SECONDS OUT

For the last nine months the All Share index has languished within a narrow range of no more than 3% either side of its current value. This quite unusual behaviour has probably proved pretty poisonous for punters. For investors the problem has been compounded by the fact that during this time valuations have remained historically high and so opportunities for new money are very limited. The situation will of course change at some stage and in my view the correction will be downwards. Also unknown are when this will happen and whether it will be as sharp as the 2008 correction. And it would be really useful to know how far down the market will fall.  In the absence of all this information the best idea is still to sit tight in quality well-managed dividend paying companies, particularly those who have some exposure to mineral exports. This morning’s announcement by Anglo suggests that it might now be back in that category after a very bleak period in its history.

I was a student in England when the politicians there decided that people were incapable of enjoying and organising exercise without interference from the government. A Minister of Sport was appointed and many folk wondered what he was going to do. Would it be unfair to point out that since then England has yet to win another soccer world cup? Naturally here in SA we also have a department and minister to look after sport, recreation and culture with a budget this year of R6.4bn. This week that department plunged into the murky world of SA boxing, promising taxpayer’s money for pugilists who claim that their own governing body has cheated them by allegedly not paying purses or incorrectly withholding taxes on payments. The story is extremely muddled with tales of cancelled bouts, withdrawn boxing licences and stripped titles. Naturally SARS are in the mix too after noting that nothing much appears to have turned up in their coffers either. The best quote so far comes from the head of SA Boxing who complained that his outfit “is not a tax collector.” This could develop into a wonderful drama.

My thanks go to a reader who has pointed out the glaring fact that explains why the government’s anxiety about the merger of Wallmart / Massmart is still dragging on. Presumably it is simply because no palms have been greased and no relatives have been promised mispriced contracts. In the US they have a piece of legislation that forbids any of their companies from paying backhanders and corporate suits are fearful of being caught because the law is enforced and penalties are severe. Local panhandlers have yet to grasp this concept.

Indeed the tide of corruption and inefficiency seems to rise deeper every day. At a rough count almost one half of the stories in the local pages of Business Day are about unusual and unexplained cash flows.  With great reluctance suspected miscreants are suspended or allowed to leave, only to pop up in an even more lucrative and sensitive position elsewhere. Here’s a suggestion that might help. In the state sector especially, immediately stop the practice of suspension on full pay. The accused, if guiltless, will understandably insist on a speedy resolution of the case and when cleared can receive the missing salary. The dodgy will be unlikely to want to face an inquiry and with luck will disappear and the post can speedily be filled.

As well as the weather becoming nasty (again!) there are few reasons to get out of bed tomorrow until at least noon. In this way you will miss having to watch live the clash between the ‘Bokke and the All Blacks down on that soggy island. But you will be able to catch the qualifying session at the Hungarian GP. And of course the Currie Cup matches where, I would remind you, the Golden Lions head the log.

James Greener

29^th July 2011

JUST KEEP BUYING THOSE LOTTERY TICKETS

In rand terms the gold price is probing new highs and in the scramble to own something trustworthy there are even buyers of short dated US government bills with negative yields. There is growing awareness that the suits and talking heads actually have no ability to bring back the good times that many folk in the west recall from the second half of the 20^th century. In his speech recently Fed Governor Bernanke almost admitted as much. He did boast that there were at least three levers he could still adjust to bring about instant happiness but neglected to point out that none of them had actually worked as promised when he pulled them last time. The US Minister of Finance even warned his citizens to prepare for a long period of hard times! The fact is that most old and developed nations have run out of the resources necessary for the all the programs of state employment, handouts and entitlements that have for so long been used to buy votes.

Official response has been mostly to try to gather more resources. Report after report tells of some talentless satrap who has a scheme where everyone bar his cronies and fans will contribute towards either worsening a mess already created or fixing a non-existent problem. This is not just a local issue. The biggest but most boring squabble is happening in the USA where they are having their annual joust about something called a debt ceiling. It will, as always at the eleventh hour, be raised so as to extend the lives of the sacred cows of entitlements and tax cuts, simply because the notion of that nation defaulting  is unacceptable. The notion of the nation being bankrupt is somehow acceptable. In Europe the bureaucrats are going through the most amazing contortions to disguise the fact that many nations there are also bust. Back home the list of who wants more money is endless. From distributing Lotto money to a trade union to hold a party, through hiring more labour inspectors to enforce regulations that destroy employment, and on to scams like RICA and schemes to raise property rates. Although the National Treasury’s exchequer numbers are, on face value, benign enough, the bearish analyst can discern signs that the expenditure side is lacking discipline. For example why the need for the moratorium on state spending for budgeted capital projects? This is killing the construction industry.  Government revenue is taking its time in returning to pre recession levels – another sign that the private sector is still struggling.

