rate of thousands of barrels per day. No wonder the rumours are spreading that the oil producing nations, now drowning in a sea of dollars, are seeking other currencies to convert their loot into.

This sort of news must be among the reasons for the US dollar being quite weak this month. And my other pet indicator, the US 10 year bond yield, is edging higher. The rigging is creaking louder and louder.

Loud is what we will all need to be tomorrow at noon when the ‘bokke take on the Wallabies in Perth. A good tech idea would be a two-way TV sound system that allowed all us experts to relay back to the ref our opinions of his decisions that we sometime can hear all too clearly. Which brings us back to those musically challenged tin-eared hopefuls.

James Greener

19^th August 2005

SHOUTING THE ODDS

The National Ports Authority is this morning calling for tenders to supply “fog signalling equipment” for East London. Several things come to mind. What is East London doing now to warn ships that they are closer than they think? Just how many suppliers of fog horns are there in SA? Is it a business worth getting into? Thanks to many years on the bond trading floor my voice is able to make its presence felt when the occasion arises. As an interim measure I don’t suppose the NPA would like me to stand at the end of the East London pier and yell? On sunny days I could fish.

The cold efficiency of screen dealing has no need for loud voices. The only time we shout these days is to encourage the blinking fluorescent numbers on the monitor to move in our desired direction. However, it doesn’t always seem to work. Just as my forecasts don’t always work. You will have noticed that Governor Mboweni ignored my advice and followed the “11 out of 12” economists who felt that there would be no change in interest rates.  Naturally this disappointing failure to reduce the price of money has been taken as good news by the bulls (in fact any news is good news to the current breed of bull) and market indices have continued their seemingly unstoppable journey northwards. This just makes us bears shout even more loudly at the screens.

A few months ago a potential client chose not to open a broking account when I told her that in the absence of our own investment research from Watermark, I could provide her with any opinion she desired. I am not sure whether she disapproved of the implication that I could tailor my own views to suit hers.  Actually, the point I was trying to make was that the Internet has now turned information into a commodity. Within minutes of an analyst pressing “SEND” to distribute his hard work to his selected client list, that same report disappears into cyberspace. I am sure that if I took the trouble to read all the research that appears in my inbox that I could find opposing opinions provided by respected rated analysts on any stock.

Investment and broking is only one of many businesses trying to learn to live with the new world of free distribution and transparent pricing. Watch how the entertainment “celebrities” are wrestling with the same problem.  Most of their product, for which they have been handsomely (over)paid for more than a century, is now instantly digitised and distributed to cries of “theft and piracy” Aside from giving the police an excuse  to keep away from more dangerous crimes while they hunt down DVD pirates, this process is inevitable. Eventually the price of the original material will fall until “piracy” becomes not worthwhile and all the links in the entertainment business chain will have to learn to live on less. One by one the professions will succumb to the internet until only plumbers and sportsmen will be able to command big bucks!

The internet allows one to sample numerous and diverse opinions on just about any investment topic. This fuels my existing scepticism that it is possible to forecast the future – particularly in areas of human endeavour, of which the stock market is a perfect example. This is not to deny that many analysts have deep and excellent understanding of the industries and companies that they cover. It is just to state that I don’t believe that equips them any better to forecast next year’s earnings, dividend or share price. Disappointing isn’t it?

James Greener

The Glorious Twelfth of August (unless you are a grouse)

RATES AND TAXES

Judging by how quiet the markets are today it seems that women around the country have been asked to celebrate their very own public holiday by loading the 4x4 with food, drink and children. I’m sure the roads out of town are filled with families off to make a long weekend of next Tuesday’s holiday. By tonight the air above the game and fishing lodges of the country will be thick with braai smoke and the local wildlife will be bolting at the sound of popping corks and snapping ring pulls.

It was just a month ago that two groups of aging performers from the world’s richer countries were squabbling over who had done the most to grant $50bn debt relief to the world’s poorer countries. At Gleneagles we had the head honchos of the G8 and from Hyde Park we had Sir Bob and another clutch of wailers. Just what mandate either group had to speak for the actual taxpayers whose money had been loaned to the dubious dust-bowl desperados and despots, was not explained. Are those citizens pleased to have the chance to write off any chance of getting at least something repaid? As I read it, folks in the UK and the USA are already in pretty dire straits on the debt front themselves. And now this week comes the report that the bureaucrats tasked with the actual job of tossing the loan ledgers into the bin are a little anxious about what this largesse will do for their own way of life. Writing off so much money will make a huge impact on their ability to carry on their business and they may just have to shut up shop. By the way, this figure of $50bn shows that our own $1bn arrangement with the other Bob is not a trivial amount. One Business Day correspondent converted this sum to about R150 per man, woman and child currently living in South Africa, many of whom would, I’m sure, be very grateful for such a handout.

