ECONOMIC FREEDOM (DAY) IS NOT CLOSE

Among the many numbers that we analysts can use selectively to boost our current view is one rather optimistically named “the leading indicator”. Allegedly it behaves in a manner that is later is echoed by the dreaded grand poobah of GDP itself. The latest published value for this statistic is down a tad so in simple terms this means that 2012 could turn out to be a slow year. If so, that would count against us enjoying decent market performance for the year as well. In fact the All Share index has been stalled for almost six weeks and the dispersion between the performances of the different sectors has disappeared. This is not the time for large general portfolio investment.

This week the broking industry got its first taste of playing tax-collector for the new dividend withholding tax. It works like this. The full as-declared dividend amount is credited to each client’s income account, whereupon a 15% deduction entry is immediately processed for every account not identified as exempt (basically all individuals and trusts are not exempt). This money is then sent to SARS together with a list of who it was collected from. In cases like Anglo where some clients have chosen to receive shares in lieu of the cash dividend, this after-tax dividend amount is sent back to the company and in due course the extra shares will be added to their portfolio. Any suggestion that SARS ought to pay us a fee for this work has been rejected with scorn and derision. Things are creeping closer to the alleged joke tax return that asked just one question of the taxpayer “How much money have you got?” Send it to us.

The furore about how to fund the company (SANRAL) that upgraded all those roads around Joburg is raging strongly. Apparently it was made clear when the project started that tolling the roads would be the solution but now the arguments against tolls range from outright defiance to detailed nitpicking of the fine print. An eleventh hour courtroom drama is taking place. Fanning the flames is the recent realisation that the promised exemption from tolls for the already belligerent mini-bus taxi industry is not certain. Here’s a suggestion for those taxi drivers. Just pay the tolls chaps and then claim them back when the exemption comes through. Surely you trust that SANRAL will swiftly refund your money?

At first glance the INet-Bridge headline announcing a new government agency to promote entrepreneurship seemed like a perfect example of oxymoron. Surely by definition anybody who can create wealth would never work in government and so the state could hardly be in a position to offer advice on such a matter. But a moment’s thought reveals the wisdom of the idea. For generations the best way to secure government contracts has been to know the right people in the right departments. This new agency, which will be born out of the consolidation of three existing but obviously ineffective agencies, should merely publish the names and family trees of influential government officials. Entrepreneurs will then pop out of the wood-work as it were. Unfortunately, closer reading reveals that the new scheme will start life already crushed by its name – SA Finance Enterprise Agency (SAFEA). All too predictably it is about allocating money—probably at the wrong price – to small businesses operating in “the 17 infrastructure projects identified by the Presidential Infrastructure Coordination Commission”. Well woo hoo. That doesn’t sound very entrepreneurial. A government committee? Infrastructure projects? Oh dear me no.

Another brace of short weeks has cropped up and all true South Africans have filled up the 4x4 with fuel and beer at R12 per litre and left for the berg or the beach. The markets will go into sleep mode until perhaps next Wednesday. There’s a bit of rugby to watch. One supremely optimistic journalist suggests that the Lions are favourites in their clash with the Brumbies at Ellis Park. That’s nice. In the meantime one does need to sympathise with the Sharks about some very odd decisions that keep going against them (or so I’m told)

James Greener

26^th April 2012

WHO IS KING OF THE (SAND) CASTLE?

Undoubtedly there is plenty of froth in the markets even if most investors can’t see the large bubbles that we bears are sure are there. In the USA, property prices are still falling and a very large number of house owners owe more money on their mortgage than their home is worth. Also in the US, the central bank is lending money at very low interest rates to banks that, without any one very interested in borrowing it in turn, are pleased to buy US government debt and make a bigger profit. In the Euro Zone, the patchwork quilt is unravelling at the seams as communities who believe themselves to be industrious and thrifty, deeply resent supporting others that they feel are spendthrift and idle. And here at home the government begs big business “to come to the party” (i.e. send money) while simultaneously berating them for trying to make that money. The markets have experienced many failed upside break-out attempts, but they are faced with these and other headwinds which blow business from their preferred courses of getting on with what they can do. Rather they have to do what they are told to do.

The ultimate bear’s scenario is of a significant correction that unfortunately will destroy a lot of wealth and probably scar many people but which would result in a new and solid base from where to start again.