And now there is CRISA. This is a set of 5 principles – Code for Responsible Investing - compiled by a very big committee of worthies (many of whom I hoped would know better) -that allegedly ought to be applied by institutional investors and their clients when making decisions. A 13 page guide has been published, but secretly everyone knows that the only thing that counts for every professional investor is that the total return achieved must exceed your competitors. Watch for the term “CRISA Adjusted Returns” to explain poor results. The Code is heavy on the ridiculous fallacy that a portfolio manager or a member of a pension fund or the owner of an endowment fund or unit trust is a deep and knowledgeable source of advice on how to run the companies in which their savings are invested. “Stakeholders” is these days a grossly overused term that I am sure evokes feelings of dread in the average CEO when it appears in his diary.

Why doesn’t the government just come out and say that they do not want anyone to open a business in this country which “doesn’t understand how we do things here”. The poor chaps at Wallmart/Massmart have been told to assemble yet again for questioning as a number of cabinet ministers wish to hear different answers to last time. Good Grief Charlie Brown, has no one seen that company’s estimates of what they plan to spend in order to enter the markets they are targeting? Billions.

We shall soon know if the ‘bok side sent to the antipodes for the Tri-Nations deserves the name and jersey. There’s a great deal of humble pie to be consumed if they do notch up some wins and just think what it will do for the selection pool if these youngsters deliver what we expect Springboks to do.

James Greener

22^nd July 2011

EVERYDAY THERE’S A COUNTDOWN

Just a few moments ago some news which was deemed “bad for the markets” was released in the USA. This time it was something to do with fewer Americans having jobs and all sorts of prices all over the globe, including our own All Share Index, swooned. The amount of attention that each analyst will pay to this news is probably inversely proportional to his or her age and experience or if they are unlucky, the age and experience of their boss. Among the driving forces of securities analysis is the belief that not only is there a discernable effect for every cause but also that investors should care about each one. An even more dangerous belief is that numbers are accurate and meaningful and worst of all of course is that expectation that potentially market moving information is live and current and that investors have time to react.

 The short-term anomaly of today’s US jobs data is that the US markets in particular have been behaving in a very bullish manner this week and it looked like nothing would derail them. The alarming valuations of some of the newer dot.com-like issues that are making a reappearance are worth mentioning again. Back here on the southern tip it seems unlikely that most industrial and financial companies will declare greater earnings or pay larger dividends in 2011 than they did in 2010. This might just mean that some investors become disillusioned and buying opportunities will appear. But we shall just have to be patient. In the meantime simply holding on to one’s shares in well-managed companies with great brands and reputation is about all one should be doing. As usual.

I have great sympathy and admiration for anyone managing a business. This week they were faced with the modern equivalent of the medieval sale of indulgences to buy places in paradise or at least the government’s good books. And this came as strike season hotted up with unions promising their members that 2011 will be a year to remember. For all our sakes let’s hope that it wont be the memory of the year they lost their job.

I am pleased to report from Durban that it does not look as if any Olympic Official missed either lunch or dinner while located here for their important meetings. Blue-light escorted motorcades have been wailing up and down the highway between the conference venue and the area’s top hotels throughout the day and night and no one important suffered the indignity of a traffic jam.

On the other hand it seems as if many potential and probable Springboks have suffered injuries during the marathon Super season. And now the Tri-Nations and World Cup are looming. I suppose only the players and teams themselves have the right to challenge the people responsible for this overfull calendar. But like us investors perhaps they are also loath to pass up a chance to make some money by cancelling some games.  Its tough stuff.

I shall be watching the last space shuttle launch tonight. I remember being taken on to Mountain Drive in Grahamstown to see Sputnik.

James Greener

8^th July 2011

ACKNOWLEDGEMENTS

This is a very sincere and heartfelt thank you to all those readers and fans of Tidemarks who found the time to send me so many kind wishes and messages of support and experience. The chocolates have been great too.

It has been both alarming and reassuring to find that so many of you have also been along this route of bypass surgery. I am surely not alone and thank you all again.

