BLOWOUTS ALL ROUND

There is a misconception that it takes “new” money to drive share prices up but this is not so.  All that happens in a share transaction is that the name of the owner in the share register changes and the amount of money involved in the deal (with a bit taken off for tax and the stock broker) moves from one bank account to the other. This happens over and over again and it does not matter at what price the deal is struck. What drives a bull market is the continual willingness of buyers to pay sellers a price that is above the previous recorded trade. The market is indifferent to who owns the shares and who holds the cash. Similarly when sentiment changes and it is the seller who agrees to trade at a lower price than the one previously recorded, we have the makings of a bear market. Note that neither a bull nor a bear market increases the amount of cash held in aggregate in all the accounts. This is, however,  not true of the total valuation of the shares! Hence the old saying: “In a bull market who needs analysts but in a bear market who needs shares?”

Both buyers and sellers use dozens of different methods to determine the prices they are prepared to bid or offer.  Suspicion and concern has recently been growing that buyers are running out of ideas while sellers are accumulating them. Some notable and large companies have been presenting half-year results that are worrying. One day, perhaps soon, holding cash instead of shares will become popular again.

The seismic results and geophysical mapping for the location of South Africa’s first really deepwater oil exploration borehole must be particularly interesting. The delightfully named Brulpadda-1AX wildcat well has just been spudded 180km south of Mossel Bay in 1500m of very uncooperative ocean. Oil horizons may lie 3000m or more below the sea floor. The estimated cost of this exercise is R2bn and if anything interesting is found the state will claim a fifth of the profits. Oil exploration is not for the risk-averse! Please note the oilfield jargon – a legacy of some years in that business a very long time ago.

There has been a welter of really depressing news spewing from state controlled mouthpieces recently. It’s all about new laws, regulations and processes that will replace market forces with policy – a lethal development for growth. The increasingly inane and insane thread of rejecting skill, experience and knowledge in favour of race, gender and age runs through everything. Reportedly there are five new pieces of legislation about land ownership and use on the way. Cue an outbreak of small and mean offices staffed by even smaller and meaner officials unable to do anything except pass the problem to someone else and unreel another roll of red tape. And then it has been proclaimed that the inability to distinguish the difference between a kilowatt and a kumquat may not impede employment in the energy sector. Meanwhile our newest political party has spent more time destroying public property and trust than it has arguing that their policies (if there are any beyond a bizarre dress code) will drive the nation’s progress.

There are two huge events which are causing great excitement in the kingdom this weekend. A wedding and a rugby match. Unlike the latter, the former is a home fixture with about 30 000 spectators expected to travel to Ulundi as King Zwelithini weds his 6^th (possibly) wife. Those of us who have not been invited or are unable to be there will be represented by the Premier of the Province who has (presumably also on our behalf) already delivered “not a small gift” for the happy couple. Details of the wedding breakfast are not for the faint hearted.  How many Sharks supporters will be present at the Super 15 semi-final versus the Crusaders in Christchurch is unknown, but a large number back here will undoubtedly be moving straight from their much more modest breakfast table to the TV room tomorrow morning. Only the outcome of the wedding can be predicted with certainty. The match will be harrowing.  And what can be said about the test cricket in Sri Lanka other than to repeat that it is a funny old game.  

James Greener

25^th July 2014

PRICE SETTING FEVER

The biscuits in the meeting room at SARB must have totally run out. Governor Marcus was in no hurry to blurt out the news that the repo rate would be going up 25 basis points and dash back for another lemon cream. All over the world central banks and similar authorities control the price of the most artificial commodity of all – money. They deliver grave speeches citing reams of history and forecasts that were used to arrive at their conclusions. Unquestionably, however, the price at which the commercial banks can obtain emergency funding from the central bank should be set by market forces and not at the whim of wise men and women. This, however, is unlikely to happen since central bankers as a breed seem to get ever more certain of their own infallibility. The US Fed. Governor has been offering investment advice!

