GROWTH – BUT NOT AS WE KNOW IT

I would say that the question we posed last week has now been answered by the market. This action is not a mere buying opportunity but the birth of a pretty impressive bear market. So far, just the hair and the claws on one paw are visible. The teeth we have yet to see. And its eyes are not yet open. Almost every share has been wounded. None yet fatally so. The largest one still standing, is PPC. And Krugerrands are at a two and a half year high. If this is the start of a significant market melt-down then I don’t think it will do much for the cabinet’s grand plans for the economy. All kinds of fancy schemes to transfer assets will slip underwater if market prices dip significantly.

Suddenly the GDP growth story has become a mantra with everyone chanting their own favourite number. If only it was that simple. Most of us will have been puzzled by the news that the government this week have approved a “blueprint for 6% growth by 2010”. Why didn’t they approve a “blueprint” like that five years ago?  Could we see the current plans please? Will it involve government appointing and paying for more  legislators, regulators, inspectors, advisors and consultants? If so then it would seem unlikely that the rest of us will have much opportunity after filling in forms and preparing reports about what we thought of the forms actually to get much work done.

For example, the new National Credit Bill promises to “register consumer credit providers, conduct inspections, monitor compliance and investigate systemic market conduct problems…” Apparently the present system is “dysfunctional”. This view hardly fits with the 18% pa growth in personal credit extension reported last week. It seems as if everyone is already borrowing plenty of cash without even more folk coming along to monitor them.

Reserve Bank Deputy Governor Guma, pitched up at the podium yesterday to deliver the interest rate decision. He was so nervous, poor chap, that he surpassed the previous record for monotonous delivery. I gather that towards the end he said that there would be no change, but by then I was fast asleep. The market was already charging southwards and also paid no heed.

It is tempting also to ignore the JSE’s data on net foreign buying of equities. Do you believe that, with the exception of a very small amount (R22m) of net selling yesterday, every day so far this month the overseas investors have never bought less than R300m worth of shares. Last Friday – when the first signs of panic began to appear – the net buying is said to have exceeded R1.1bn worth! This really does not feel right.

I managed to publish some proper research this week and on the website you will find a discussion of the likely impact of interest rate increases on the prices of the banking sector preference shares. In short, I don’t expect them to decline by very much at all. But now that I have written that down, as well as the view that we now have bear market, you can be sure that I will turn out to be wrong on both counts.

Why does the market collapse only in October?

James Greener

14^th October 2005

BEING KEPT IN THE DARK

Our internet connection went on the blink this afternoon just as I was  about to press the SEND button on this edition of Tidemarks. The news from Telkom was grave. Technicians, they said, were being dispatched. I had visions of encampments of those candy-striped shelters being erected over manholes around the suburb and the blow torches being pressed into service as water heaters for the coffee. Chunky men in corporate t-shirts sitting on low stools with large blue handsets pressed to their ears. Black leather tool boxes snapped open and small cardboard note pads snapped shut. Our communication with the outside world depended on these guys. On a Friday afternoon. It looked bleak. But then, as you can see, we suddenly rejoined the globe, caught up with the markets and completed this letter.

There are half a dozen theories as to why the market at its worst point gave up almost 5% of its value this week. The word from the big institutional brokers is that there has been considerable foreign selling. These wicked overseas sellers are always a favourite bogey man and there is a little evidence to support this. The full picture provided by the JSE data will become clear only next week. Another favourite is that there is a “huge structured deal being done”. Usually this explanation is offered to the dealing room with lowered eyelids and knowing nods after a long whispered phone call. Screen watchers claim to be able to spot the “waves of stock” surging across the ticker.

Other more prosaic reasons may be found in the opinion that there has been a quite sudden turnaround in consumer sentiment and the main story in Biz Day this morning ran with this theme and gloomy quotes from some tame bears. This kind of thing can quite easily spook local sellers who almost all will have substantial book profits that they suddenly feel like banking. That petrol price is really starting to make its presence felt in the pocket of almost everyone who doesn’t walk to work.

I have no idea if this is the beginning of my long awaited decent sized correction. So far, the pull back has not yet erased even a fortnight of the All Share’s gain, although there have been some spectacular falls in certain shares, particularly Sasol and BHP Billiton. I think we shall need to be very vigilant next week to see if this action is either going to continue or whether we are just being offered a buying opportunity.

