FASHION ISSUES

It is always puzzling how easily professional investors can handle losing other people’s money. A company which a few years ago borrowed almost R1bn by issuing a bond has gone bang. Investors in this bond included some of the smarter investment houses in the land and they are now dismissing the default, claiming that it will have no effect on their investments. If that was true then why did they buy it in the first place?

Any member of the JSE (today that means firms not people) that is rich enough will soon be able to rent space immediately alongside the JSE’s own computer. The proximity means that these firms will get JSE prices and information milliseconds before someone like me down here in the kingdom. This clearly highlights that the market is less about raising capital and more about providing a casino-like environment for speculators, traders and their computer programs. Undeniably there are ultra short term price discrepancies and movements that can offer profitable trades. Whether these are triggered by news released publicly or hinted at privately does not matter but it does show that while “insider trading” is considered a no-no then “just next door trading” is just fine! There is some very muddled thinking happening here.

It turns out that tax payers, via an outfit called the National Empowerment Fund, have lent R34million to someone planning to open a shop that will sell luxury goods. The new store owner obviously knows all about her market. Just a day or two later the New World Wealth consultancy released its report that there are nearly 50 000 dollar millionaires in the country     half of whom live close to this boutique. I wonder if she would consider operating a loyalty program offering discounts to any customers who can produce an income tax receipt. Mind you according to SARS there are far fewer top tier tax payers than this. Nevertheless the entrepreneur’s track record leads one to think that it’s going to be a far less risky use of public money than funding the Gauteng Climate Innovation Centre, which proudly wants to “help South Africa reach its potential in climate technologies”. Once again the bureaucrats are confident that they have spotted opportunities where the market has not. And anyway don’t the Chinese make raincoats and sun umbrellas all so much cheaper? 

South African members of parliament get a salary which, relative to the average income of the rest of the nation, ranks them as among the 5 highest paid in the world. Sadly we do not receive value for this expenditure. Here in the kingdom one of their number has dusted off the idea of installing a cable way to whisk tourists to the top of the Drakensberg. Then there's the plan to "fast track" pilots to fly the national airline’s great big passenger jets. Not to mention allowing the SABC to launch a 24 hour news service channel. What about reducing the state payroll by firing the cops with criminal records and the 25% of teachers who don’t work on Mondays!

Isn't that sweet? Our president was invited to come and collect his new smart ID card the other day and was introduced to the four machines that have been acquired to print these things. He immediately named each of them after a woman. Despite his age there is no doubting where his main interest lies.

The natural order of things has been restored and the Lions are back in the Super 15 for next year. However all is not lost for the good folk of Port Elizabeth. The Spanish fashion chain Zara has chosen their city as only the fourth in SA in which to open one of their trendy shops. The people of the Bay can go and swap those uncomfortable crowns for more stylish berets and other smart gear. The Eastern Cape in not just about pineapples and sheep you know. Some of those millionaires are lurking among the spekboom and aloes.

James Greener

The day before Women’s Day 2013

TOP OF THE CYCLE?

In yet another illustration of what fun it is to spend other people’s money, the carbon dioxide-belching talk shop that was COP 17 donated 92 bicycles to the city before departing Durban 18 months ago. Presumably because some have already mysteriously gone missing, a further R100 000 of rate payers money will be spent buying more, so that every city councillor can “pedal to work”. Now anyone familiar with the hills of Durban and with the shape of most legislators will spot the flaws in this plan

With the exception of some resource sectors where a few shares are clawing back shreds of respectability, most of the market indices have been more or less stalled for a few weeks now. Even the rand is a little stronger but that of course is because the US dollar has seen a bit of weakness. The US bond market is looking pretty shaky, with people becoming concerned at the wisdom of lending money to the US government for 10 years at just 2.5%. After all isn’t that economy showing signs of life? And then there is still the niggling fear that the Fed will do that “tapering off” thing with the money printing presses.

Two of the JSE’s larger listings reported results this week and there was little to get excited about. SAB Miller are hanging on grimly but Anglo American’s earnings are down almost a third. The obvious drivers and sources of revenue for these two companies are quite different but the simplest conclusions are that folk don’t have a lot of excess spending power and anyone employing labour is finding life very hard.