Conveniently, the Sixth BRICS summit was held just two days after the Soccer World Cup final in Rio. The venue was a city which is about 3 hours flying time north of Rio. Our president would therefore have enjoyed ample opportunity to read the more than 8000 words of the Fortaleza Declaration. This is the document that he signed on behalf of our nation at that summit. Amongst the many obsequious, bizarre, meaningless and terrifying notions contained in this perfect example of bureaucratic claptrap are the clauses that ratify the founding of the New Development Bank (NDB) This bank will have a Board of Governors chaired by a Russian, a Board of Directors chaired by a Brazilian, an Indian President and will occupy headquarters in China. Our share of the spoils is that we may open a branch to service Africa. And, oh yes, as a founding member, South Africa will be expected to make an equal one fifth contribution to the initial capital of $50bn. On second thoughts, perhaps JZ did not read the Declaration. This was not a good trade! And it also cost us taxpayers a flight to Brazil and a ticket for the final for Number 1

Apparently a reason why it has been decided to found the NDB is that the International Monetary Fund is failing to pay enough attention to the needs and aspirations of the BRICS and their friends. Now the IMF itself exists because it was felt many years ago that “private international capital markets function imperfectly”. This phrase is really a complaint that people with money prefer to lend it only to others who can be relied upon to pay it back, and  with interest. The IMF therefore diligently smoothes out this perceived imperfection using public (i.e. taxpayer’s) money. As an entity designed to accommodate those whom even the IMF consider dodgy, it suggests that the NDB may soon be a champion at pouring money into bottomless pits. Or does JZ believe that SA will get back more than it puts in?

Once again government is getting worried about the private security industry. They could shrink that problem in an instant if they were to get the police to do the job we already all pay for. Everyone would be delighted to cancel their pricey armed response and street patrol services if they could rely on the state to catch and lock up the bad guys.

Sadly the state prefers to meddle in things for which they have no competency. Some buffoon has proposed that our government needs to declare something called “a developmental price” for most extracted commodities. Without even reading the whole bizarre report one can guess that this is a price which undervalues the true cost of a real economic activity and transfers the difference to parties who choose to look to the state for a handout. Presumably the BRICS Sherpas and Sous-Sherpas[1] are available if large piles of cash need to be transported.

The Brazilians are looking about in a daze wondering what became of that FIFA fellow who they now suspect mugged them comprehensively. Welcome to the club chaps, and I can tell you the market in used soccer stadia is well offered. With no buyers.

James Greener

18th July 2014

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[1] The Forteleza Declaration proudly reports that people with these titles have been meeting successfully. Who they are and what they do is left unexplained. Presumably lavish catering and travel is involved.

CHECK THIS LITTLE BEAR’S BIRTH CERTIFICATE PLEASE

Half the year has now passed but it will be only right at the end of next month that the machinery will spit out the GDP numbers for the second quarter and only then will we discover if we have been engulfed in an economic recession or not. Talking heads that are actually paid to make forecasts about these things are already embroiled in public squabbling. Some of us have noted the slight softening of JSE share prices and ask if that might reflect the concerns about where further huge earnings growth could come from. In the next week or so the first of the half-year company results will appear and may confirm that in some areas of the economy it has become harder to control costs and get paying customers to place orders.

One of the most sensitive economic statistics is the rate of exchange between our runt and other currencies. On balance it looks as if fewer people than in the past are demanding rands. In fact so many are offered for sale at the moment that a foreigner can buy one for less than five and a half new English pence apiece. At that price overseas holiday makers have been seen jostling for attention in estate agents specialising in the more picturesque regions of the nation. Even the demand by our local royal for his (?) land back does not worry them

Recently announced was yet more legislation from the vindictive communists who hate to see people enjoying themselves and embracing freedoms which have not been specifically endorsed. An especially distressing aspect of any regulation is that it usually entails an interaction with a dysfunctional government department in order to obtain the documents and permissions required. It is for example already tragically obvious from the nation’s traffic accident record that the requirement of renewing a driving licence on a regular basis has utterly failed to produce safer and better drivers. Adding to the foolishness is a system that necessitates at least two separate visits to the issuing office to effect the renewal. Its not surprising that urban legend has it that most drivers don’t bother. Just promulgated is the requirement for both arriving and departing family travellers to produce a specific version of each child’s birth certificate. Firstly, in this country, acquiring such a document is not convenient, seamless nor speedy. Further it is doubtful whether this is the most effective measure to stem the vile crime of child-trafficking, if only because the enforcing officials are so often easily corruptible.