All this excitement in the market has quite diverted my attention from preparing my proposal for a Competitiveness Action Plan for the Local Competitiveness Fund of the Kwazulu-Natal Local Economic Development Support Programme. I have picked on this particular flock of tax-consumers before. There seems to be no end to their optimism that bureaucrats can make people’s lives better by spending their money for them. They are unlikely to accept my proposal for their Plan. It is short, cheap (free in fact) and contains suggestions like: resign, get real jobs and give the money back and come out here and see what actual competition is all about.

I am afraid I can’t get enthusiastic about this cricket series of Australia versus the rest of the world. As well as being uninteresting it also increases the chance of injury for players whose skills and fitness we are so sorely going to need later in the season.

May it rain on us this weekend.

James Greener

7^th October 2005

A VERY BUMPY RIDE

After spending a superb but extremely hot long weekend in the bush in Umfolozi I unfolded the free map that I had been handed at the petrol station. Emblazoned with the proud claim to have been published by the tourism board of The Zulu Kingdom, it proved to be no more accurate than my guess of how many wives that King might currently be supporting.

The promised tarred road from Hlabisa to Hlobane fell far short of what the loyal subjects of the Kingdom deserve. Even as dirt roads go it was pretty shocking. There was some evidence of a desire to tar the route sometime during this decade. Graders and lorries cluttered the scenery in places. Most obvious, however, was a government make-work project. Every few miles, four glistening new orange traffic cones, placed according to taste by the accompanying squad of three safety-bibbed women, warned of work in progress.  The most astonishing of the tasks in hand was the construction, entirely by hand, of small stone spillways at short intervals across the width of the wide drainage channel that sometimes appeared alongside the track. These seem to be some sort of anti-erosion device. It was gratifying to see one’s tax-dollars going to something more basic than bean fests for the bureaucrats.

So like most free information, the map was worth its price. But we got home in the end and the car’s suspension has been given a good thrashing.

And that’s also what the bears have again been receiving this week; a week that will be remembered for the dreadful murder of one of the market’s more colourful mining personalities. It somehow seems symbolic or perhaps ironic that the gold mining index will be the top performer this month with around a 30% return. At the other end of the scale the sober-suited and staid life assurers will be down about 4% in September.

The third quarter of the year is now history and I am sure I caught sight of tinsel and plastic snow in a shop window. Certainly the party season is hotting up and as the weather overseas cools down one can spot flocks of migrant merchant bankers in dark plumage coming in to land. They are being lured not just by the weather but by the news that R8bn worth of non-core assets belonging to Eskom and Transnet could be going up for sale. Just imagine getting a piece of the V& A Waterfront in Cape Town for your portfolio. That could just rank higher than a house in Clifton.

The various inflation figures were published this week and seemed to surprise only non car-owning economists with their uppish tendency. The press have managed to fill a good few column inches with the conjecture that this means that interest rates will have to rise. If I say that I agree, it will ensure that nothing will happen when the wise men and women of the SARB meet in a fortnight’s time.

The state has announced a competitor for Tidemarks in the form of Vuk’uzenzele, a free magazine that will supply “information on socioeconomic opportunities” and “enhance awareness about government programs”. I am flattered by the imitation and may well have to concede defeat to the 32-page bimonthly in all official languages and Braille. No word yet on their expected circulation though.

James Greener

30^th September 2005

WHAT HAVE YOU PLANNED FOR HERITAGE DAY?

I am very heartened by what I saw described as “the worst possible German election result”. That fact that no one has emerged as a clear winner is excellent. The voters have shown that they don’t care who runs the country and actually prefer it if no one does. It means that the politicians will all be so busy squabbling about who has power that no one will be able to exercise any, and the population will be able to get on with living without interference. Add this development to the news that Germany does seem to be slowly clawing its way out of the economic morass brought on by unification, and you wonder if there might not be an interesting investment story developing there. Keep an eye on the JSE’s new Itrix fund based on a European share index.

One of the best performing securities in the last few months is the JSE (Pty) Ltd unlisted share that has trebled in price since its appearance in July. Those who have long been involved with the exchange and its services failed to realise what sense it makes to buy into a monopoly. (This is the same reason so few of us bought Telkom.) Turnover in the equities market has recently been regularly exceeding R9bn per day; numbers previously seen only at close-out events. The JSE must be making plenty of cash. I wonder if they are contemplating a dividend.

But to return to that trading volume. Some really big trades have been going through the market. Some evidence points to fairly large foreign selling – particularly in the bond market. This means that local buying is eagerly absorbing the stock as prices have certainly not been plunging. Neither has the rand. The experienced amongst us feel we can smell big changes a-coming. But maybe it’s just the long awaited rains that we so badly need.