Who knew that there was a National Regulator for Compulsory Specifications watching over us from some eyrie in Pretoria?  This week they burst into the limelight with the announcement that at least one cleaning liquid had failed a “bacterial efficiency test” and thus was unsafe for users. South Africans, it turns out, have a right to disinfectants that kill a sufficient proportion of germs. In addition, cases where distributors had ignored their obligations to complete forms and pay a levy had been uncovered and these products should also be considered unsafe for use until the paperwork is completed. Now that most of our air force planes and helicopters are lying unused in hangers, we should all be grateful that there is at least one state agency still able to keep us protected.

It is hard to conjure up as much indignation and concern as the authorities are displaying over the allegations of collusive behaviour that apparently infests almost every industry in the country. If indeed the practice is as widespread and more importantly as profitable as the triumphant investigators claim then one wonders why there is no particular evidence for that in the published earnings of the supposed cartel members. Or are the companies just as good at hiding the money from their auditors as they are at avoiding raising suspicion among their customers and clients that the tenders are not as competitive as they ought to be? Has anyone asked if any of these alleged super profits might not perhaps flow back to those awarding the tenders. And then there is always the worry that the money raised with the fines and penalties for these unproven crimes seems to go no further than the general revenue fund. Undoubtedly most of us will never know exactly what happens when an eminently corruptible client with public money calls in the suppliers of goods and services for a chat about what they really want.

Finally the relegation matches that the Lions were denied so unjustly last year are taking place. We will now get to see if waifs and strays who largely comprise the Kings deserve their Super 15 slot. And most of the nation will temporarily shelve their prejudices and keenly support the Bulls in their semi-final clash tomorrow. Pointedly we shall not mention cricket where not only are the Proteas battling against Sri Lanka but the growling noises coming from the forces that really control world cricket are getting ugly and unnerving. What on earth is the point of reopening a case against a disgraced man so long and tragically dead?

James Greener

JSE July 2013 month-end.

BERNANKE IS BOSS

The markets are regaining their composure, trying to forget about the panic that seized them last month. Admittedly the All Share does appear to having a bit of an issue with cracking 41 000 decisively but considering it launched from 38 000 it might think it deserves a rest day or two. As ever it is impossible to see any substantive new facts which may have calmed the bull’s fears and again as usual it appears to be all down to what one man in Washington says about opening or closing the dollar money taps. What enviable power. Or as one commentator puts it: What an unhealthy obsession for this man the markets are developing.

Yet again the brains trust that meets at the Reserve Bank every couple of months came to the conclusion that our most useful commodity – cash – is priced just right and left the repo rate unchanged. They did, however, acknowledge that many folk are struggling to find customers and clients able and eager to pay for stuff and in consequence the economy is probably getting even more sluggish. It will, they thought, manage to grow just 2% this year. This is not the case for everyone though. Those who have clawed a way to near the top of the government payroll are doing OK. In particular spirits in the Ntombembe household have risen pretty high this week when it was announced that Auditor General Terence was to get a salary increase of R1m a year backdated for 6 years. Is that that a reward for pointing out how many state-owned and operated institutions are incapable of doing their sums?

The ruling party official, who enthusiastically claimed that its policies and record were so compelling that even fish would vote for it, must be dismayed by Deputy President Motlanthe’s more pragmatic suggestion that the party’s struggle history meant nothing to citizens who are much more concerned about their government fulfilling its promises. A similar dose of pragmatism was doled out to Minister Davies by the slew of European high-ups who popped down to the southern tip to escape the heat wave back home. They pointed out to Comrade Rob that it is pretty foolish to renege on agreements with your clients and customers. Rather, they suggested he should worry about the little black spots which are growing on the oranges we are trying to sell to them.

The South African Revenue Service’s reputation for ruthless and incorruptible efficiency was discovered to be spotty as well when it was revealed that the Commissioner has been keeping strange company and had adopted an allegedly sexist job interview technique. Minister Gordhan eradicated the blight with commendable speed but we may not have seen the last of this epidemic.

The fixtures list for the dozens of matches that comprise the round-robin phase of the Super 15 are a fantastic balancing act which valiantly attempts to satisfy dozens of competing requirements. So complex is the task of compiling this list that reportedly the SANZAR rugby officials outsource the job to a specialist team in Canada. One advantage of this arrangement is that the folk there probably have little idea what rugby is beyond it being something that you would rather not try to do on ice. With a similar knowledge of cricket those Canadians should be asked to take a look at the international tours program. They would instantly spot that there is something wrong with scheduling seven back to back ODI matches against India over 26 days. And would they not suggest that to have an Aussie tour that does not play a test at Wanderers is a serious omission.  Surely they would question why within a year of the Proteas hosting Pakistan we send our lads to play them all over again in the Persian Gulf.  In the meantime this weekend we face the usual struggle deciding which side most deserves to lose the Ashes tests, reminding each other that yellow jersey wearer in Le Tour is actually an Old Johnnies boy, and marveling at how hard links golf is even in good weather. Time to go and plump up the cushions on the couch. And to polish the bottle opener.