I seem to have made the classic error in underestimating just how long a full recovery might take and I also did myself no favours when I scanned the missing weeks’ headlines to find that the world has become no more honest or sensible while I having been lying looking at the ceiling. I think the “adopt a pothole” program must have altered my prognosis several points. Recovery was even totally stalled for a while when I got to the picture of the thankfully now departed potential Lions business partner and his blonde retinue.

It is going to be a while before normal service will be resumed.

James Greener

1^st July 2011

ROBBING HANS TO PAY ZORBA

The markets are frankly a mess. News items which in the past may have elicited one type of response are now just as likely to have the opposite or even no reaction. In the USA there are signs of yet another fad in buying shares in hectically overvalued companies where the assets walk out of the door on two legs every evening. Another bubble appears to forming around the huge numbers of very rich and label-obsessed Chinese who have discovered shopping as a contact sport.  Best to keep one’s head down and stick with the larger, financially healthy, well run and established companies that make and sell stuff we know and understand.

Once again the total absence of any formal economics training makes me unable to make any sense of the idea that lending money to Greece to help it pay its debts is either sensible or, more importantly, mathematically valid. At the end of the charade, Greece or which ever the particular basket case of the moment might be, is still in debt. Perhaps it now owes different people, but even that is not certain since there seem to be only a limited number of sources that have any money to lend. Follow the trail back through the thickets of lenders and borrowers and it is quite likely you end up at the door of the very same institutions that made the now obviously bad decision to lend the original sum to Greece in the first place. And too often the deeper tragedy is that those lenders turn out to have been using some else’s money left with them for safekeeping. It seems sensible that governments ought constitutionally to be forbidden from spending more than they collect and that debt in public enterprises should be used only for financing identifiable and specific infrastructural projects. It is wrong that an investor or lender of any amount should expect or demand a rescue from some benevolent third party – more often than not the tax payer – if it turns out that the counterparty fails to deliver.

The taxman’s complaint about shrinking revenue is a similar issue. A few years ago the government made the erroneous assumption that owning shares in a company is the path to instant prosperity. From this idea grew the policy of political allocation of resources which companies were strongly encouraged to facilitate. Since in most cases these empowerment schemes were characterised by a chronic shortage of actual cash it was surely obvious that companies would try to get the state to plug the gaps, since it was their idea in the first place. Elaborate deals were therefore concocted in which tax payment minimisation played a part. Hence the taxman’s moans.  This will of course be yet another example of the failure of command economics that its supporters will ignore and deny.

An impressive number of cell phone owners have RICA’d themselves with ID and proof of residence. The proportion is well above 95%, and since the stated objective of this annoying and intrusive piece of legislation was to help cut down on crime it is sad to see no report of this happening. Presumably that means that it is the people who have so far failed to RICA who are the ones responsible for all the crime and it should be simple to go out and pick them up. No, wait, we don’t know where they live. Uh Oh.

Investec have refreshed their delayed issue of a new variable dividend preference share. The interesting aspect of this counter is the very high (95%) fraction of the benchmark prime interest rate that will be used to set the dividend amount. They declare specifically that this is in preparation for next April’s change in tax legislation when dividend withholding tax at 10% is scheduled to be introduced. Other issuers will on that date have to adjust the fractions on their preference shares upwards to compensate shareholders. Until then the price of this INPPR will be presumably be high relative to the others.

I am told that the Bulls Sharks encounter this weekend is the BIG ONE. It will undoubtedly be fierce, and perhaps even a bigger game the World Cup final in a few months?

James Greener

17^th June 2011

BOXING CLEVER

One needs to be in a quiet place with no distractions in order to think about the information that the US government’s biggest creditor is its own Central Bank – The Federal Reserve. On behalf of the nation, the government has so far borrowed $1.3 trillion from the Fed – almost all of which was created at the click of a mouse or the rumble of a printing press. This process gloried under the name of Quantitative Easing, and there have been two sessions of this event known as QE1 and QE2 in the last few months as the US has tried to force its way out of recession.  However, that government, like many others, pursues a policy of every day spending far more than they collect by way of taxes. Some of the spending has, of course, to be used to service the debt, because if they did not do that then the USA would be in default – just like Greece – and everyone knows that the US is way better run than Greece. I hope you are following this.

Washington has been spraying the rest of this borrowed cash around in the hope of making its citizens feel prosperous and optimistic again. Sadly for the suits, this has not happened. The reality is that job prospects, wages and most significantly house prices in the US are all still very subdued. Another factor is that the second biggest category of lender of cash to the US Treasury is the US householder, who is at last starting to wonder if he will ever get all his money back.