Mind you, my bearish nature was cheered by the front page report of a portfolio manager seeking to reassure investors that small cap shares “will not take (a) dive again.” Such public confidence has a terrible way of biting back. Just ask me – writing this note every week.

I have received a kind invitation from the South African Post Office to attend a Corporate Breakfast, during which their 2004/5 financial results will be presented. This can mean only that the results are likely to be a whole lot better than their ability to deliver a letter. The puzzling bit is that the invitation carries a large colour sketch of a Krugerrand falling to the bottom of a wineglass filled with sparkling water.  The significance of the image eludes me but presumably this promise of largesse is what elevates the meal to “corporate” status.

The woes brought by Hurricane Katrina failed to soften Sir Alan’s heart and he cranked US interest rates up another notch. With the even stronger Rita now bearing down on President George’s own state, the folks in the USA must be starting to worry about who they have offended to be getting into all this trouble.

This edition of Tidemarks is going out a day early because the public holiday, rather inconsiderately, is not.

James Greener

22^nd September 2005 (The Vernal Equinox)

JUST HOT AIR – NO HURRICANE

The JSE did a good job. No glitches anywhere during their presentation of 34 slides explaining how prepared they were for the volumes associated with Futures Close-out. It was clear that if there were going to be problems (and there weren’t) they were ready to sidestep any blame in a slick and well prepared manner. Just one thing bothers me though. How come that even the slides showing the computer links with The London Stock Exchange carried the “Proudly South African” logo? Is the LSE, like the England cricket team also heavily infiltrated with ‘bokke?

While the market did peak just as the 100 minute close-out event began yesterday afternoon , that record was quickly  erased in today’s trading. Fueling the buyers is the gold price now confidently well north of $455 and the gold shares are doing the heavy lifting. Nevertheless industrial companies’ reports out this week continue largely to boast of solid earnings growth.

In defence of their limited and costly broadband access to the internet, Telkom’s Business Market and Government Executive (whatever that  may mean) claimed that the cost of PCs (currently at an all time low) and lack of compelling content (currently at several billion pages and growing faster than ever before) were also to blame for SA’s lack of connectivity. I wonder if this fellow has ever actually Googled anything.

While reeling from this piece of ill-considered waffling I noted the story that any company trying to obey every rule and regulation needs to keep up to 170 different types of records. Some of these must be archived indefinitely. From New York comes the news that The Federal Reserve has called in 14 of the world’s largest banks for a little chat about a backlog of paperwork in the $8.4tr market for credit derivatives. It seems that everyone is far too busy doing deals to bother with recording and confirming them. Is there a storm far worse than Katrina brewing in the wings?

Back home, our own Reserve Bank is planning a big refurbishment and is seeking “gender and disability sensitive” contractors able to supply it with office furniture.  Meanwhile the Governor, presumably making do with his insensitive old desk, offered the observation that the SARB would not allow second-round effects from the oil price to develop into an inflationary spiral. While this suggests that the next interest rate move (possibly in December) will not be down, it also makes one wonder how he believes business will absorb the transport price shock.

Another SARB initiative called Labour Market Frontiers was published this week. It reportedly offers the tentative research conclusion that the lower the level of education of the work-seeker the more likely they were to inquire directly at the workplace. Those who can read and write are more likely to respond to job advertisements. Presumably the research is a bit clearer on the issue of how brain surgeons look for work! It is high time we stopped wasting public money on this kind of rubbish. Even the BBC used their licence payer’s money to do a survey that shows South Africans to be amongst those nations that most trust politicians! Surely these are not the same politicians that have presided over a doubling of the number of people living below the poverty line in just six years? Not to worry. Just this week SA won the “African Country of the Future” award. Can anyone remember who won the previous one? That might give us an idea of how long the future will last

James Greener

16^th September 2005

WILL THE GULF CAUSE A CRACK?

Enormous amounts are being written and said about the likely economic consequences of the dreadful tragedy unfolding after the passage of hurricane Katrina across the Southern Sates of the USA. It seems that the human consequences alone are nowhere near yet understood or countable and so it is perhaps both heartless and premature to discuss the impact on our portfolios. The clean up cost will be astronomical, but the US is a very rich country. However, I am certain that things will develop quite differently than they would have without this very serious event. The world’s economy is inordinately dependant on the US consumer buying things that the rest of us supply in one way or another. Watch the debate about whether political pressure will make the Federal Reserve postpone their program of steady interest rate increases.

