WAITING FOR THE BANG

Sometimes there is never any shortage of material to write about down here on the southern tip.

One could have another pop at PAP who really does seem to believe that even though less than a tenth of the member countries have paid their dues, somehow those of us who actually work for a living deserve to support them and pay their president’s rent. Or I could drone on about the National Gambling Board’s (which is not a big blackjack table in Pretoria) report that that industry’s annual revenue was R8.2bn, but gambling taxes and levies collected amounted to just R764m – which seems like nice work if you can get it.

And then one could surprise everyone and talk about the market and how it delivered 5.7% total return last month. This was thanks to a surging 9.5% from the financial sector which behaved quite coquettishly when it discovered that a foreign suitor was about to ask for ABSA’s hand. Firstly, of course, the eager groom must do the rounds asking permission of the presidency, the unions, the central bank and who knows which other “uncles”, all of whom will doubtless carefully explain the lobola system.

These forthcoming nuptials were cited as the main reason why the rand improved between 2 and 3% against most of the big currencies last month. Official inflation numbers also came out surprisingly low. Hence the “dead cert” bet in the markets for this month is that the Governor will pull the “Interest Rates Down” lever when the MPC meets for the tea and biscuits in a few weeks time. However, perhaps one or two attendees at that gathering will have spotted the following news item and might inject a note of caution into proceedings.

This news was that we South Africans are consuming every gadget and geegaw the world can’t sell elsewhere and this is resulting in a massive trade (im)balance number.

Confirmation of this shopping spree comes from the JSE’s general retailer index that was the best performing industrial index last month and holds a top five position in the third quarter. Lewis Stores will be listed in this sector on Monday and its R2.8bn market cap will be a very welcome addition. I think it will run hard. As, I hope, will Spar, a fortnight later.

Definitely running hard is a pack of US presidential candidates. Perhaps until a winner is declared, Wall Street will continue to ignore the signs that us bears are certain foreshadow a foul-up. One time-bomb that I believe is ticking is the delightfully named Fannie Mae organisation that is a very key player in the US residential mortgage market. The explosives include derivatives and interest rates and accounting rules and suddenly departing employees and so on. I have watched this one carefully for a while and think that the little red numbers are getting very close to zero.

Now for a Lions home semifinal.

James Greener

1^st October 2004

(PAP = Pan-African Parliament)

SERVICE ECONOMY

They just don’t get it do they? Governments have developed this quaint notion that taking tax off us is a “service” and we should be grateful and perhaps even proud.

This week, news reached us that The South African Revenue Service (there’s that word again!) had opened a new business centre “to cater for large scale taxpayers”. Picture the ambiance of deep carpets, piped music, potted palms, art by the yard and lurking plush couches.  “Clients” are plied with fake coffee in real cups before being ushered into an inner sanctum where the walletectomy will be performed.

Obviously governments do require money to operate. This fiscal year our chaps look as if they will need something like R375bn (up from R330bn last year) to keep the wheels turning. Odd as it may seem to a tax man, most of as intend very firmly to contribute as little as we can get away with. We believe that spreading what remains of our own money between “services” of our own choice will likely do just as much good as most government departments can manage. It will also be more fun.

There is a world-wide trend for politicians, many with dubious electoral credentials, to tap the public purse for purposes of patronage and reward. What results is a mushrooming establishment of bureaucrats who, like the politicos, believe that they alone have the sole best model for resource allocation and distribution. The assurance that everything is done “in the public interest” is not universally convincing. To raise a faint murmur of concern often brings a swift and furious response. Some examples from just this week come to mind

Here on the southern tip I suspect that most citizens, whether or not they are clients of SARS, would prefer to see more cash being directed towards the real and vital services rendered by the teachers, nurses and policemen and less being spent on Pan African Parliaments and the like. The contrast yesterday between the march of strikers in Pretoria and the sushi and chardonnay shindig in Midrand was stark.