The chaps who run the nation’s ports are going to dig a brand new one down on the site where the old Durban airport used to be. It is very exciting and it should create a lot of employment and will need plenty of spades. When finished, the new harbour will be capable of berthing two dozen ships. What is not mentioned, however, is what they plan to do with all the sand that will come out of the hole. There is only a limited market for souvenir packets of the stuff for nostalgia freaks wanting to remember the old runways. The rest is going to require some inventive salesmanship. Maybe someone in Joburg would like to build a beach resort?

Just how many athletes and administrators are we sending to the Olympics and how much will their outfits cost? It must be plenty because out of that amount the Chinese supplier has promised sponsorship of around R30m. It is little wonder that no local supplier of takkies and t-shirts was interested in kitting out the boys and girls in green and gold if this was the level of incentive required. Is this maybe one of those mysterious trades like the notorious arms deal where we expected to benefit from R110bn of so-called “offset investments” in return for buying just R60bn worth of toys for the defence force?

This kingdom thing is getting really messy. We might be in for a War of the Hibiscus. It seems that the government knew that something was brewing and took the precaution of setting up a Commission on Traditional Leadership Disputes and Claims. So far at least ten king wannabes have made appointments to meet with the commission who will need the Wisdom of Solomon to sort it all out. Fittingly the venue for the meetings is the Jewish Hall in Durban.

Perhaps the Commission will have representatives at Zuma’s place in Zululand this weekend looking to see if any of the pretenders really are A-list and have scored an invitation to the President’s wedding. This is the sixth time Mr Zuma has taken a bride but a Presidency spokesman has tried to calm tax-payers fears of mounting costs by pointing out that Miss Ngema will become just the fourth official wife. Nevertheless, her two children become eligible for 60 single domestic economy class air tickets a year – paid for by the state. That’s a lot of flying and multiplying that by the whole Zuma youth ensemble it helps explain why flights are so often fully booked. And why the Pres himself travels by private jet. He avoids having a youngster from the back of the plane creeping forward to ask if Dad could advance next month’s pocket money.

You have probably noticed that the Lions are at the foot of the log. Again. But they have won a game; unlike last year. Go Sharks (they need even my support against the Chiefs tomorrow).

James Greener

20^th April 2012

SHOOTING OUT THE LIGHTS

We bears are quite certain that the financial crisis is not yet over and that the various pieces of good data may be misleading. Certainly the US bond yields have fallen back to 2% and the midweek equity market flight is being reeled back in. But Europe is really still in a dreadful mess with many governments being unable to admit that all the disbursements and subsidised services that their citizens have come to expect can frankly no longer be sustained at current levels. Here at home the stories and evidence of the plight of the small enterprise is growing. Whether it is the demolition of manufacturing capacity by cheap imports or the government’s misguided attempt to control everything, turnover and conventional productive employment are under threat. And don’t even mention profits.

The state is currently spending R2.4bn a day, but far too much of that seems to “leak” straight into personal consumption without the government obtaining any services for the payments. It is further worrying that R0.4bn of this daily expenditure is borrowed money. These are shaky foundations on which to build a recovery

One can understand but not condone a government’s desire to keep certain information to itself. Like who has stolen what or which promises have not been kept or how many submarines are “out of order” or how many hours the president spent actually presiding. But how can cement sales be considered so sensitive that their release must be delayed by 3 months? Reportedly this has something to do with preventing collusion and promoting competition, but I doubt that would stand up to analysis. Just wait until the commission responsible for this idiocy hears that the JSE insists that companies reveal their accounts within 3 months to everyone including their competitors. Shocking.

So SANRAL’s campaign for everyone to have one of those electronic e-tags in their car is really born of their concern for your safety. It is not just that it gives them looting rights on your bank account but if you become unwell or suffer a car breakdown on the tolled road they maintain that the tag will enable them to dispatch help swiftly. Does this mean that the motorist without an e-tag who has paid the full undiscounted toll will be ignored if they get into trouble?

Here in the kingdom, preparations are underway at the Royal Natal Yacht Club for suitable celebrations of the other monarch’s 60^th jubilee celebrations. They have wheeled out a number of cannons of varying sizes (some are titchy) and tested them for their boom potential. A 21-gun salute to Queen Elizabeth is planned for June. Undoubtedly this attention-getting ceremony will have caught the attention of those who already feel the need of a blue-light convoy to signal their importance. Expect more bangs.

