INTEREST RATE INCREMENTS?

The bull is pumped up with all the joys of Spring Day. The market is flirting with record highs. Almost every company is reporting record profits. The new national soccer coach has landed a deal where the pay slip program will need adjusting to accommodate extra zeros, some of which will go at the end of the salary line and just one will be needed for the tax deducted line. His arrival must not be confused with the appearance of The Lion King on a Joburg stage or with the launch of Neotel. Both will be hoping to make money as much money as he will. Neotel is the name of the new Telkom competitor. During the doubtless lavish launch ceremony they announced that among their customers they are proud to have Cell-C (the mobile phone company that has yet to make a profit), and Telkom itself. Bizarre. Am I alone in wondering about the origin of the name? Might it have something to do with the news that modern day man has some Neanderthal genes coiled up in his DNA?

But us old bears who root through the news for something to worry about have been hitting pay dirt this week and it is all pretty scary. Every economic number published these last few days has led me to wonder if Governor Mboweni might not surprise us with an unscheduled increase of the repo rate. He has told us that he is a keen observer of the inflation numbers and he will not have missed that PPI is above 8% (a three year high). In addition, how about those figures that suggest that the nation has 25% more cash to play with now than it did a year ago? There is no mystery about where the money is going. Imports in the last 12 months have totalled almost R400bn. This is a record, but more worrying, it is about R50bn more than we earned from exports in the same period, despite the record high prices of the commodities we sell. Other upward pressures on the price of money are seeping into the system from the news that Eskom is going to start its long overdue building of a few power stations for which it plans to borrow R3bn.

I have not enjoyed any overseas holidays for a while nor have I needed to add to my fishing rod and reel collections or even to my single malts so my own impression and experience of the current bout of rand weakness was that it was not so far particularly savage. I was therefore astonished to see that against sterling and the euro our currency has in just a few weeks given up more than half the recovery it struggled to compile over the four years following its collapse in the closing weeks of 2001. Although Finance Minister Manual has been telling students that “engineering is more fun than banking”, I would think that any banker on the currency desk would disagree. But someone will soon begin to grumble about building barriers to stop the currency leaking away and so there’s another reason to expect higher interest rates.

Now the theory is that when interest rates go up, the stock market goes down. However, so far that theory is getting a thorough pasting. The All Share index returned 5.4% total return in August with some rate-sensitive sectors, like property, doing particularly well. Bonds, on the other hand did not perform at all in August so it looks as if someone is alert to the looming problems.

Do not panic yet, but it looks as if commodity prices (expect for gold) are on the way down. And the All Blacks have called up the A team to deliver the coup de grace in Rustenburg tomorrow. Is there any good news? Oh yes. It’s Spring Day and summer is a’coming in.

James Greener

1^st September 2006

GETTING REVVED UP

The Top 40 index this week came within a whisker of topping the record of 20 260 that it set on 11^th May. Whether or not it will soon  actually break out into new territory and whether or not that will be significant I shall leave for real analysts to say. My observation is that this bull seems to be quite determined to erase the memory of the meandering trip of the last few months that took him to the edge of the bear-filled abyss. My view is that he may not yet be able to do that.

With probably indecent delight I comb the media for stories about how the US consumer is starting to feel the pinch. Apparently the future of the world’s economic  growth depends to a very large extent on that fellow spending money. However, for a few years now, most of the money he and she has been spending has been borrowed and not earned. Moreover, it is seems that the US housing market has been the supplier of the credit. But now that market is showing signs of melt-down with all those statistics like “housing starts’ and “new home sales” and “existing homes inventory”, changing direction rapidly and emphatically.

Now the connection between the Top 40 index and the plight of the man in Michigan with a monster mortgage is not obvious. But this bear believes that it exists and involves links such as Wall Street, inflation, commodity prices and indebtedness. I expect, however, that I shall need a bit more patience to see if my belief is true.

In the meantime, I can think about our own statistics like the second quarter GDP growth of 4.9% pa. Total GDP in the last 12 months was R1 606bn. Government expenditure in the same period was R434 bn or 27% of the GDP. At present rates of growth of both these figures, the ratio could be at 28% by the end of this year. Three years ago, this ratio was 24%. The trend is clear and alarming. Government’s share of the economy is getting far too large. Isn’t this another negative for the Top 40?

I believe it is; especially when they spend our money on lunatic ideas like holding an “International (!) Conference to Address Gender Equity in Transport Policies and Planning”. Billed to last three days and boasting a dubiously incorrect logo of a male astride a hermaphrodite bicycle, this is a clear piece of nonsense. It makes about as much sense as declaring that Pluto is not a planet when we all know it is Mickey’s dog. It will be more distressing than usual to send in the provisional tax payment next week knowing that some of it will be used to support “rural freight logistic interventions”.

