SURVIVAL OF THE RICHEST

Only a few brave and agile traders will remember the amazing volatility in August with fondness. Problems were triggered when a ratings agency suggested that the US was not quite as good at servicing its debt as it used to be and dropped it from the AAA club. Opponents of this view rightly pointed out that since the USA actually printed the dollar bills, there was no chance that lenders would not get their money back. The ten year bond yields fell to the ludicrously low level of nearly 2%. What received less publicity, however, was the undeniable fact that the very act of printing those dollars was simultaneously eroding their value and so lenders would definitely be repaid with less value. That seems a fair enough reason for the rating downgrade.

Even before the month is over another potentially market-moving event is taking place in Jackson Hole in Wyoming. This sounds like the venue for a shoot out between the bad guys and the sheriff, and in a way it is. US Federal Reserve Chairman Bernanke has been attending a meeting there and is scheduled to report on its deliberations later today. It is unlikely that the talking heads will have been able to resist the temptation to “fix” things, and indubitably their interventions will provoke the bull and then later the bear.

Mr Warren Buffett, possibly the world’s richest man, has infected his peers and competitors with a very dangerous disease. Its symptom is the demand that they be allowed to pay more tax. This reveals their entirely mistaken assumption that governments will distribute their money to the poor more effectively than they could. Tellingly, the disease has yet to surface in SA. In the meantime, Mr Buffett has arranged for the Bank of America to take a $5bn deposit on which it will pay the astonishing yield of 6%pa. Which of that bank’s other clients are going to be paying for that generosity? Probably it will be the poor ones with overspent credit cards.

It is rumoured that the missing despot from that troubled North African country has been spotted at a traffic light in Pretoria selling flags, naartjies and coat hangers. After all we have been the only country to complain that the manner of his removal from power was undemocratic and it is possible we have offered him tea, sympathy and a job. Noble sentiments, but unlikely to impress the young men wielding those terrifying automatic cannons fitted on the back of a bakkie careering through the streets of Tripoli. With so much weaponry on the loose it may be a while before the ballot box is seen as a practical alternative.

Allegedly the SA Rugby Board is considering a plan where a side in the Currie Cup will lose points merely on the basis of the names on its team list. Just think where this could lead. No longer will it be necessary for coaches to pick the 15 players who they hope will have the best chance of beating the opposition in 90 minutes of physical encounter on a rough or muddy field.  Instead each week they will merely submit a team list of individuals they think will meet the Board’s criteria and await news of how many points they lose. The best actual and aspirant rugby players in the country will drift off to play somewhere where they are required to don a jersey and boots to prove their worth. This of course is a concept and technique becoming all too familiar elsewhere in the nation. Potential ability and skill to fill a post, counts for less than name, gender and ancestry. Sadly the one or two cabinet ministers who have expressed concern about this deeply unfair and hugely inefficient labour policy, have been reprimanded for straying outside their ambits.

James Greener

26^th August 2011

THE BEAR IS GETTING WARMED UP

For many months the JSE share market was stuck in a trading range and the list of factors that were being scrutinised for a sign of which way the breakout might go was getting longer. Frankly I think that we bears had the better and more compelling list. And so it has proved to be although it is quite uncertain what finally pushed matters past the tipping point. Personally I single out the US debt situation but right now it doesn’t matter. All those factors are still there and many of them will be exacerbated by the damage that the bear is doing to share markets around the world. It is not yet anywhere near the time to begin looking for bargains.

Undoubtedly all the usual “experts” like the central bankers, politicians and bureaucrats will soon be barging in and distributing other people’s money in yet another attempt to “fix” things. This fixing is really just about not letting capitalism and markets do their job of culling the weak and sick businesses and ideas and making space for fresh and novel ones. The problem is that in many economies the government and business are mutually dependant for survival and they both hang on long past their usefulness.

Here is SA this does not seem to be the case as there is a growing antagonism within the ruling political class towards the organisations and individuals who probably pay most of the tax. Lead by a so-called “youth league” the kleptocracy are raising their eyes from the tax to the income on which the tax is levied. The demand is for “economic freedom” which as far as I know they have not defined beyond the phrase “nationalisation without compensation”. The core principal, however, appears to be the acquisition of unearned income. Their point is indeed attractive and given just how hard it is to start and run a private enterprise where earnings exceed costs, their marches might attract support from everyone in the country not already dependant on the state for a living. Sustainability is obviously some else’s problem

The latest crop of company reports show a slight bias in favour of disappointing earnings often considerably lower than a year ago. Even MTN, the cell phone company, failed to reach double digit percentage growth. Some niches are doing better, however. The demise of Transnet as a reliable service has certainly helped the trucking industry, and the low profile unglamorous businesses that stock and supply the parts that keep the big machines running are OK for the moment too.

Finally here along side the Indian Ocean the Yellow Billed Kites have returned. For me they are the indicator of the start of summer and it has indeed warmed up considerably. If we have another cold winter like that down here next year I shall have to think about moving! Sutherland, I believe is a poor alternative. Thank goodness I never pursued my idea of a career in astronomy.

SAB are finding the Foster’s defence against their takeover bid as fierce as the Wallabies defence of their try line against the ‘bokke last week. Meanwhile the All Blacks are returning our favour of resting their stars for the test in PE tomorrow. Unfortunately not every ‘bok supporter will be clad in green and gold. In a huge triumph against crime and corruption the police have unearthed and impounded a large consignment of counterfeit ‘bok shirts. It’s hard to see why we should not be allowed to choose to buy them over the genuine article. After all many suggest that even the ‘bok coach is not the real thing. May I once again point out the unbeaten Lions at the top of the Currie Cup log?

James Greener

19^th August 2011

WHO’S TURN FOR THE YO-YO?

