TEA FOR TWO TOO MUCH

I would not be surprised if it turns out that the JSE has just scored its greatest ever one week gain. With a leap of almost 10% in just five trading days it certainly justifies today’s headline that we are enjoying a rally. I do not, however, think that it signals the end of the bear market. Nothing fundamental has changed in the global picture this week. Despite the frantic actions by many overseas central banks, who are hosing down their financial sectors with great streams of cash, the fact remains that the balance sheets of everyone from the city dog catcher to the great Citibank itself are in poor shape. And confidence is in tatters. My belief is that these things will take respectable periods of time to repair and it really doesn’t help anyone (except perhaps banker’s bonus cheques) to see money supply growth soar into the stratosphere. Word has it that the price of cash in the US may fall to zero next year. The only help that will be in the short term probably will be to make the compound interest formulae so much simpler. It may also prove to be a fatal blow for the dollar which perhaps already is showing signs that its 2008 rally has reached the end of the road. Who will want to own a currency that pays no interest?

Back here one can with luck persuade a bank to pay you double digit rates, but that of course is still below inflation and so lacks very much appeal. In less than two weeks the Big Shy Man of Pretoria will plod up to the podium and reveal his final ideas about the repo rate for 2008. Some analysts have claimed that inflation is yesterday’s problem and expect that SA will join the rest of the world in pushing rates down. While I must admit that I seem still to be living in yesterday, I do agree that a rate cut is possible. That would probably cheer up the share market bulls.

It should be noted, however, that the current recovery is not widespread throughout the sectors. There is a distinctly resources-only slant to the bounce and my guess is that BHP Billiton is nearly solely responsible for getting the All Share index from 18 000 to almost 22 000. The market just loved the news that it was giving up on its attempt to buy Rio Tinto.

I am intrigued by the stories that gold coins have become virtually unobtainable. This has had the effect of pushing the price of Krugerrands as much as 10% above their intrinsic value, but the easily traded NewGold exchange-traded securities are at a discount. It is alleged that hedge funds who owned these latter assets are big sellers of them in order to cope with redemption requests from exiting investors. This is a much neglected corner of the market. Sell Krugers and buy NewGold?

The most amazing fact to emerge from an interview conducted at a Sandton hotel with some luminary from the accounting profession, published in today’s paper is that she and her interviewer sat down to a cup of tea and a few eats and coughed up R300 (excluding tip) for the experience! The interviewee’s mission is to attract the young to the profession. Catering like that should have them queuing up.

Thank you to those of you who noted that my birthday must have been far happier than anticipated in view of the wonderful ‘bok performance at Twickenham. Sadly now until the Super 14 starts in February(!) all we can do is stare in horror and amazement as politicians and other malignant organs fret about which breast the ‘bok emblem should grace. Well, how about awarding it to only those who have earned it, who can decide for themselves where to place it and are not inclined to vomit on it? If you want proteas, go to Kirstenbosch.

James Greener

28^th November 2008.

SINKING MARKETS SINKING PIRATES

This is a bear market. That means that there are more sellers than buyers and at the moment there are actually quite a lot of sellers and buyers have all but become an endangered species. Every participant has their own array of reasons for adopting their position but I would think that for many of the sellers it is a desire to raise cash as quickly as possible because that would seem to be something that is going to become very scarce. For the same reason, buyers are holding on to their money and are not going to spend it on very much more than paying off debt and surviving as economically and frugally as possible. Jobs and income are disappearing.

In my view the seeds of the current crisis were planted when governments began to believe in their ability to interfere constructively in the way that people lived their lives. The most pernicious and lethal of their activities has recently occurred in the financial realm where they hoped to impress voters by instructing people who have wealth to relax their own standards about sharing it with to those who have less. Here on the southern tip the current form of this scheme lurks behind the word “transformation”. An earlier equally appalling system chose the phrase “separate but equal” to disguise the reality.  The political allocation of resources assumes many guises but there can be few success stories. For a short and glorious time it seems that almost everyone is hitching a luxury ride aboard inflating bubbles. But now there is a roar of popping and escaping air.