Newspaper owners must be grateful that this urge for self-promotion remains so strong amongst our politicians and bureaucrats. No matter what the track record might indicate no event or milestone is thought too trivial or embarrassing not to be announced with at least a quarter-page full-colour spread in the press. The latest is published by something mystifyingly called The Department of Human, (sic) and announces awards to honour the role players in the housing value chain. This notice appeared on a public holiday just 24 hours before nominations for the accolades closed, so it is obviously restricted to insiders and not intended to recognise and reward those chains of skilful brick throwers at building sites who appear effortlessly to toss bricks from one floor to another.

Sadly the fifth annual games for members of the Non-Aligned Teachers Unions of Southern Africa received little publicity until the participants failed to pitch up in their classrooms after the weekend of sports. It seems that the journey back from the Windhoek venue was exhausting.  Hopefully organisers of the games for the Aligned Unions will have taken note of this problem and will select somewhere more central. The country really can’t afford exhausted educators.

James Greener

Friday 13^th April 2012

EASTER EXCITEMENTS

A little while ago the US worthies who meet in Washington from time to time to set the price of money in the land of the free decided that the world deserved to know how they reach their decision. So this week the minutes of their last meeting were published and the markets caught the vapours. By now what the minutes contained matter less than the observation that a two week-old record of a bunch of people discussing the inevitable and obvious can cause such damage. Perhaps it has been the rise of more or less instant distribution and consumption of this kind of frothy and mostly insignificant data that has eclipsed the solid and basic indicators of the ability of each nation’s economy to grow. The more tenuous and volatile the data set, the seemingly greater the over-reaction.

It has been another dreadful week for the mining shares. Investors are clearly worried how any of them hope to make money digging stuff out of the ground when a) some people are suggesting that appetite for the stuff is waning and b) there is always someone official pitching up at the gate to deliver a new regulation. That first concern is mainly about China which has released figures that could indicate a slow-down. While there does appear to have been an political showdown in the country which is upsetting those who failed to predict it is difficult to forecast a rapid slowdown in that country’s demand for raw materials. After all the USA – one of their bigger customers – is reportedly struggling back to its feet.

Iron and steel seem to trigger a very bad response in politicians all over the world. From time to time they reach the conclusion that the folk and businesses that actually produce and use the stuff are in sore need of help and advice. The fact that most politicians have never run anything except to the luncheon buffet does not discourage them from interfering in the processes of producing and selling this rather useful metal. The latest piece of nonsense in this regard is the declaration by our wise government that they “will deem steel to be local even if it is imported”. This glorious foolishness is necessary to get themselves out of an embarrassing situation caused by some prior meddling in the market place. Bureaucrats should be forbidden to use this delightful and powerful word unsupervised. In January they deemed that pretty much any school leaver who had managed to find the examination hall and write their name on an answer book was eligible to go to university and read for a Bachelors degree. This was a cruel and misleading deem.

Long time readers will be familiar with my contention that the sole value of the wealth-destroying program of political allocation of assets is to provide material for research projects by future students of economics. Our own version of this program, called BEE, has attained a new level of dangerous absurdity in the fishing industry where “a black-owned company may not sell interests or rights to anyone who is less black”. The irony of this policy is breathtaking and terrifying, particularly if, as is expected, it soon appears in other areas of the economy. From a purely technical side, however, it would be interesting to understand the physics required to distinguish between one absence of light from another.

Thank you to those who explained that the hastily arranged T20 against India at Wanderers was supposed to be a Jacques Kallis benefit match. This is so insulting that it confirms that despite some rearranging of their numbers  the suits allegedly in charge of the game still have no idea what to do. The Boat Race, The Two Oceans marathon, The US Masters and lots of rugby will keep the telly and the couch hot this weekend. And aren’t you relieved that at least the kit for the Olympics has been chosen and shown off at a fashion show? Now can we put the same effort into nurturing the athletes?

James Greener

Maundy Thursday 2012

LATE CUTS

Compared to many other share markets in March, the JSE offered a very pedestrian performance with the All Share index leaking just 2% or so. Elsewhere there have been some spectacular moves, mostly to the upside with the US being particularly strong. Despite history suggesting otherwise, investors seem convinced that great returns are possible from current levels. Bearish pundits – who frankly don’t know either – are muttering about bubbles and such like. The next few months leading to the US presidential elections will be full of surprises. The present incumbent has already been overheard begging the Russians not to rock the diplomatic boats at least until his next term begins. And Fed Governor Bernanke has reiterated that the price of money will remain near zero for simply ages more. The message is that voters and investors have nothing to worry about.