James Greener

19^th July 2013

WEEDING OUT THE KING

Globally, investors were delighted with the news that Fed Governor Bernanke appears to have relented somewhat and has agreed to keep on hosing cash into the US economy from where a lot of it finds its way into the markets. US market indices are setting all time highs. The JSE All Share index has returned to the 41 000 level (a mere 1 000 points off the record), gleefully disdainful of anything that might suggest this is high-risk territory.  Like being concerned by comments that the important construction sector is “facing a (government ) firing squad”;  or that China’s imports have taken a dive; or that president Zuma’s cabinet reshuffle has placed yet more avowed communist party members in positions of power over vital sectors. When in doubt pay up is the investor’s mantra and this is prising sellers out of the woodwork Volumes are satisfyingly high.

The dollar gold price is now at levels last seen more than three years ago and a wonderful skirmish between the bulls and bears on this commodity has broken out with the “barbarous relic” camp hooting with delight while the bulls are asking if anyone has seen signs that the Fed is hell bent on anything other than the destruction of the US dollar. Meanwhile thanks to our weak currency the rand price of bullion has given up just a year’s worth of upside work and those of us who fear the relentless rise of the socialists are taking this as a buying opportunity.

A fellow over at National Treasury has spotted that the business of looking after other people’s money can be rather lucrative. He points out that if fees were lower then clients would get better returns. This rather simple piece of arithmetic fails to address the hardships that a cut in money management fees would cause for purveyors of premium liquors and exotic cars. And the urban landscapes would become drab and uninteresting without the temples and palaces erected by the guardians of other people’s money. Careful where you go with this one chaps. The luxury goods markets need the support of more than just politicians and their cronies. But here’s an idea. Why not see if fund managers will agree to share downside as well as upside risks with their clients. Wouldn’t that be fair?

There is just one interesting development to emerge from the disgraceful and painful saga being played out in the politicisation of Nelson Mandela’s last days. That is the revelation of the complex family, clan, tribal and royal structures and traditions that still influence a large proportion of our fellow citizens. Claims and explanations of a number of relationships and status of individuals have been both made and rejected in recent weeks and so far at least one camp has resorted to a non-traditional western-style court to seek redress and satisfaction. While this is fascinating to watch it is also deeply unsettling since a simple clean resolution to the end of the Mandela era is what the country so grievously needs.

Another thing the country desperately needs is for the government to roll back all the legislation which makes it impossible for employers to assemble teams of workers who need to and want to work for the offered wage without any outside interference. The debacle at the seriously behind schedule power station construction site is repeated on a smaller scale just about everywhere in the country.  Once again we despair at the distortion of the labour market brought about by those who believe that the state knows best. Increasingly too this position is coloured with the desire of the corrupt and crooked to maximise profits.

Just when England thought they were getting the better of the Aussies on both the rugby and cricket fields along comes this debut number 11 who scores 98 runs. And the yellow jersey is being worn by an old Johnnies boy. Isn’t sport wonderful?

James Greener

12^th July 2013

BET ON THE BEAR

Anyone hoping for a clear trend to ride in these markets is bound to be disappointed. Although us bears are convinced that our view will prevail, we are having some edgy moments. Increasingly determined voices are assuring everyone that the USA is on the road to recovery, but there are still some sceptics. The JSE is has bounced back to the extent that the market is tantalisingly midway between its most recent highs and lows. The rand is finding it hard to hold onto gains. Undoubtedly a lot is dependent on when Madiba dies.

In common with many other tin pot regimes our own believes that withholding information about the health of leaders both past and present represents wisdom and a sensible exercise of power. Of course it does neither and rumours breed and grow. Noticeably no doctor has been trusted to tell an eager and concerned public the facts about the state of our aged and respected icon Nelson Mandela. If the poor man is indeed now being kept alive by machines, the big question is who will make the fateful decision. Any politicians involved can be relied upon to arrange matters to ensure the greatest benefit, exposure and kudos for themselves. Taken together with the family feud that has boiled over into the public eye this is a very unpleasant chapter in the nation’s history. Dignity and compassion are sorely absent.