However, a proper analyst should be focussing instead on all the company reports filling the pages of the paper each morning. Most businesses are steaming along very nicely with earnings and dividend growth in double figure. One of the more interesting facts to catch my eye is that BHP Billiton’s earnings are running at R27.3bn for a pe ratio of 12.2. Anglo American, which is 44% larger by market cap, earned just R25.6bn for a pe of 18.7.  The price of the latter has been running as the result of whispers that a deal may soon take place – but that difference still seems too wide.

I am looking forward to a pleasant day at Loftus tomorrow, provided my hosts allow me to stay at the bar in the marquee and not force me to watch the rugby. And there’s the Instanbul GP on Sunday. I wonder what Mr Ecclestone would have to say about gender equity in Formula 1?

James Greener

25^th August 2006

OUTSIDE INFORMATION

Loyal readers will have realised that I carefully avoid making any call on a specific share in these notes. The reason for this is that I could not bear having to append a four and half page disclaimer that states what people should already suspect: that in all probability the recommendation is wrong and is potentially dangerous to their wealth. A few analysts do have an excellent knowledge and understanding of various industries and companies and their research is often interesting and revealing. However, I also firmly believe that this insight will never reliably result in an accurate prediction of earnings, dividends or share price behaviour.  Obviously, the idea of tacking a disclaimer on to items of investment research has grown out of an acknowledgement of this chronic unreliability. If we were always right we would not have to say “sorry” and we would also probably not be peddling shares but negotiating to buy another island paradise with his and hers harbours.

Therefore, I shall not mention the name of the bank that has recently published its interim report with which I spent a few minutes and a calculator. I was interested to see that the traditional business of borrowing money at a low interest rate and lending it at a higher one contributes less than a fifth of the bank’s income.  Furthermore, the lending side has proved to be rather dodgy. The bank felt it prudent to set aside well over a billion rand in case the borrowers should prove forgetful about their obligations to repay. This “just-in-case” money is given the wonderfully coy name of an “impairment charge”. Recall, as well, that government a few months ago fretted in public about the spread between these two interest rates and it is little wonder that the bank’s most lucrative arm is the one that does “investment management and life insurance activities”.

I rarely attend those presentations given for the fraternity of proper analysts. However, one company always hosts their affair at a rather grand watering hole high up on the Westcliff ridge. If the weather is fine it is a good opportunity to see the progress of the spring blossom across the suburbs and to hear how the shipping business is doing. Very well, is the answer, but the CEO is puzzled that the investors do not share his optimism and is frustrated that the share suffers a low rating. Maybe we are just not a seafaring nation and prefer buying shares in holes in the ground.

And not just deep holes. The construction sector index has been flying (up more than 10% this month already) as the country pours money into bricks and mortar. One of the shipping company’s busiest routes is bringing cement from China to SA. But have you noticed that the squabble about where the Gautrain money will come from is still going on? In fact minor battles are breaking out all over the place. Eskom appears to be disputing just how dark and cold it was in Cape Town this winter. Telkom is unmoved by complaints about lack of bandwidth. South Africa’s display of beetroot, garlic and African potatoes (what are these?) at the Aids conference in Toronto has raised tempers. And the oil companies are pointing out the age-old fact that if you want less of something you just have to tax it.

Perhaps we need to tax All Black and Wallaby tries. Enjoy the weekend and keep an eye on that currency. It looks skittish.

James Greener

18^th August 2006

BOWLING FOR ANOTHER TIME

The financial and commodity markets seem to have decided that the great successes achieved by the world’s policemen in foiling what would have been an appalling act of terror is a good thing. Perhaps only the travel business will see any drop in turnover. Since your laptop may now not accompany you to the executive lounge and will likely end up making a different journey than your own, business trips become even more unappealing. Moreover, spending much of your beach holiday on the shores of the airport terminal will discourage the other kind of travellers as well. Petrol at north of seven rand per litre has one reaching for the bicycle pump. But then, I suppose, someone will want to test you for steroids. Oh dear. Best stay at home and look for shares to buy and sell.

In the last few days, central bankers in England and South Africa have raised interest rates while in the US they decided that the price of money was just right and did nothing. Even if these remote decisions are an important factor in driving share prices, turnover on the JSE has reflected a four-day week and the start of some school holidays. Excitement and involvement levels are modest as the market extends the current spell of low volatility.