However, those people with a salary and pension fund paid for from taxes have yet to feel any pain. Therefore they continue to travel and meet and talk and declare that pouring ever more public money into bottomless pits is the solution to restoring people’s confidence about the future. Hampering them a little is the scary sight of declining tax revenues and it looks as if their lifestyles and plans will continue only if they are able to borrow the cash. At the moment there is a happy coincidence of this borrowing requirement and investors’ “flight to quality” in the form of government bonds. This situation may not last long. There is little sense in continuing to lend money at interest rates below inflation. Our own National Treasury think that they will borrow offshore. I sense a foreign road show coming up. What will they answer when asked who the next president will be? The wrong answer could add a few points to the rate!

There is of course some good news in the share market’s pull back. It simply means that one can contemplate taking another small nibble at some of the quality counters that are undoubtedly better value now than they were a few days ago. Have you noticed that Anglo, now only the third biggest share on the JSE (behind BAT and Billton), is in danger of being pushed into fourth place by SAB? Be aware also that the current round of company result announcements is throwing up some disappointments in the form of lower earnings.

Not only are the Indians giving the Aussies and now England a cricket lesson they also won my admiration for sinking the pirate “mother ship” that was operating a little way up the coast from here. Somalia itself might be lawless but out there on the ocean, cannons rule. Yo ho ho. Etc.

I think that I may need to be alone to watch the England game tomorrow. Being in the company of possibly equally outraged and disgruntled fellow ‘bok supporters will be a bad way to spend my last hours in my fifties. Mind you, it might result in SAB securing bronze.

James Greener

21^st November 2008.

COPING WITH A DOWNGRADE

So by Monday, the world will be back on track. Lenders will be lending, borrowers will be borrowing, consumers will be consuming and politicians and bureaucrats will be rewarding themselves for having done a good job. The most powerful people on the planet are going to Washington this weekend to sort things out. We mere mortals may relax and leave it to them. Why at any of their many previous meetings the great and good failed to spot or do something about this economic slowdown will not be explained. Presumably they missed some vital factors or needed to break for lunch early or someone had to catch a plane and so nothing effective happened. To be fair I don’t believe that these guys and girls can do very much and what they ought to do, they won’t. This weekend will see gales of hot air, jostling for air time at the podium and a last group photo with the old guy in the White House. There will of course have to be a similar gathering in the New Year so that everyone gets an opportunity to meet the new guy. It will important for the political memoirs to have a picture of oneself shaking hands with him.

What isn’t on track however, is the way that these incompetent and wicked rating agencies are daring to suggest that South Africa might just possibly becoming a less desirable place to send ones money. Now I do have a great deal of sympathy with the fellows at National Treasury who claim to be affronted by these downgrades. I have no faith in the skill of these agencies to forecast the financial future of any entity. Their records contain some delightfully spectacular failures; for example it seems that much of the toxic waste that recently destroyed the investment banks had been accorded top quality status by these agencies. That they are often paid to carry out the rating by the one being rated makes me suspicious, and since they are really trying to signal a simple can pay / wont pay scenario why do they need all those letters  from triple A to double D that remind one of a lingerie department? Nevertheless I don’t remember anyone carping about these agencies when they were doling out upgrades. For all our sakes I really do hope that there is no local borrower about to renege on their foreign debt. It does us all great harm if that were to happen.

The JSE has been causing great harm to most people trying to make a quick profit. The short term gyrations have been huge and as always unpredictable. On average the All Share index remains about 40% off its highs and about 5% off the most recent lows. Resources have been the biggest losers.

Also amazingly unpredictable has been the oil price. Few folk thought it would ever be this low again. I too suggested that the producers had become so pleased with all the extra loot that the high prices were bringing in that they would do everything they could to stop it falling. But now at $60 a barrel I think we might begin to hear sad stories from those people who thought it would be fun to live on an island that looked like a palm tree from space. And us recession-bound westerners hoping for some bale-out cash from their sovereign funds – forget it!