And here in the financial markets a new and bigger central registry for over-the-counter derivatives is on the way. As hinted in their name these entities are often unique and created from nothing more than the intellect of a smart trader. This baffles bureaucrats who are often driven frantic with envy and suspicion that some people are getting rich from trading in things they don’t understand and probably can’t tax. Undoubtedly the risks and losses inherent in these pieces of whimsy are poorly understood by pretty much everyone including and especially the risk managers of the trader’s own institution. Reporting to some non-swimming lifeguard in a high chair at the top of the beach will do little to reduce the damage when an unexpected rip-tide hits. All that needs happen is to let the failures get swept out to sea in spectacular and noisy fashion and to reject calls to launch lifeboats full of taxpayer’s money.

And so at last we grind to the last round of the round-robin segment of the Super 15. This tournament seems to me to be over-designed.  It’s really not a crime if there’s a weekend between March and October not filled end to end with rugby. However, presumably the world of rugby is a true free market which is driven by everyone concerned attempting to maximise their earnings at the expense of someone else’s effort, money and wellbeing. Softies, including fans, unable to take the heat can read a book.

The big one this weekend for most people will of course be the Soccer World Cup final. The interesting thing about this match is that Germany appears to have qualified by scoring a converted try. Surely some mistake?

James Greener

11^th July 2014

COUCH, FIND (THE REMOTE) AND VIEW

Most of us harbour the same quaint and nagging suspicion that it must be possible to acquire sufficient information, experience and skill to be able to make faultless investment decisions. This naive belief extends to thinking that the industry is packed with people who have attained this pinnacle of expertise and knowledge. There are many things, however, that should point to the small flaws in these assumptions. A fine example this week was provided by the furore that erupted when Aspen, one of the market’s super performers, called a small meeting to warn that business was becoming rather slow and that consequently earnings will be disappointing. Naturally not everyone who felt they needed to know this was present at the meeting – it is interesting to speculate if things would have turned out any different if they had – and so when the share price tanked, a howl about unfairness went up. Actually a careful look at the charts suggests that the price began falling even before the meeting took place. Not an uncommon thing. Prominent among the believers that perfect and universal knowledge is possible and furthermore can be achieved by regulation, are the regulators who needed some prodding before setting off with wailing sirens and flashing blue lights in pursuit of the perpetrators.

Another clue that not even the revered experts are all that confident in their powers can be taken from the fact that fund managers understandably find it both prudent and necessary to extract a small but regular commission from any money entrusted to their care. Relying solely on capital gains for one’s bread and butter is dicey even for investment professionals. If indeed there are any superheroes in this business they wisely keep their skills quiet and to themselves and compile their fortunes in privacy. Even Warren Buffet shamelessly tells the world what he likes and has bought, but does so only AFTER he has arranged his own trades so as to ensure some decent price support from the faithful wannabes.

The Dow Jones Industrial index broke through 17 000 and the JSE All Share achieved 52 000. Buyers in both (and many other markets) can see no difficulty with valuing companies far in advance of any underlying growth in business activity or profitability. In SA this conviction is particularly troubling and puzzling as the nation faces the possibility of the largest single strike in the country’s history. Among the blizzard of opinions, positions and policies being offered by the talking heads, one small but telling statistic was released which undeniably indicates that we are not as a nation keeping up. It turns out that this year we are using about 1% less electrical power than a year ago. This is not bullish news. And the ratings agencies have noticed.

We are also all watching the unruly and unhelpful antics of the Economic Freedom Fighters who have now made their point – such as it was – about coming to parliament dressed for work in red overalls. So far that seems to have been their sole contribution to the legislative processes in the various chambers. There has been no evidence of work, of anyone having read any papers or prepared any arguments.  It would be wonderful if, for example, the EFF were to question government on the contents of yet another international survey that has placed SA far behind the rest of the world in internet services. Unfortunately for far too many the term bandwidth refers to how many chairs are needed on stage for the musicians.

It’s that weekend which every year allows me to showcase my uncanny skills with the TV remote. Added to the usual mix of Durban July, Wimbledon Finals, Tour de France start and Super 15 are Soccer World Cup Quarter finals and Silverstone GP. What a feast. Now just as long as Eskom manages to keep the lights on. Can’t have the beer getting warm.

James Greener

America’s Birthday 2014

ADJUDGED OUT

A brief gust of woe and dismay blew through the JSE when instead of surging to and through 52 000 the All Share backed off and actually fell for a few consecutive days. The panic however has melted and confidence in the certainty that share prices must rise eternally was restored. In the currency market, however, sellers of the rand continue to dominate. Both wise and dumb money is leaving.