The flies in the ointment however, are all the mining and resources stocks which lost plenty of ground this month. The JSE’s top ten market capitalisation losers this month are all in those sectors. The feeling is that China’s appetite for raw materials might be waning but the data reliability on this matter is questionable. Fortunately, solid gains were recorded by booze and fag sellers with cell phones (at least those not involved in some strange squabble with the Turks) and luxury gee-gaws also doing well.

The constant thread running through almost every report from local business is just how unfriendly and antagonistic the legislation and the regulators are becoming towards anyone trying to produce a service or goods for a profit. An analysis has shown that, on average, owners now earn less than employees. Presumably this result is a consequence of weird distributions of both data sets. Nevertheless it is clear that risk takers – most of who work as hard to keep their businesses afloat as they do to meet the endless list of government demands and regulation – are an endangered species.

From this desk I can watch the traffic on the coastal highway out of Durban. There is not a lot up this road that any politician could vaguely claim required their urgent presence; unless of course, they were going to lunch or a round of golf or perhaps to buy a present for someone special. Nevertheless, several times a day a wailing cavalcade of fancy cars speeds along this road in a blizzard of flashing blue lights. The only reason for their obvious and objectionably dangerous haste must be that they are late for something. Something which almost certainly involves merely speeches and catering. We must therefore conclude that both the panjandrum and his minders are utterly useless at organising a diary and we ought to signify our concern and advice for them at this shortcoming with some suitable hand signals that we can use as they zip past. How about a pair of splayed fingers to represent the space that should be left between diary entries?  Or a single extended finger to suggest that only one person ought to be in charge of making appointments.

Our own president joined a horde of other mystified heads of state at a global knees-up in South Korea to discuss “Nuclear Security”. Few of the suits had many clues what this was about but all agreed that we need lots of it and that “great vigilance was necessary”.  Our own chap dutifully delivered a speech during a so-called Working Dinner. Obviously this was written by someone also not too clear about what an insecure nucleus might be, but no one was listening anyway being much more concerned with the origin of various meats on the buffet.

With neither the Lions nor the Sharks yet able to play effective rugby for long enough to win their games, the Super 15 season has started badly for me. It will, however, be a lot of fun watching the Newlands crowd’s reaction to the Bulls’ new pink strip tomorrow. What do you think tonight’s one-off T20 with India at the Wanderers is for? Money, obviously, is the first answer; presumably to tide the administrators over until they claw back the bonuses from the fellows who nicked the last lot.

James Greener

30^th March 2012

BEAR SIGHTED IN THE BOND MARKETS

 Slowly it is dawning on investors that lending money to the US government at 2%pa may not be so smart. Interest rates there – and elsewhere, including SA – are moving up and this might be the most important and significant indicator of the moment. As rates increase, the value of bond investments fall and among the notable investors in US Treasuries are the Chinese and the US’s own central bank – the Federal Reserve. The misleadingly named Quantitative Easing program required the Fed to buy US government bonds – lots and lots of them – and it must be alarming to watch the value of these things sink. The Chinese will also not be thrilled, although they did do much of their buying a few years ago when rates were higher, but another story of the week is that maybe economic data from that country are not as trustworthy as is normally expected when making investment decisions.

It seems that fewer than 400 out of the 2800 people who the tax man has identified as being the “super rich” of SA have bothered to register as tax payers. Reportedly, the criterion for this classification is income of at least R7m or assets of R75m. A swift calculation based on these numbers suggests that Minister Gordhan is forgoing around R10bn a year in tax collections from this secretive band of evaders. This is a big number and well worth pursuing not only for reasons of fairness. However, the pledge to hunt down and scalp these folk is heard every few years and obviously fails to have much success. Undoubtedly the cash economy is absolutely huge and much of it is simply not recorded in the usual formal records. A good example of this is the large discrepancy in employment figures provided by the official statisticians at Stats SA and those published by private sector analysts who mine and interpret all kinds of alternative data sources. The analysts doubt the Stats SA figure of only 8.4m employed, earning a total of R364bn a year and maintain that both are too low. Why does this better news draw such bitter rebuttals? Does it not suit government policy?

Even the Economist magazine believes that recovery is taking place, especially in the USA. A common conclusion from this view is that equity prices have upside since growth is therefore on the way. Another spur for share prices in the US might be the migration of investment from the now unattractive bond market. Neither argument has a proven track record, however.