Despite the religious holidays and a fairly uneventful futures close-out, the market steamed northwards this week. Bears like me spent a great deal of the time wiping egg from their faces and closing short positions in anguish and pain. The gap (“disconnect” in dealerspeak) between our All Share index (up 16% in the last six weeks) and the Dow (virtually unchanged in the same period) is noteworthy – but so far meaningless.

Liberty Group have followed the lead of Standard Bank with one of those schemes of arrangements (more correctly termed “confiscations”) which at current prices will see shareholders donating about 1% of their value to those deemed more needful than themselves. Where have we heard that story before?  As we did for the Standard Bank scheme, we shall be voting all the shares which we hold in safe custody against the scheme – but it will not alter the outcome.

May the Lions wallop the Sharks.

James Greener

17 September 2004

LOOKING FOR LEFTOVERS

Is it just us or has this market been terribly quiet recently? Taking a look at the turnover figures for the JSE it seems that it is just us. There have already been two days this month when turnover exceeded R4bn and very few days failed to get above R3bn. Much of the turnover, however, has been “professional” in nature as the large derivatives houses prepare themselves for next Thursday’s futures close out event. It would take far more time, space and energy than any of us have on a Friday afternoon to try to understand what that last sentence means. So let’s just accept that I have had a bit of time to dig around the data.

In the past month or so almost 100 different companies have announced results and (with luck) declared a dividend. Whether that dividend has been greater, similar or even lower than what was paid last year provides wonderful material for a calculation or two.

In aggregate, across the whole market, the so-called dividend base (price times dividend yield equals dividend base) has been pretty much flat for almost 18 months. However, there have been huge differences from sector to sector. Most spectacular has been the industrials, where current dividends are running about 23% up on last year. Financial sector dividends have maintained a steady annual growth rate of between 10% and 15% for almost two years. So it comes as no surprise therefore to learn that the resources index dividend base is now 25% lower than a year ago. Something had to be counteracting those other two good numbers.

Some more thoughtful prods at the calculator keys suggest that the resource share prices have not yet declined in complete sympathy with those leaking dividends. Everyone hates selling Anglo and Goldfields and Impala! It seems as if most of us are holding on in the hope of a terrifying collapse in the rand and a consequential leap in the sector. What a dilemma.

This week the banking shares received boosts from a number of sources including stories of foreign suitors. I am puzzled by the idea that anyone would want to operate a retail banking business in South Africa given the looming presence of all those politicians and bureaucrats who appear to have much better ideas about how to run one. The Robin Hood model comes to mind.

Which leaves us scratching through the industrials for shares which have not yet responded to the consumer boom – surely the main driver of all these wonderful results? What do you think of Caxton, Woolies, Metcash, Imperial, Truworths and Bidvest? Let me declare that I bought some Caxtons myself this week. Well, I had to do something about the turnover!

Late night tennis from New York, the Monza Grand Prix and a long expected family reunion will keep me happy and busy this week end. Don’t mention the cricket. I hope you have nice plans too.

James Greener

10 September 2004

TESTING POSITIVE for SPENDING

Today one of my colleagues leaves for the Masai Mara to witness the part of the wildebeest migration where the poor beasts have to cross a croc infested river. He plans to take a trip in a hot air balloon over this particular wonder of Africa. Those of us left behind will have to make do with the slightly lesser spectacle of bears being savaged by bulls. There are a few balloons left over from Watermark’s birthday party earlier this week and of course in this business there is never any shortage of hot air.

With just about two more trading days to go before calendar month end, the All Share performance (including dividends) for August is somewhere close to 8.5%. This is chunky and welcome, but not hugely unusual. On average one can reasonably expect this level of monthly return, or better, twice per year. Perhaps you don’t remember but we enjoyed 9.8% last October so this blip was right on schedule!