This morning’s report of a speech by Governor Mboweni leaves me in no doubt that he will amble up the microphone next Thursday afternoon and proclaim a quite large drop in interest rates. Yesterday he expressed “confidence” that a growth rate of 6% was attainable. What else can he do to help this happen but tug on the only lever he has? And the Bank of England cut rates this week – which shows the way.

Normally lower interest rates and cheaper money are seen to be good for share prices. However, I find it hard to see how most of the listed companies could report even better earnings growth than they have been doing these past months. Almost every day we read of yet another large “special dividend” as companies dole out their extra cash. I have no idea what the economists mean when they waffle on about the “velocity of money” but I reckon it must been reaching the speed of light here in South Africa these days. And Einstein said that was as fast as anything could go.

I was disappointed to see the newspaper advertisement from the tax man assuring us that despite the threat of a staff strike, the “service” would be unaffected. I was quite prepared to ease their burden by cancelling my subscription to their mailing list.

I have received a message from a Kiwi friend suggesting that the All Blacks, having devoured the Lions, are now eager for a taste of Bambi.  I just hope that the ‘bokke have properly digested their double helpings of Wallaby.

James Greener

5^th August 2005

GO SHORT FOR THE LONG TERM?

This has to be the way forward. Here I am scouting about for an idea on how, where and when I should retire and yesterday’s paper carries an advertisement for the perfect position. It seems that the Kwa-Zulu Natal Department of (Local) Economic Development is looking for “Short Term Experts” in just about every sector and service under the sun – and hopefully near some warm fish-filled ocean. Now if there one thing any stockbroker can claim it is that he is a short term expert. What an opportunity. There are acronyms and buzz words and partnerships with stakeholders and all the good gravy train stuff. Best of all, the cash is coming from an EU grant.  This STE in LED is just padding out his CV and he’ll be aboard in a heartbeat. And if there’s any air travel required, then a seat at the sharp end please.

While I await their reply I’ll just demonstrate my short term skill and tell you that July has been a pretty good month for the market with the all share delivering slightly more than 7% total return. This brings the year-to-date figure well above 20% - a number that not even long term experts were expecting at the start of the year. In this kind of bull market just about any buy recommendation makes one look like a genius.

Genius, however, is not the word I would use to describe the announcement that the government has identified 10 000 unroadworthy vehicles which will be removed from the roads by December 2006. Why wait? Surely just boot them off as soon as you identify them? At least it would give those of us who own slightly safer vehicles a bit more space to drive in.

Getting back to the market, I have to express surprise and delight that the markets seem these days by and large to ignore the lunacy of politicians and other extremists. Remember when Minister Manuel declared support for any team playing against the ‘bokke? That put several points onto bond yields and scared the rand. Today, however, our president’s claim that corrupt politicians had no part in Zimbabwe’s debt crisis had no effect on the markets. “(The problem)”, he went on, was simply that “the government of Zimbabwe spent more money than it had.” As a graduate of a rival English university to the one that Mr Mbeki attended, I can only say that economic theory of this standard is all I could expect. As far as I know there are very few countries which don’t run a budget deficit. We will begin lending them money too?  The SARB as the new World Bank? Eish!

So is this the top of the equity market? I have no idea. I certainly have no clever buying suggestions – short or long term – at these levels.  The industrial index earnings base annual growth rate is starting to back away from the record 40% level. The index, now a heroic 140% up since early 2003, certainly anticipated this growth brilliantly. I have once already erroneously identified the substantial rerating that accompanied this rise as overdone. Maybe my education is just as suspect as the president’s. However, I am going to plunge in again now and say that I don’t think there can be much more upside to industrial share prices from these levels. Can we really expect another season of 40% plus earnings growth? Many people think the answer is yes. I don’t.

Important rugby at Loftus in Pretoria this weekend. Can the ‘bokke do it again without Madiba there? Just 80 minutes of short term expertise like last week please chaps.

James Greener

29^th July 2005

OFF THE RAILS

You may have noticed that I didn’t send you a “Tidemarks” last week. That is because I was attending a 150^th birthday party in Grahamstown. My old school was holding a jubilee celebration and I went down there to help. It was a great occasion with plenty of long-standing friends, some of whom were old too. Food, drink and words were plentiful, with rather a lot of sentences beginning with “When I was here...”. Many of the old boys are farmers and I was struck by how in touch with economic developments like prices, currencies and interest rates they were. The power and ubiquity of the internet reaches even onto distant maize farms in the Free State!