In SA a big impediment to growth is the terrifying rise in officially regulated and administered costs. An unusually long car trip over the public holiday provided this insular and sedentary scribe with a sharp reminder of fuel and toll prices. Many JSE listed companies have complained about the cost of transport and when those looming toll gantries around Joburg get fired up next month, matters are only going to get worse. Inflation is unlikely to slow down, despite the excitement about the recent tiny downtick, which was hailed by overexcited analysts as proof that there is no need for Governor Marcus to wear her rate-raising raiment next Thursday.

An interesting fact has emerged from the toll versus fuel levy debate about how to pay for all those new roads in Gauteng. Seemingly there is no regulatory means to earmark specific revenue for allocation to specific expenditure. All government money gets dumped into the kitty from where a separate exercise allocates and spends it. This therefore exposes as false those political threats and promises to impose taxes on the pleasures and enjoyments of the rich in order to compensate for the woes and hardships of the poor. So the increased duty on Johnny Walker Blue Whisky can not be used to repair a broken water pump in a rural slum. More likely the money will be used to restock the minibar in the presidential jet.

Like the early start GP races, it is hard to get excited about cricket tests that begin before dawn. Nevertheless the NZ series is helping to uncover some talent that will be useful when The Proteas tour England later this year. I especially like the policy of bowling on the wicket!

James Greener

23^rd March 2012

BYE LION

After the dreadfully violent wars and conflicts that dominate the Middle East regions, perhaps the next most significant events to watch are the US presidential elections and the Eurozone financial fandangles. Neither makes any sense to anyone expecting reasonable, logical and civilised behaviour from erstwhile role models for such things. Words and concepts like faith and science and honour and debt and promise and trust are being misused and devalued to the point where they convey no meaning. Similarly in one recent but small incident in our industry a big cheese has resigned from a well known investment bank with an open letter that spills the beans on the way things sometimes work in some of those businesses. Sadly I can confirm that he is not making that stuff up. Greed scores way above integrity with just enough people for the rest of us in or around this industry to feel embarrassed and uncomfortable when we admit what we do.

The bull can also see nothing to be scared of (that is the nature of bulls of course) and the All Share Index attained another new high this week, propelled there by rises in most of the top big caps. Main attention grabber, however, is the sharp up-tick in US long bond interest rates, followed somewhat by our own. No credible explanation for this behaviour has yet been offered but it is worth watching.

I am not the only commentator to be amazed by Eskom’s very relaxed acceptance of their requested 26% price rise being pared back to 16%. The CEO even remarked that this would not derail any projects or affect its financial sustainability. What? Really? My disappointment is that the regulator (who must find it hard to feel businesslike and dignified with a name like NERSA) did not look after us consumers and shoot back with a second offer of 0%. The trade  might have settled at 8% or thereabouts.

The KZN provincial government have kindly provided me with a full-colour glossy pamphlet detailing their plans for spending R83.6bn in the new fiscal year. Only R2.3bn of this sum is collected by the province itself with all the rest being distributed from National Treasury. This does, however, mean that the surprisingly modest R59million earmarked for the expenses of The Royal Household places no burden on the rest of the country. We pay for our own royalty down here.  In the scheme of things this is not a great deal of money but perhaps we should expect a bit more work from them. As long as it makes no further impact on the leopard population it would be nice if our King and his family could be persuaded to appear in traditional regalia for photo ops and other suitably harmless activities like opening stuff and waving at commoners. Travel in open horse drawn carriages would be quaint but perhaps even more disruptive to traffic than blue-light flashing car convoys.

The general secretary of an outfit that operates under the name “The Black Business Council” is very offended that it has been accused of being racist. Many of us who believe we understand language but obviously don’t understand politics are puzzled why this and several other similarly-styled organisations, with membership apparently determined by physical characteristics, are deemed appropriate, legal or indeed necessary.  The fact that the accuser is someone who would himself be eligible for membership of that very council provides an irony that we South Africans delight in and love to pour scorn and ridicule upon.

To divert attention from the fact that here in the southern hemisphere we are almost half-way down the slope towards midwinter, comes the start of the Grand Prix season. These early ones start too soon in the day to provide background noise for the post Sunday-braai snooze. Nevertheless it will be fun to see the new cars and what rule changes have been dreamed up to quell the excitement. Banning the mid-race refuelling stops was disappointing for those of us who enjoyed fuel nozzle uncertainties and the occasional pit-side conflagration. Rugby will not be mentioned this week. The Lions have a bye.

James Greener

16^th March 2012