Someone should introduce the founders of our newest political party to that anagram computer program. Just feed in the letters of all the words that they would like to use like congress and Africa and people and South and national and see what pops out. It must be very discouraging when your thrusting new group can come up with nothing better than COPE. That’s a rather weak idea for dealing with the country’s problems.

I am returning to my roots this weekend with a quick trip to Grahamstown. A beer at the Rat watching the Scotland match sounds good.

James Greener

14^th November 2008.

BARRACK ROOM DRAMA

I am delighted to see the end of the tired and seemingly inept and corrupt dynasty that has been in power in the US for what feels like a very long time. But the gales of waffle about what the new team will do and how they are going to return the world to prosperity and peace by next Thursday put me in mind of an English king getting his trousers soaked by a rising tide.

Many people around the world do not yet realise it, but they are now at the foot of a very long and steep learning curve. The most famous of them all is the US president elect who has begun a series of meetings, where it will be explained to him just what comes with the chair next to the window in the Oval Office. Since neither candidate displayed much grasp of the concept “insolvent” during their campaigns I would just love to be a fly on the wall when the fellows from the treasury show him the empty cash box and the list of foreign creditors. From that meeting he moves on to meet the uniforms who are bursting to bend his ear about bigger and better toys for killing people he didn’t know he was supposed to hate. By the end of these briefings he may well decide that the campaign motto of “change” is more appropriate to changing his mind about wanting the job.

Other folk losing their footing, even on the nursery slopes of their learning curve, are investors who are discovering that however welcome and history-making the new man is, he is also a left-wing politician and believes passionately in the Robin Hood model. This translates into more and bigger taxes and more and bigger government officials who are eager to help distribute the cash to needy cases that they believe they alone can identify. Provided, of course, that their own needs are first addressed with suitable salaries and perks.

And then there are the millions of folk on this continent who believe that because the new chap has relatives here, we can expect Airforce One to appear in our skies at any moment. It will of course be stuffed with sacks of folding money and instructions to the crew to fill the upturned palms that are such a part of the local landscape. Quite a lot of learning going to happen here too I think.

Central bankers world-wide seem to be missing the point. Interest rates are being slashed – has our own man been watching and taking notes – in the hope that people will borrow money and spend it. One article suggests that the planet is moving towards a zero interest rate scenario. As a hungry member of the baby-boomers-now-reliant-on-income-from-savings brigade this is a terrifying prospect! Also terrifying is that the very people who half a dozen years ago sewed the seeds for this mess by encouraging banks to lend without asking questions are now the ones gracing the screens with remedies against recession.

It is always hard to understand share prices, but oddly enough in this turmoil where the indices are 40% and more off their highs it seems reasonable to expect that on a five year view, portfolio returns could be respectable. If they turn out to be negative on that time scale then we are all indeed doomed and I will be long gone. Gentle buying at this time would not be discouraged but don’t expect miracles by Christmas.

Thank goodness there is some rugby to watch this weekend. The cricket has been dire and the wind is blowing so hard down here in the kingdom that any activity on the beach is a non-starter. I am not the shape to consider kite surfing.

James Greener

7^th November 2008.

AT LEAST OCTOBER IS NOW OVER

Tonight’s Halloween ghosts, gremlins and ghouls are going to have a hard time finding people to scare. Anyone watching the markets in the last few months has been experiencing the most terrifying times ever seen on the planet. A spot of ectoplasm oozing across the floor, bat wings brushing the face, skeletons in the closet and candle-lit faces inside vegetables are trivial compared to what we have witnessed. This week’s bounce was incredibly sharp and the phones lit up with investors worried that they had missed the bottom. No they have not.  I feel that the bottom is still a long way off in time if not necessarily all that far in price.