The most baffling story of the week concerns the news that it is recommended that the nation should build another coal terminal in order to handle the export of black coal. But isn’t all coal black? And isn’t there spare capacity at the existing Richard’s Bay facility? Odd.

Thousands of taxpayers logged into the tax website within seconds of the tax return season opening. So many taxpayers were eager to reveal their innermost financial dealings  situation the SARS system displayed signs of indigestion. This selfless haste was puzzling until it dawned on me that of course those folk who are expecting a refund of overpaid tax are eager to claim it back as soon as possible Did the tax man anticipate this aspect of his electronic filing system?  It will be interesting to see if the refund flow shows up in the exchequer figure for July when they are published.  The May revenue and expenditure numbers for the government just released, confirmed an inexorable trend of growing state spending but no similar improvement in the rate of revenue collection. National Treasury’s vigorous rebuttal of accusations that the distribution of Social Grants (i.e. cash hand-outs to the needy) was threatening to get out of control was fair enough but there is little room for complacency. Most of us are worried about the disparity in the numbers of tax payers versus tax eaters.

The JSE may well be congratulating itself on the success of its campaign to reduce the flow of captive advertising to the newspapers. Very few companies now publish those huge spreads of financial schedules and commentary in the dead tree media. Undoubtedly this has left the small and vulnerable shareholder much worse off that before the JSE lifted the requirement for those notices. SENS and websites just don’t work anywhere near as well in providing a source that can be perused at leisure with pen in hand. A great pity and a definite backward step in transparency.

Wow! A South African in the Yellow Jersey at the Tour de France! Bicycle dealership around the country will be rubbing their hand in glee as the rest of us now rush out to buy a bike and join the bruised buttocks brigade. I forecast an oversupply of used bikes for sale in a few months time. In the meantime, all the very best to you, Daryl Impey. And then of course at Greyville here in the kingdom tomorrow, the nation’s finest dresser uppers will attempt to scare some horses.  And of course there’s tennis, rugby and Formula 1. Another tough weekend for the couch.

James Greener

5^th July 2013

WHO WANTS TO BE A BILLIONAIRE?

One does have to wonder why the Africa Ports and Harbours Show was held in Sandton instead of in one of the country’s actual harbour towns. Is our government taking their foolishness about threatened sea level rises to new heights of ridiculousness? 

Suddenly it is abundantly clear why the new mining workers union, AMCU is attracting members in droves. The leadership there is blissfully innocent of any arithmetic skills and they share our president’s deep and contemptuous misunderstanding of economic relationships. On behalf of their members they are demanding that wages for some categories of worker be increased by 100%. Of course they have not pointed out that in order to meet that demand, those workers whom the employers would have to fire would suffer a 100% decline in wages.

The most obvious impact that this sort of combative labour relations is having on our own small and mysterious corner of the economy, is that Anglo American has now slipped to only the 8^th largest market capitalisation on the JSE and is now smaller than Sasol, Naspers and MTN.  

There is something unsettling about the state’s claim that they have ferreted out collusion and malfeasance in every corner of the private sector they have bothered to look into. Certainly most companies singled out by this perhaps rather arbitrary process have readily agreed sometimes to make very substantial payments which they naturally insist do not constitute admissions of guilt. Whether they do that merely to keep the peace or to prevent further investigations and disclosures is unknown. However, the undeniable attitude of smugness shown by the authorities responsible makes one wonder if there is not some form of bounty hunting taking place. Certainly the fines collected seem never to go to those who were disadvantaged by the alleged crimes.

 Talking of substantial sums brings us to the R2.5million fee required of each firm lodging an application to run the National Lottery. This comes after those firms have already paid R50 000 each for a copy of the Request for Proposals and attended a two-day briefing session. The justification for such outrageous amounts lies presumably in the declaration that the winning bidder gets a contract worth R40 billion. This is shocking and appalling. While no one will begrudge the operator a reasonable profit, any monies over and above that should surely go into the Lotto beneficiary’s fund.  And don’t even go into the fine print about how the National Lottery is guaranteed freedom from competition and the right to operate a monopoly. Again I am reminded why I try never to buy a Lotto ticket and instead just take the vastly better odds of picking winning shares.