Amidst the hectic gyrations of the global share markets, a quite disturbing announcement was delivered in Washington. This was that administered interest rates would remain close to zero at least until 2013. While this is devastating news for those having to live on savings it is also an admission by the largest central bank that its efforts to get the economy going are puny and fruitless. Many commentators are warning that the USA might be echoing what happened in Japan where share prices and businesses have been depressed and slow at least a decade.

Locally it feels that the number and impact of positive company announcements and economic reports and data have been substantially outweighing the less optimistic ones. Certainly there have been days when the JSE quite deliberately moved up when other markets were losing their grip. However, I think that the outgoing tide is probably the stronger and the rand weakness suggests that overseas money is going home. That is, we have not yet seen the bottom, so in due course some tempting valuations will be revealed and prudent buying will then be in order.

I am ashamed and embarrassed to admit that I did not know that here on the southern tip we had more than one recognized king. Reportedly they all (?) converged on Joburg this week for their first ever meeting with each other.  Presumably agenda items will have included the care and maintenance of regal regalia, how to deal with unruly princes, and the terrible cost of appropriate consorts. I don’t think the Swazi king got invited as he would have been tied up ensuring that the “four pillars” of performance required for the disbursement of his R2.5bn loan from SA were in place. The first of these is reportedly that his government needs to undertake “confidence building measures”. What a classic piece of bureaucrat nonsense!

Also in Joburg it was announced that taxis and buses will be exempt from the tolls on the R20bn worth of highway improvements that the city has provided. Whether or not royal entourages and bureaucratic convoys will also be exempted from the impost was not mentioned, but obviously only those vehicle owners with easy to find addresses will be pursued for fees owing. Substantial shouting about and deep dissatisfaction with the proposed tolls has broken out, allegedly on behalf of the poor, who are not, I’d have thought, car owners.

No one would disagree that the health services in SA are in dire need of improvement. Just getting back to the levels and standards of a dozen years ago would be a good idea which the present leaders seem unable to achieve. The proposed National Health Initiative is therefore very unlikely to be a success. The biggest puzzle at this stage is why is it going to be so costly? Presumably just about every doctor, nurse, physio and pharmacist who wants employment is already earning an income whether from private patients or the government, and while increases are always welcome, where else is the money going to go? How many Cuban doctors are we going to be able to attract? Some of the cash could be spent on buildings, equipment and training, but are there not already unspent budget allocations and woeful inefficiencies in those areas? Drugs and consumables are extraordinarily expensive; but even with an increase in the number of professionals surely not that much more can be used up? Not even the most ambitious schemes for larceny, theft and corruption could account for the balance.

The city is filling up with folk wearing green, gold and an air of panic. Tomorrow’s test against the Wallabies is the reason. No further rugby comment can be made except to point out that the Lions are top of the Currie Cup log, unbeaten and probably insolvent.

James Greener

12^th August 2011

FLOCKS OF BEARS SIGHTED

Suddenly it is all looking very messy. In a couple of days the All Share is down almost 10% and is back to where it was a year ago. The news wires and pundits are crackling with excitement and urging people to buy at these wonderful levels. But I am not so keen and think that the bear has a lot more work to do before he gets most investors to the point where they never want to buy another share ever again. Traditionally that’s the signal that rouses the bull. Except for this big fall in equity markets, nothing fundamental has happened elsewhere in the economic landscapes. In the US, where of course they raised their debt ceiling at the eleventh hour to even sillier heights, there is talk of the feds coming in once again with “stimulus money”. The Eurozone is springing leaks everywhere. People are waving and drowning!

One good news story locally comes from the so-called small and medium supermarkets sector which operates mostly in the rural regions. They are reporting sales up 73% compared with 2009. From our desks in the city it is hard to imagine how this can be, but perhaps it is government outflows both formal and illegal that are reaching purses and wallets out there in the sticks.

If these poor souls try to flee to the cities, probably the only job they might get will be to clean stuff like streets and floors. Fortunately for them the Services Seta is right onto their plight, convening Cleaning Services Industry Information Sharing Sessions. The five item agenda for these sessions is astonishing to those of us who have no idea what goes on in this industry. The item about new qualifications and unit standards is particularly fascinating. Who knew that, provided the standards were met, one could become qualified to push a broom or wield a mop?

The Pan South African Language Board spent R5.4 m in legal fees to dismiss its CEO. That seems like a lot of money to say “You’re fired!” but presumably the process had to be conducted in all 11 official languages (and Braille).

And so here it comes. Legislation to regulate the ratings agencies is on the way. They will have to become “registered” – that delight of all bureaucrats. Because there is scant difference between a ratings report on an entity and a research report published by an analyst, registration of pretty well everyone in this industry must be imminent. Mining analysts are already in the net. Presumably the objective of the regulators is that aggrieved investors who follow advice that turns out to be wrong must be able to place the blame and loss elsewhere. Sadly it is true that even professionals, who should know better, fail to understand that the responsibility of an investment decision rests with them alone. Justification for this statement lies in the fact that, especially in the case of company analysis, it is common that respected analysts will have opposing views, thus demonstrating the subjectivity of the exercise.

The government has announced that it is to create two new commissions whose tasks will include fighting red tape.  There is something oh so wrong about this idea!

 “Winning will be high on our list of priorities” was the headline that accompanied the report of the Springbok coach’s response to the nation’s disgust at what happened in Sydney and Wellington. What exactly is at the top of this list then? Ensuring that the sponsor’s cheque arrives on time? Providing properly prepared orange slices for the lads at half time? Or maybe it is to have a training and selection policy that confuses and disappoints as many people as possible while delighting the opposition. Yes, that must be it.

James Greener

5^th August 2011

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