Despite the attraction of keynote speaker Minister Stofile at the Esselen Park Conference Centre next week, I am afraid I shall not be applying to the National Heritage Council for my opportunity “to contribute to the heritage plan of football in preparation for the 2010 World cup Soccer legacy”. Whatever this nonsense might mean; it is another clear example of plans to board the gravy train. However, I have now at last seen a credible way in which the ordinary citizens of South Africa are likely to benefit from the boondoggle that the 2010 FIFA world cup is threatening to become. In recognition of the fact that seat prices at the event in Germany this year were way out of the price range of the average local football fan, a plan is being hatched. Very cheap or even free tickets will be offered here on the southern tip to “the poor” in four years time. What fantastic news. Without even needing the example set by the Namibian sports executive who sold his own free tickets this year at a very satisfactory mark-up, “the poor” will doubtless immediately spot the possibilities offered by this plan. Once again, the market mechanism will triumph and money will flow in the proper direction.

Similar trust in the efficacy of markets is not, however, evident in the creation of the Jali Inquiry. These worthies have the task of seeing how and why the banks make money and then presumably suggesting ways in which they could stop doing so. Before starting work, every member of the inquiry board should be required to use their own money to buy a portfolio of listed banking shares. Then they should offer the portfolio as collateral to raise a bank loan, the proceeds of which must be placed in a fixed deposit at another smaller bank. I can think of no better or faster way to learn about the banking business.

Do we really need to suffer the sight of the legendary seamer Shaun Pollock bowling off-breaks? Please let him go home to spend quality time with his new family. Thanks for all the pleasure you have given us in the past Polly.

James Greener

11^th August 2006

SUMMERTIME, AND THE BULL IS EASY

Although some of the short-term traders will disagree, there is some evidence that the market is steadily returning to an upward trend. As I warned you last week, this has occurred because of my suggestion that the bear would amble back into the frame. Naturally, he has not done so. His reluctance may also be due to the rand improving to better than seven per US dollar, which could be taken as evidence that some foreign buying of our markets is taking place. The frenetic turnover that we experienced and enjoyed in June has also tailed off and things do feel a lot calmer.

However, the recovery has not yet been sufficient to allow the overall index to boast a positive performance for July. The gold mining shares in particular have taken a hammering. Company results for the June quarter-end are starting to appear and it will be interesting to see if the record-setting gold price has brought some cheer to the sector.

Very few shareholders, however, will be delighted by the prospect of next month’s seemingly inevitable interest rate rise. The most recent inflation numbers have apparently surprised those pundits who clearly have never been to the shops and tried to buy any of life’s little luxuries lately. So alarmed are they, that predictions of at least a 100 basis point increase are being published. From my own standpoint of economic ignorance I don’t understand why pushing up the cost of money should reverse the impact of the ever-increasing price of energy for everyone on the planet. The strikes in support of higher wages taking place around the country suggest that most people are a bit short of income. It also feels as if there is acceleration in the number of people feeding both informally and officially from the public purse. Not only is crime speeding along unabated and undeterred but officials who could be doing something about it are off to parts north to supervise elections and the like. Don’t those countries already have enough corrupt officials of their own to ensure the appropriate outcome?

I was unsurprised when a global survey of the banking sector showed that their biggest risk is to become submerged in regulation and legislation. My own experience of being informed by my bank of the last three decades that they could not use my passport as proof of my identity is yet another small example of the lunacy swamping us. On Tuesday, another new government organisation will begin its task of checking on the estimated 6000 privately owned organisations that grant credit and lend money. The state believes that they can not be trusted to lend only to folk who can afford to repay the loans. Just who is being protected from whom is unclear. But it is clear that a new tax is being levied on the financial industry.

And it is hard to find any good news in the sports pages either. It seems that the Tour de France this year was won by an American with maybe too much testosterone. For the last seven years, it was won by an American with almost none. The All Blacks’ new haka format is scaring everyone and the Proteas in Sri Lanka are wilting. I wonder if there is any need to renew my season tickets at Wanderers?

It is probable that there will be no Tidemarks next week. I need to go to the coast to see if summer is arriving. Keep safe and happy.

James Greener

28^th July 2006

IT’S ALL IN OUR GENES

For those of us still reeling from last weekend’s rugby result, here is the good news. Since Monday, the rand has improved by 3% against the Aussie dollar. And it is back below seven per US dollar. So there.

Our green and gold money has also put in a great showing against most other currencies and is line for the yellow jersey for the month of July.