Now when they lead the bull away for his drug test at the end of this round, the sample will come up blindingly positive. And the lads in the lab will have no difficulty in naming the substance as rand currency. A potent stimulant that itself has been diluted almost 6% against the US dollar this month. And out there, in the full blaze of publicity, brandishing the syringe for all to see is coach Mboweni. Talk about a gold medal effort! Please rise for the playing of the national anthem.

This week saw another batch of good and excellent results announcements. Pretty well anything associated with consumer spending has been enjoying an excellent year. Have you noted the trend I have discussed before of how numerous companies are seeking ways to return money to shareholders? A few months ago I commented on declining dividend cover ratios. The following hypothesis is starting to take shape.

With the exception of domestic property there is a significant trend away from capital investment as companies and individuals choose not to make long term commitments. The companies have been distributing the excess cash. The reasons for this could provide the material for a lengthy, heated and undoubtedly political discussion around the bar counter.

After several years of fiscal prudence government taps are opening and state spending is growing at something like 15% pa. No wonder SARS are trying to hunt down anyone they believe is “read[ing] the law in such a way that there is no taxation at all”.

Much of this loot is now turning up in the hands of those folk who are delighted to discover and prove that they are born to shop. But somewhere ahead there’s a muddy donga full of slashing jaws and the gas in the burner is running out and the balloon can’t keep up for ever!

What will the Athenians have in store for us on Sunday?

James Greener

27^th August 2004

BULLISH ABOUT THE ‘BOKKE

The bull is clearly rather enamoured by that cute laurel wreath-type headgear that is being dished out to podium places over in Athens at the moment. He wants one and a gold medal too. And his chosen sport seems to be the high jump. He has added about 10% to the bar height since the lows of last month. And not all of that can be put down to the boost he received last week from that interest rate cut.

The bear has been relegated to the menial task of cleaning up the grandstand and discarding the naartjie peels and empty bottles.

We are still in the midst of reporting season and there have been some cracking results from many companies. I note with interest that quite a few of them have been looking for ways other than simple dividends with which to get the cash across to their shareholders. At least one was honest enough to say that they (the company) really didn’t want to pay the STC tax that a dividend would attract. This means of course that you and I will probably end up paying capital gains tax on the payout.

On the topic of dividends, have you noted the way that the prices of the three bank preference shares have risen? In the middle of July all three were priced to offer a theoretical dividend yield of round about 7.7%. Then, as if they knew what the rest of us didn’t – that a rate cut was coming – the yields started slipping and took a largish plunge on the Governor’s happy news. Theoretical dividend yields are now very slightly north of 7%. I still believe that most portfolios should have a chunk of these instruments. If you hurry you can still buy the Nedbank one before the 27^th and receive a 42.8cps dividend the following Monday. If there are no further interest rate changes the Investecs will pay about 427 cps at the end of November.

The rand has been trending weaker against all major currencies since the SARB’s bombshell.  It is back to roughly the levels we were enjoying when we were all trying to remember the words to Auld Lang Syne. So far this month it is down about 5% against the pound and the dollar and a bit more than that against others – because the dollar itself has slipped a bit too. It’s probably time to saunter casually into the electronics and computer shops and see what bargains are still on offer.

The office – and indeed the city - has emptied noticeably these last few hours as the migration to Durban takes place. Tickets are trading at hefty premia to face value as the need to witness the ‘bokke hoisting the Tri-nations gets ever more urgent. I would guess that celebrations could be a tad less tidy than a handshake, a posy and a funny hat made out of leaves. Wouldn’t it be great?

Go ‘bokke!

James Greener

20^th August 2004

DANCING TO A DIFFERENT TUNE

Yesterday’s front page carried a picture and a story about a deputation of trade unionists who visited Governor Mboweni with a complaint about the strength of the rand. Unusually for a South African gathering of protest, everyone in the picture including the Governor is wearing a serious expression. There is no one dancing. Mr Mboweni had even stepped out of the monetary policy committee meeting to receive the delegation. Clearly he was impressed by their story. Just one day after their meeting, the Governor stood before the TV cameras and teased us all with a 30 minute speech before turning over to the last page and announcing a 50bp cut in repo rate. Only the lobbyists could have been expecting that news and mayhem resulted in the markets.