The worlds of finance and investing are infested with jargon and structures designed to intimidate and belittle outsiders. A classic example appeared this week with the news that the state is considering how best to “recapitalise” Eskom. The monopoly power utility wishes “to be reimbursed for operational losses resulting from the difference between what it was allowed to charge for electricity and what it spent on producing the power”.  Translated. this means: “We are so bad at running this business that we spent way more money than we earned and now we need some more. Please make the customary large transfer of tax payer’s money and fax us the proof of payment immediately”.

Meanwhile, in Australia, the dismal truth about the alleged skill of actuaries and fund managers has been uncovered. This is that most of us need to keep on working and saving for our retirement for far longer that the sunny assumptions of the experts have been suggesting. We are living longer and getting a far poorer return on our savings than either of those professionals predicted. The sole remedy (aside from getting our offspring and their friends to support us) is to work for longer, and retirement age in Aussie is being moved out to 70!  Now this really is an inconvenient truth which is certainly not yet accepted in Europe for example.

The government ramped up its level of disdain and contempt of the citizens of the nation several notches this week. Amongst its most spell-binding acts of crass stupidity was the election of Julius Malema to membership of the Judicial Services Commission – the body whose function is to select fit and proper persons for appointment as judges. Not only is this a huge and distressing message for the legal profession and their tradition of learning and deliberation but it will also satisfactorily irritate the several other opposition MP candidates suited for such a post. It might even distract Malema for a while.

Noticing that the SABC boss man was surfing the “Brides from Venda” pages on the internet and pretty much distracted, the government slipped through another one of its ideological targets and announced that it will be culling considerable swathes of Afrikaans language content from the airwaves. This act deserves a serious response from advertisers as well as viewers especially in the light of the Corporation’s own admission that the programs are popular. In the meantime Miss Lynne Brown our new Public Enterprises Minister (who naturally has scant enterprise experience) is facing calls from SAA for recapitalisation. What else? Instead of simply flogging off the whole sorry mess she has been waffling on about “business-models” and the like. Just killing off all the free flights on SAA for the chosen ones would save plenty of cash.

The general impression is that the government’s policy of agricultural land transfer has been a calamity. But perhaps this impression is simply a result of biased and hostile reporting and indeed the nation’s newest farmers really are working just as hard and productively as their predecessors. However, the fact that the country is now a net food importer is far more significant than Rural Development Minister Gugile Nkwinti’s exciting news that three of the new boys are now millionaires and so are doing really well.

Soccer must be one of the few sports in which 32 reasonably well-matched national sides can be assembled for a tournament. It’s obvious that Bafana would have been way out of their depth in Brazil. And if the state persists in its meddling, pretty soon the ‘bokke and the Proteas will slip from the international rankings too.

James Greener

27^th June 2014

COME ON SUMMER

At the time of the winter solstice last year the All Share index dipped quite sharply. Since then our planet has gone right around the sun and the index (plus dividends) is almost 40% higher. This is an astonishing performance pretty much unpredicted by anyone – particularly the bears who have been crouched in a corner rocking gently and keening softly. Or are they  English and Spanish football fans? The cause of their (the bears) concern is that this rate of growth is more than double the earnings growth of the non-resource sector companies. A further, but rather more technical issue is that interest rates look to be increasing and theoretically this too ought to dampen value expectations for equities. Unavoidably it will one day come tumbling down but when and how far is utterly unknown. A brand new and really disturbing development that is derailing many historical valuation comparisons is the news that central banks are now participating in the equity markets. When you have players who can create money at will coming to buy shares, bulls can don their party frocks and order more bubbly stuff.

Just what the nation did to deserve another Address about its State is uncertain but it did kick off what is turning out to be one of this country’s most amusing but rather worrying parliamentary sessions. Amusing, because the “establishment” has no idea what to do with the hypocritical but very blunt talking Honourable Julius Malema, leader of the EFF. Worrying because in due course he will probably be bribed to sit quietly and add his votes to the ruling party’s policies. Part of those bribes might be to reopen the nationalisation debate that seems to be a cornerstone of his strategy for the revolution he plans to lead.

The JSE lists 12 platinum mining companies on its boards. They have a current combined market capitalisation of R 276bn. But only 5 of them declared profits in their latest reports. These totalled slightly more than R6bn.  Subtract from this the aggregate R2bn in losses reported by the other 7 and the industry’s net earnings are in the region of R4bn. Dividing this figure into the market cap number suggests that the whole industry (as seen through the eyes of the JSE) is trading at a whopping 67 times earnings. Now on the foolish assumption that any nationalisation program would pay market value for the assets it wanted to seize, and ignoring the fact that through its pension fund and other vehicles the state probably already owns a portion of these shares, it seems to me that as a simple trade, private shareholders should be happy to let Mr Malema have the lot.