A great number of those freshly printed notes found their way into the hands of folk who decided to spend it in the share markets. This helped to keep prices looking rather buoyant for several months. But now comes the news that there might not be a QE3. Buyers are disappearing and US share prices are doing what they probably ought to have been doing for a long time – falling. Even in those markets where their government has not been so financially imprudent – like here – bulls have also been standing back and the JSE had a poor week

It is hard not to be cynical about the reason for the unexpected shuffling of the boards of the big state owned enterprises. It is true that none of the organisations was performing in an exemplary and admirable way but in some cases the deposed incumbents were new and inexperienced (much like their replacements) and had not had time to show their stuff. But as we can see with the proposed information secrecy bill, the government appears to be tightening its grip everywhere and perhaps the enterprises were straying too far “off message” and needed to be reminded that ideology comes before customer satisfaction.

On this theme, Durban must now be one of the largest cities outside of China and North Korea where the mayor is a communist. Mayor James Nxumalo, draped with the city’s R2.3m mayoral chain of office, looked rather un-proletarian but declared himself to be an activist and servant of the people without any aspiration to being a capitalist. Well that sounds very good then. Good luck James.

And now I am off for a beer with a squad of loyal and fanatic Sharks supporters. I shall of course tell them about the TV pundit I watched last night who felt the Lions were in with a good chance and how I hope he is right. Of course I won’t admit to them that I really do want to see three SA teams in the playoffs and will move swiftly on to the topic of whether we can hope for another toothy South African lad winning a golf major at the US Open.. And then of course we can discuss the very first IBF women’s welterweight belt being fought for on African soil tomorrow night. It is between a South African lass and a New Zealander. I wonder if she starts off with the Haka?

James Greener

10^th June 2011

MANUFACTURING GROWTH

Why do you think our President JZ went to see the Colonel in Tripoli earlier this week?  I really hope it wasn’t to offer him the facilities of the state guest house now just refurbished after the last despot departed. Aside from boosting sales of Deep Black hair and moustache dye in Pretoria there seems to be no other upside to hosting that rather tatty character here.

The news that the economy had grown at its fastest pace in more than three years was received with some doubt by us bears. The puzzling detail was that the biggest single contributor to this growth was the manufacturing sector which does not currently seem to be happy with its order book. During the second half of 2010 the Industrial index earnings base did put in a rise of about 8% from the depressed level that followed the 2009 decline. Since then, however, reported earnings from JSE listed industrial companies have been pretty flat and we will need to look elsewhere for something to propel the GDP as much as this. Another satisfying result of the unexpectedly perky growth is that many of those other statistics that are expressed as a percentage of GDP are looking much healthier. In particular the R149bn government deficit is now just 5.2% of GDP. This is a ratio that many other nations like Greece, Portugal and the USA would be very pleased to have. Furthermore, government expenditure has also backed even further away from breaching the 30% of GDP level. If all these numbers are true and valid we have lots to be proud of. But why are so many people unable to find work?

However, it will take a much bigger fall than we saw on the JSE this week before most shares on the JSE are no longer overvalued and trading at prices that are discounting earnings rises far larger than can reasonably be expected. A number of new listings and plenty of capital raisings are doing their bit to suck up the cash that is looking for a home. Amazingly even the outfit that builds and operates the toll roads saw its bond offer many times subscribed. Some of that debt is government guaranteed but still they are the guys who have built these roads but have not been allowed to collect their tolls yet.

But lending money to suspect outfits is all the rage. In the USA long bond yields are far below even the official inflation rate and yet many investors seem anxious to pile in and enjoy an assured erosion of their wealth. One day someone in Washington is going to discover the lever that lifts interest rates and give it a hefty tug. “Then”, as a colleague once said “it will be viewing unfit for children.”

About the only crime that Wal-Mart has not yet been accused of wanting to commit now that at last they have been granted permission to come and risk their own money in SA, is that they will be selling contaminated German cucumbers to the poor and helpless consumer. I do hope that someone is keeping a list of all those people who have predicted that the opening of a new shop will cause the end of the world. It would be fun to see which of those on that list might actually be tempted by the allegedly low prices of this new entrant.

The words “if” and “then” are getting a vigorous airing in the pubs of the kingdom at present as Sharks fans work out the various combinations that will get them to the final. In the event that things go awry I suppose that there will be widespread support for the opinion that the Super Rugby season has been far too long, especially as this is a World Cup year. Lions supporters have an easier sum to do.

James Greener

4^th June 2011