Adding to the mining sector’s woes is a rather nasty bear market in the dollar price of gold. Even after reducing this fall by looking at it through the lens of the rand dollar exchange rate it is starting to get worrisome. Isn’t it odd how people all over the world after years of choosing a hard asset over holding a currency have now suddenly with no obvious trigger incident or reason changed their minds? One of the biggest bears of the season can be seen in our SA bond market, where investors using pounds will have taken losses as large as 25% only half of which can be attributed to the currency. It will take lot to persuade them to come back one day.

It is one of those winter weekends when the TV couch is going to take a beating and the remote-pressing thumb will need constant refreshment. Super Rugby returns to Kings Park but fans are more concerned by the way the management are still unable to solve the beer ban yet were able swiftly to hand the coach  a shabby dismissal. At Wimbledon we watch to see who will next manage to trip over the finely mown grass and from Corsica there is the start of the race to find out whose pharmacological team can travel the furthest round France on a bicycle without detection. The Silverstone GP is always fun and not just because the corners have names not numbers.

James Greener

28^th June 2013

FOR WHOM THE TOLLS TOLL

So just how much deeper could this bear drag the market?  Well the answer is a mighty long way. The declines suffered so far are really not yet at all severe when expressed in terms of valuation measures such as the price to earnings (PE) ratio. This bear has not yet destroyed even a half of the gains that the All Share index achieved since the little hiccup and low point in the middle of April, a mere two months ago. That index has so far scored a maximum decline of just 6.4% from its peak above 42 200 on the last day of May. Self respecting bears can do far more damage than that. At the low of the 2008/9 market correction, investors were paying an average of just R9.00 for R1.00 worth of historic earnings (that is the PE ratio was 9). Currently the cost of the same amount of earnings is about R16.00 (PE ratio now 16).  So if the market were to return to that lower PE ratio, prices would need to fall at least 40% from current levels. And that’s not the end of the gloomy news. Thanks mainly to the unfolding calamities and tragedies in the mining businesses listed on the JSE, average earnings of the overall market have been falling steeply. If this were to continue, average prices would also need to fall just to maintain the present PE ratio.

Even when using an index such as the Financial & Industrial, which excludes the mostly dismal mining and resource shares, the picture is equally concerning. While growth in the average earnings of these sectors has slowed a little, it is still satisfactorily positive but the index itself has outpaced that growth in the past few years. Therefore, to return to the PE ratios experienced in 2008/9, current prices in that index would need to pull back more than 50%. And then only a particularly bearish analyst will also point out that economic conditions are such that even the financial and industrial sectors might also soon begin to report negative earnings growth.

And that’s what has happened at Telkom where earnings apparently are down almost 75% despite holding a near monopoly on fixed line infrastructure and a stranglehold on almost all internet traffic for which they charge exorbitantly. The attitudes of the politicians who allegedly are in charge of our communications these days are an echo of a previous government who also felt no good would come of letting South Africans enjoy what the rest of the world had. On that occasion we were denied television. Now we are denied cheap and plentiful bandwidth.

Remember that fearsome price collapses like that suggested by these calculations do not take place overnight. Indeed they can take months and years to unwind and before they end many investors will have grown bored and gone to find something else to do. That is of course when we must all remember to buy.

There’s a nice little side-battle taking shape at the edge of the big one about the tolls on the lovely new roads around Joburg. The company that was responsible for installing the fancy kit that will scan the passing traffic and calculate the tolls due is based in Austria. It has been explaining to their shareholders there how things work in Africa. Despite having installed and tested the gear more than a year ago no actual money has yet been collected and everyone must wait for the dancing and singing to stop. Reportedly the company hopes that their share of the income will be some 50 million euros per year. Sanral, the local operator, however, would appear to have other ideas. They are telling everyone that no money from the tolls will leave the country. This could be fun, as long as you are not Austrian.

The roads around the bowling club are being cordoned off in preparation for a car show starring some alleged celebrities from the BBC. Huge excitement is promised and large crowds are expected. Hopefully, however, the Metro Police will stick to their promise and go on strike over this weekend. Without the clueless cops messing up the traffic it might still be possible to get there for a beer. Hopefully the rugby deprived folk of Nelspruit will turn out in better numbers than we managed at Kings Park last weekend for the back to back tests. It must be pretty dispiriting for two national sides both playing an away game to appear in a near empty stadium.  

Remember that Monday is a holiday. It’s when we celebrate being young again.

James Greener

14^th June 2013