The situation on the gold mining board is even clearer. There the aggregate net earnings are a negative R1bn and the 10 listed companies are valued at a mere R151bn in total. Surely if a buyer turns up at these prices, this sector is another clear sell.

Tragically the reality is that labour and its leaders seem to be prepared to negotiate whole industries into collapse. While perhaps they were not wholly responsible for the decline in the gold mines, not even the government seems hopeful that they can be persuaded to reconsider their program at the platinum mines.

The lurid headlines about “calls for chicken duties” were not about looking for people to guard the coop at Nkandla. Once again it is a story about governments meddling in markets and setting prices. Disappointing really.

Disappointing also was the Baby ‘bokke being beaten by one point by England in the Junior Rugby World Cup this morning. It will be interesting to see if the Lowvelders pack the stadium in Nelspruit tomorrow for the next test against Wales. Last week’s game here at Kings Park was hugely entertaining and satisfactory. The real Tests are still to come of course.

James Greener

(Almost) The Winter Solstice 2014

THE BEAR EVADES SUPER PROPHETS

This bull market is really still solid and broad based even if it is moving the historic pe ratio on the financial and industrial index up to the knee trembling level of 20. The heavy hitters most responsible for lifting the market to yet new highs this week do tend to be those with assumed rand hedge properties (SAB, Naspers, BAT, Sasol and Aspen) which makes sense as the currency was again under pressure while the self-important ratings agencies huffed and puffed about the country’s ability to repay its loans.

Even if the platinum miners’ strike is coming to an end there are going to be no winners. The foregone revenue and wages will almost never be made up and everyone will go forward with suspicion, resentment and debts. The country is plagued with cynical unfeeling opportunistic leaders who make utterly impossible promises to followers who are totally under equipped to spot that they are bogus. As pointed out by many observers, this is perhaps the country’s biggest tragedy and shortcoming. The sole remedy is a more informed and educated populace but the suspicion that the leaders also strive to prevent that from happening is commonplace

Government is thinking about introducing a tax on mining super-profits. An ominously named Strategic Intervention in the Mining Sector discussion paper has confidently defined a super profit to be a “return on investment” greater than a “normal” level of about 15%. In the opinion of the socialists who clearly authored this paper, any money earned above this rate belongs to the people of the land and not the company or its workers. This idea is deeply objectionable on so many levels and it is impossible to be sure whose investment is being targeted. Even if is doubtful that many folk have enjoyed a double figure return from the mining industry in recent years, it is certain that blizzards of bookkeeping will be employed to minimise this impost. Those people of the land looking forward to a windfall handout may be rather disappointed.

Hlaudi Motsoeneng is obviously finding his new position as head of the national broadcaster very onerous and time consuming. It leaves him with little opportunity to find a wife. But the proud and grateful leaders of his tribe in Limpopo have rallied round and offered him a selection of 10 young women from the province. Hopefully he will find one to make him happy, unlike that pesky lady Public Protector Thuli Madonsela who is complaining that his appointment and remuneration is rather dodgy.

Already this winter has produced some minimum temperatures which amaze even our emigrants in Canada. Predictably Eskom is finding itself unable to meet demand and load-shedding is back in force. Here in our region of the kingdom, we are also faced with a possible water shortage due to theft and vandalism (being escalated to sabotage by the infuriated officials) of a critical part of pipeline. Those of us who prefer cold beer and wine over hot tea and coffee are unaffected.

The first Brazilian player who managed to score a goal in the correct net during the opening World Cup match, was moments before involved in a physical contact incident that  which in rugby would have earned him an instant red card. Perhaps the reason why we oval ball fans find soccer so baffling is the refusal of the incredibly wealthy and arrogant suits who control the wonderful game to use proven technology to identify infringements. Presumably someone is benefiting from letting human “fallibility” influence outcomes. Tomorrow the obviously exhausted ‘bokke will hopefully avoid injury in the match with Wales before the critical tests against the Wallabies and All Blacks. In order to assure a steady flow of TV money organisers agree to a packed calendar and discard wounded veterans in favour of young players eager to earn a national cap. This sport too has become a production line.

James Greener

Friday the 13^th.