Another observation, after spending 20 hours on our national road network, is the enormous number of huge trucks and buses rumbling up and down the country. And yet at Noupoort – once the hub of the railways – I saw very few trains on the tracks. As a nervous flier who rather enjoyed the glory days of cheap British Rail services in the early seventies, I have long thought that a reliable comfortable overnight intercity service between our business centres would be a good idea.

While I was away, the market powered on northwards – this time it was the financials and industrials doing the heavy lifting. Anyone who hoped for a buying opportunity in SAB following their news of a substantial cash raising exercise to buy most of South America’s beer was disappointed. Similarly the threat of official investigation of undoubtedly high cellphone costs did nothing to dent the telecoms sector. Resources slowed a little as the rand recovered against most currencies.

A strong rand should be welcomed by taxpayers who this week have been told to chip in with a loan to Zimbabwe of one billion USD dollars. Just what the terms of this loan might be has not been released (why ever not?) and some of us are a tad sceptical that we will ever see it repaid. However, we also appreciate that hungry neighbours are definitely unwelcome.

Still on the topic of the rand but slightly more technical, it is interesting to note that at approximately 3%,  the cost of 1 year forward cover (the price of dollars for a deal to be settled this time next year) is at its cheapest in the memory of most dealers in the market today. What this means is that the foreigners who are currently buying copious amounts of the JSE share market can very cheaply insure themselves against the rand collapsing and wiping out their profits. This may provide a useful bolster and impetus for yet more buying by those fellows. Another underpin may also be forthcoming from the Barclay’s cash that must eventually seep into the market as the ABSA shares get paid for. All in all, it’s a bad time to be a bear.

It’s a bad time to be a ‘bok supporter too.

With all the good news on the business front these days, people are changing their newspaper reading habits and starting at the front pages instead of with the sports pages at the back. But I am pleased that it looks as if Lance Armstrong will clinch his seventh Tour de France title this weekend. A wonderful triumph on behalf of all former cancer patients.

James Greener

22^nd July 2005

WHAT BOMBS?

This week we learned that a tragic and appalling terrorist outrage, this time in London, meant little for the markets. I was very surprised by this lesson, but obviously there were people who welcomed the buying opportunity offered by the initial response of a sharp dip in prices. We bears will just have to be patient and wait. Eventually, some event will destabilise the market. In all likelihood it will be a seemingly trivial announcement that will be identified well after the fact. Only sterling itself has so far suffered any modestly significant and enduring weakness. It amazes me to see that the world’s cash has been flowing solidly back into the USD. The real government deficit in that country is now so large that even a 100% tax rate would not close the gap!

I am certain that politicians worldwide will seize the opportunity afforded by these attacks to say “we told you so” and to ratchet up the restrictions and invasions on individual freedoms. It has already begun. A member of my own family arriving in Toronto from London yesterday waited an hour and a half while all in-bound luggage was X-rayed! Air travel is going to get even more tedious. The sad irony is that none of the measures put in place in the last few years managed to detect or predict yesterday’s disaster.

Did you spot our own distinguished president in the row behind the leaders of USA and France during the telecast of Prime Minister Blair’s impassioned speech at the G8 summit? In common with the other heads of government our man appeared not to be paying too much attention to the oration and his mind was obviously elsewhere. Perhaps he was wondering how soon he would be able to escape the perils of bagpipes, oatmeal and haggis and get aboard the presidential jet and its R827 per passenger catering budget. He will need something to help ease the transition from Gleneagles to Sudan – his next port of call.

After having (sort of) announced the tender winners (Basil Read Holdings up 27% this week) for the Gautrain project, the provincial premier and at least half a dozen public servants are off to London, Tokyo and Randstad (not Randburg) on a fact-finding tour. It seems that these places have “good transport, cultural and safety set-ups”. Apart from lousy timing as far as London is concerned, I would have thought that this kind of study should have taken place years ago when the project was first being planned.

Citizens, however, are less convinced that public transport is the answer and bought a record 50 000 new vehicles in June. Retail sale growth in April of 9.2% shows that the chunky pay increases for various CEO’s around town are being put to good use. The spread between the top and bottom of various pay scales is always a rich source of acrimony and accusation. It is probably one of the reasons for next Tuesday’s strike by Joburg municipal workers. However, council officials have assured residents that “services will not be disrupted”. How will we tell?

Our office move here at Watermark proceeded with little disruption to services. None of the pictures are hanging yet, but the kettle and most of the telephones are working. The computers seem to be thriving on cement dust and the local coffee bar has cancelled all plans to close. Go ‘bokke.

James Greener

8^th July 2005