This idea helped the US dollar to weaken and the gold price sniffed at $450. This in turn caused the rand to get below 6.20 per USD at one stage, and I reopened the discussion in the dealing room about whether we would next see a big figure of 7 or 5 for this number. There were still no votes for 5.

The All Share index enjoyed another week of teasing the bears and got within a hair’s breadth of 16 000. Thursday sees the dreaded close-out event and the first concern is whether the JSE computer system will cope with the anticipated trading volume. It does not have a good record in this area. A meeting has been called where the JSE will promise to do their best and the dealers will threaten mayhem if they don’t. The next little hassle is whether is Joburg City Power will come to the party – and not with candles for the cake. Numerous power failures in recent days have not helped calm the nerves. In the worst case the trade would be to go short JSE (Pty) Ltd (unlisted, but quite tradable on the OTC market) and go long pharmaceutical and liquor companies.

This morning’s headline about “property prices (coming) off the boil” must have been written by a fellow bear. In the text it turns out that price growth has slowed to a mere 19.2% pa. In my book that’s still a tasty return.  And in the same paper I was amazed to learn that Joburg “council is very strict about the number of people it allows to live in a flat.” The article was silent on the council’s attitude toward the number of people that may ride in a taxi. Substantially more than may stay in a flat by my reckoning.

I am intrigued by the news that Governor Gono of Zimbabwe took the $50m owing to the IMF with him when he went to Washington recently. Images of briefcases stuffed with grubby banknotes in the best movie traditions come to mind. I wonder if he booked his luggage through or popped it into the overhead locker for the journey. Everyone must be very grateful that the plane suffered no incidents. It must have taken the chaps in Washington a while to count that sort of cash. Did Gono ask for a discount?

There’s tennis and cricket to get us through the weekend, which up here on the highveld is looking set to be more of those stunning spring days. But some rain would be nice. Any chance of Shane Warne retiring before the summer?

James Greener

9^th September 2005

EBONY AND IVORY

Now, who would have ever thought it? Some research outfit has discovered that “Black South Africans prefer paid jobs.” To have a job in a city beats the alternative of sitting on 100ha of rural land. Unless that land boasts a trout stream, sea view, golf course or interesting wild life I can only agree wholeheartedly with my fellow citizens.

Orlyfunt Holdings is reportedly a consortium that believes it would like to spend R1.4bn on a portfolio of assets currently held by JCI and Randgold. Aside from the delightful name there are several points to ponder in that particular statement. In the meantime it reminds us of the French plan to add a levy to airline tickets to fund aid for Africa. This thoughtful gesture to help their passengers in their charitable duty is worrying. It won’t be long before every business will be relieving customers of the tedium of remembering to make donations.

Back home, Minister van Schalkwyk showed a firm grasp of his Environmental Affairs and Tourism portfolio with the observation that climate change posed a major danger to the tourism industry. What he believes he can do to reverse these forces of nature was not explained. I suggest he taps “Katrina” and “New Orleans” into Google to see what bad weather can do for tourism. And then begin promoting the Karroo.

He and his cabinet colleagues also approved The National Freight Logistics Strategy which seeks “to ensure that the freight sector responds to the imperative of higher rates of economic growth”. To be fair I have not read this doubtless worthy document that was 18 months in the making. But I am deeply sceptical that any government can ever make lorries go faster or railways work. As I recall the last official word on this matter was to try and ban big trucks from the roads of Gauteng during rush hour.

Similar breathtaking insouciance was shown by the Western Cape Premier Rasool who claimed that unless business followed government prescriptions, the county’s growth target will not be met. I submit that just reading and filling out the forms he will want completed will knock several points off productivity and growth. No bureaucrat ever had a better way to do something than the guy who is trying to make a living from doing it.

One piece of state calumny that was good news, came from north of the Limpopo where the unexpected discovery of a stash of cash in Bob’s bottom drawer means that our own possible loan to him could be less than originally anticipated.

The JSE computers had a few bad hair days this week and trading was halted while the mechanics lathered up some fresh shampoo to get things going. Nevertheless we have seen a 600 point bull market that has taken us back to within 100 points of the all-time high set on the 16^th August. Aside from the all too simple explanation that there are more buyers (and judging by the rand’s strength, overseas ones) than sellers, I have been told that the forthcoming futures close out on Thursday 15^th will be a HUGE event. In preparation of that affair, traders are adjusting their Greeks, and this is at least one cause for recent volatility. No – I don’t understand either.

Nor do I understand how I can possibly support the Aussies when they meet the All Blacks in Auckland tomorrow. It will be a grim day.

James Greener

2^nd September 2005