But this last conjecture could also be woefully incorrect if any of the dire possible threats gracing the newspapers comes true. Did you see that FIFA have taken out insurance against having to relocate the 2010 world cup tournament from South Africa? That’s alarming. You can be sure that none of the claim money would appear down here if they pulled the plug. And then there’s the matter of the government-in-waiting’s so-called economic policy. While correctly identifying unemployment as the biggest ill their belief that more and bigger government will fix the problem is terrifyingly wrong. You think the rand is weak now? Just wait.

Now let me see if I have this right. The big problem in America is that people were encouraged to borrow money to buy things that they were told to think that they could not do without. In far too many cases the loan was structured to disguise from often naïve customers the unpalatable truth that not only would plenty of interest need to be paid over the life of the loan but that the principal sum would also one day need to be returned. Adding to this alarming situation is the fact that many of the goods bought with this borrowed money quickly became worth substantially less than was paid for it. In dire cases the goods were consumed and now have no value.

On the lending side the footwork was swifter and niftier than any seen on “Come Dancing” The original lenders were all too aware that it would end in tears and shucked their tuxedos and strapless frocks in a heartbeat, to chains of buyers each eager not to be holding the parcel when the music stopped. And stop it did. In the last six months the financial markets and players have been plunged into a process of finding out who amongst them actually has any real money. To answer that question with certainty has in many cases necessitated that paper assets be sold for cash and has also brought to a near dead stop all other normal banking business. Alarmed by this stasis which threatens to derail the best laid plans of the politicians they have come up with a genius plan to make money even cheaper! Not only have they doled the stuff out to anyone with a pulse and a Wall Street address, they have now cut rates to a mere 100bp above zero! They believe that it is their duty to get the merry-go-round to start up again even though the fair-goers are exhausted and bankrupt. Eish.

This business of unearthing academic and other records of your rival has now popped up here on the southern tip. And deeply embarrassing it is going to be. I thought I would get in first by admitting that it took me four years to do a three year degree and that I never made the cut in the Throwing the Cricket Ball event from U9 all the way to U13 at prep school. Fortunately my woodwork was considered too bad for me to consider it as a matric subject so I had to do Latin instead. Malum malus. (Malema?)

I am certainly hoping for a home town victory at the final Grand Prix of the year on Sunday. Last weekend’s one was certainly very popular around here. And cricket season has started. When am I going to get a chance to go fishing?

James Greener

31^st October 2008.

BULLS ARE BLUE

Even founder member bears like me are startled by the way events are unfolding. I think that one of the big drivers for what is going on is that the US has decided to turn away from the outside world and concentrate on themselves and their own problems. The biggest of these is of course is debt – and lots of it. Despite everything that the so-called authorities can do, there is extreme reluctance and lack of capacity for any more lending to take place. There is now a desperate need for truck loads of dollars to pay off that debt. Americans are apparently selling off everything they own in order to raise dollars. And when they sell foreign assets – including here on the JSE of course – they then need to sell that foreign currency and buy dollars. Hence the present amazing strength of that currency.  

Naturally, selling shares on Wall Street is also a source of dollars and so that helps explain the weakness of that market as well. Anyone idly flicking through the TV channels will invariable chance across a remarkably attractive wide-eyed young lady relaying the latest plunge in the Dow while in the background are scenes of dejected dealers watching screens filled with red numbers. Thanks to these instant communications, the alarm and despondency becomes global in the blink of an eye, and investors everywhere become bearish about even their own local markets. It is an entirely unvirtuous and very vicious circle.

My guess is that the weak dollar gold price is evidence that the US government is selling some of their bullion reserves because they too also need dollars to pay debts. The rate at which the US economy is sliding into an ever deepening pit of economic seizure is quite terrifying. No investor anywhere is immune and there is pretty well nowhere to hide. Even the world’s greatest investor has felt moved to announce loudly that he thinks that on a five year view shares are worth buying now. The problem is that much of the audience are battling with a 5 week horizon of meeting the bills. Mr Buffet’s mortgage is probably paid off.