This has not necessarily been stunning news for the share market and the All Share once again demonstrated its penchant for roller coasters. The week’s range has been over 700 points, which is not healthy for those of weak disposition. So far the index has remained north of 20 000, at which level it would be just 10% below the May 11^th all-time high. As always, calling the move from here is a foolhardy exercise but with my record, I shall do all the bulls a favour and say that I think that it should go weaker. I am quite amazed that the Middle East conflict does not yet appear to have undermined confidence to any real extent.

Technology allows everyone to follow, in graphic and distressing close-up, the pain and anguish caused by the nasty and brutish conflicts being caused by so-called leaders pursuing their ideologies.

But it is all getting rather pointless as we shall soon be merely provinces of China. An advertisement placed in the local paper by a retail store in Springbok – a small town about 500km north of Cape Town (and we all know how remote that place is) – is seeking a shop assistant fluent in Chinese. And if the Orientals don’t take over the world, the bureaucrats already have.

Another notice, posted by some doubtless already under-funded research institute, warns the public that it is planning to plant some potatoes. Said spuds allegedly boast a rather special pair of genes. Namely, the firefly luciferase gene and the cassava granule bound starch synthase gene. The possibility that this information means anything at all to more than six people and their pet hamster is zero. The only jeans that we could recognise would be Levis or Soviets. However, it seems that we have something called the Genetically Modified Organisms Act on our statute books. This legislation apparently does more than just describe the people who promulgated such nonsense. It gives them powers. And the prospects for the potato planter are poor, because elsewhere in the press I found the news that a similar trial with sorghum has been rejected by government. Some committee has decided that the greenhouse in which the plants were to be reared was not sufficiently secure to prevent the genes escaping. After all, our record with jails is not good either!

Muttering about interest rates has begun to be heard again. US big bank boss man Bernanke said something that could suggest that he won’t again soon be lifting rates. Or maybe he meant the opposite. Nevertheless, his testimony provided enough ambiguity for traders worldwide to buy, or was it sell? Back home, money market interest rates in particular are ratcheting upwards presumably in anticipation that our own big man Mboweni will tug the UP lever at the next meeting in August.

I hope there’s some beach volleyball on TV tomorrow morning.

James Greener

21^st July 2006

BULLS STILL STORMING THE RAMPARTS

Bastille day. The French are everywhere these days. Bike races, football and tennis champions, grands prix, head butting; it’s all happening for them. But soon the spotlight will move on to our southern tip. SA’s preparation for our own world cup tournament in four years time is reportedly much further along than were the previous hosts at the same point. We have a logo. We have chosen which cities will be used to stage the games Was the selection all that tricky? AND we have negotiated the sponsors and discussed the dreadful crime of ambush marketing with them. As was the case when the cricket shindig was here, spectators can expect to have their persons and parcels frisked for the slightest sign of scorn for the supreme sponsor. Woe betide anyone who dares display the banned brands. I can’t wait to see who will get the job of explaining to a stadium of thirsty Black Label consumers that only Bud Lite is on sale.

That will be worse than explaining to the perma-bears like myself that whatever the oil price, wherever the wars are and whoever is in charge, this market just wants to keep on going up. Sure, there have been a couple of scary down-days when some punters have felt the bear’s breath on their necks. But after each of those sessions, the buyers swarm in, and most prices edge back up. One sector, however, worries me more than the rest. I have often commented on the waves of interference and regulation that keep on crashing onto the shores of the financial sector. Today we had the latest foam- crested breaker, when no less than the Registrar of Banks made free with advice on how the banks should run their boards of directors. The fact that last year he warned them that the good times were over (prematurely as it turned out) and they should brace themselves, reveals that he has little confidence in his customers running their businesses correctly. 

I have also noticed that the industrial share earnings base is now not growing at anywhere the rate it was enjoying just this time last year when companies were boasting of at least 40%pa increases in profits. Now the growth rate is down to just 15%pa. This is of course still a very tidy number. Most of us would be very pleased if our own annual incomes were improving like that. However, the market prefers rising growth rates; so if the forthcoming season of result announcements does not reverse the trend, the price reactions will be worth following.

And yes, I did have a wonderful trip to the arts festival. I managed to avoid those plays where deeply committed actors shout insults and abuse at the (paying) audience and accuse them of being responsible for all the suffering that has and will happen in the evil society we live in. Instead, I enjoyed a lot of music from ABBA to ZZ Top by way of Mozart and Bach. And there was a trip to the Blaaukrantz Bridge where, almost 100 years ago, of one of the country’s worst rail disasters took place. It was disappointing to learn that, even then, brigands appeared on the scene and looted the belongings of the victims and the rescuers.

And talking of victims, who will be brave enough to watch the scenes from Brisbane at noon tomorrow?

James Greener

14^th July 2006