First to go was the rand. At its worst so far it has required only an extra 40-odd cents to buy a dollar compared to a week ago. The thought that exporters would be receiving all that extra loot when they sold their dollars, excited the bulls and they went into a frenzy, buying everything that wasn’t nailed down and driving the all share index up 342 points. Contrary to popular memory, there was a marginally larger one-day move as recently as May of this year but before then one needs to go all the way back to the rand crisis of late 2001 for comparable market moves.

While this was all happening, major markets elsewhere in the world were falling as fast as South African wickets in Sri Lanka. This headwind to any sustained firming in our market continues to blow and strengthen. You will have noted that the US interest rates went up a quarter of a percent earlier in the week. Still, it would have been nice to have been extra long these last 24 hours.

Elsewhere, I think the story of the week is the plan to install cellphones in mini-bus taxis for the convenience of the passengers. Concerns that providing this extra service might further distract the driver from his task of steering his vehicle from the outer lane to a dead stop against the kerb in just 25 meters were dismissed as alarmist. However, at 50c for 12 seconds, MTN is clearly onto a good thing.

With any luck the whole nation will be dancing tomorrow after the test against the All Blacks at Ellis Park. One journalist has assured his readers that the ’bokke will walk it, on the rather dubious grounds that the Kiwis never have much luck in Joburg. We will need the exercise, however, as we dig in for a marathon session on the couch supervising the Athens games. And there’s a GP this weekend as well.

Have a safe one.

James Greener

13 August 2004

BASED ON THE NUMBERS

Yesterday the All Share index closed down compared to the previous day, bringing to an end a sequence of nine consecutive days when the index had closed up. Such a long series had me reaching for my copy of the Bear Markets Control Act of 1987 (As amended) to see if there was any legal remedy for the harm being caused to my views by this run. The sole advice was to buy put options, but in the fine print was something about good money being thrown after bad.

Talking of good money, the Anglo results were announced this week and I’m sure you also marvelled at half year profits of $1.7bn. This is equal to about 15% of the current level of South Africa’s gold and currency reserves. Perhaps this is not a very meaningful comparison but it has been a bad week for those of us who use numbers. After a huge revision to the official retail sales figures, the head of Stats SA warned that we must all be “ready to ride the wave of continuous change (to statistics coming out of his organisation) over the next 18 months.”

As a data analysis geek from the natural science world I have often argued with practitioners of the dismal science that many of their conclusions and models seem to rest on pretty rotten foundations. Perhaps that is why so many of the predicted effects never seem to follow the apparent causes. The numbers are just no good. [Maybe the models stink too]

I do think that in this business the numbers which most reliable are prices, especially those that are set by a balance of substantial numbers of buyers and sellers. By this criterion the rand exchange rate comes out at the top of the local heap. It is probably just about the most genuine economic number of all. Now, you may not like the rate and you may harbour suspicions of “intervention” and “manipulation”. But the fact remains that a large number of players both here and overseas watch that market and are able to buy when they think it’s cheap and sell when they think it’s expensive. This so-called speculative activity sits alongside a much larger market of demand for dollars or rands by people who have proper jobs.  An odd consequence of this liquidity is that no one can ever know, in real time, why the market is moving in its current direction.

I would categorise the soundness of the prices of many of the liquid shares and bonds perhaps a notch below the rand. And so on, spreading out like a cone from its apex, each level being less dependable and containing more members than the layer above, until at the base we have the fictional figures that we really shouldn’t use to make decisions. Forecasts of most things – including the weather - fit right in here. As do retail sales figures and rules of thumb like “the market never goes up nine days in a row”.

Have a wonderful long weekend.

James Greener

6 August 2004