Mr Buffet is, however, probably correct and even I believe that local investors will probably find that most share prices five years from now will be higher than they are now. Those with the happy but thorny problem of a large amount of cash might think about the following two points. Firstly that the outlook of a positive 5 year return certainly was not true in May (some 40% ago) and secondly it is very likely that share prices will continue to go down even from here. This is a big and persistent bear.

But now consider the following propositions: that no one knows where the bottom will be nor how long it will last; that in the current environment, cash is a very poor asset class; that a buying program should be spaced out over a period of months or perhaps even years and that importantly, buying must be restricted to the highest-quality strong dividend-paying securities that are at multi-year valuation highs. Buyers should also promise to themselves and their advisers that they will not look at the shares prices and portfolio valuations more than once every month after each buying spree.

I have been in Johannesburg for a few days refreshing myself on what a proper traffic jam feels like and on just how beautiful this place is when the Jacarandas and roses are blooming. This evening I shall be home trying to find a place for a quiet beer which is not festooned in black and white bunting and posters portraying a toothy piscatorial predator.

James Greener

24^th October 2008.

AND NOW THE CURRENCY CRUNCH

If money had to carry a passport and had to go through customs and immigration when ever it went from one country to another then the queues at Joburg International would be all the way out of the door and into Kempton Park. The stuff is leaving South Africa at one hell of a rate. Both foreigners and locals are deciding that despite the attractive big-five motif on our notes, the artwork alone is no reason to hold the stuff. All of which is a long-winded way of noting that the rand exchange rates are soaring. More and more of our runts are required to purchase a unit of almost any other currency except perhaps for a Zim dollar.

 Presumably much of the foreign money has been down here trying to earn its owners a return in the JSE share market. Now there is a widespread view that it is game over in that particular arena and unfortunately for us all, the non-residents are suffering an extra whammy as they try to get through the narrow rand exit door all at the same time.

Every single foreign seller of JSE shares and South African rands will of course have their own mix of reasons for making these moves and hopefully not all of them are equally alarmed by the dramatic disintegration of the ruling political party. There will also be domestic reasons for taking their money back home. Maybe there is a new-found spirit of fiscal prudence and rectitude that will begin with paying off debt? Actually the good thing about politicians squabbling with each other over the spoils of office is that they then don’t have much time for dreaming up more ways to interfere in our lives and steal our cash. As long as they keep the noise levels down and don’t for a minute believe that anyone in the real world thinks that their opinions of each other is relevant or important, I say go for it.

It has been another week of severe tests of character and patience in the share market. I don’t think that the official interventions being proposed and carried out can have anymore than a brief effect on the still astonishingly large numbers of investors who trust that governments can conjure up a bull market. The bubbles that are being deflated and corrected in the current market actions are numerous, large and in some cases very long lived. Whether there are yet enough conditions being met to declare that we are in a recession or a depression or just having a bad hair day, matters only for the satisfaction of the box tickers. For everyone else, the fact is that their net worth, their standard of living, and their sense of financial security is noticeably less than it was just a short while ago.  Sentiment is deteriorating but I don’t think that it has yet reached a point of widespread capitulation and rejection of the share market as a destination for one’s money. Until that time the bear remains in charge. 

 I have often remarked that one of the most important components of any gathering, meeting or conference is the catering. After watching the world’s big cheeses in government finance gathering to out-bid each other with schemes about which particular black hole to throw money into, it is clear that the group photo session is also an important moment. After hard hours of saving the globe from the mess that they originally created, the delegates eagerly troop out into the sunshine and jostle about on the steps of the palace smiling at the cameras and hoping that the voters back home will see what important friends they have. Presumably there is a pecking order worked out by those smart but nearly invisible young ladies who prod the luminaries into position. It must be getting increasingly difficult to decide to reserve the centre spot for the Washington delegate and to get others who will agree to stand next to him. Folk from the USA are these days prone to asking foreigners for money.

James Greener

17^th October 2008.