WHEN PRICES GO BAD

You have to admire the rest of the Monetary Policy Committee for their ability to stand up to someone as large and determined as Governor Mboweni. According to him he was set to stomp the “Down” pedal in his office right to the floor at least twice but somehow the others managed to pull him away before the second lunge. So we got just 100 basis points cut from the repo rate and the banks immediately scurried off to drop prime and other rates by the same amount. The textbooks apparently promise that a bold move like this ensures prosperity for all. Supplied with cheaper money the theory predicts that people will surge back into the shops and businesses can prepare for boom times again.

Everyone is trying hard not to notice that this is not yet actually happening in America, despite the price of money there being virtually zero. In fact a horrifying fashion is emerging where it is cool to pay off debt and spend less than what you earn, while being thankful to have a job. The textbooks have no chapters on frugality and parsimony and prudence. They also are silent on the plight of savers earning less on their investments. It seems that Federal Reserve Governor Bernanke failed to return to the library all the books on how to avoid and survive a recession that he borrowed when preparing his doctoral thesis. He also seems not to have read them.

After dropping interest rates no one seems to know what to do next except ask the government to print more money to hand out to the people who were at the controls when we crashed into this swamp. No heroism on the Hudson here!

Among the more egregious of those decisions, involved banks buying bits of paper at prices that were many times more than they were actually worth. These now near valueless assets are accused of clogging up the channels of credit. One stunningly stupid suggestion is that that governments should set up “Bad Banks” which will then buy these bad assets. So does that mean that good tax payer money will be used to repeat the exercise of the buying bits of paper at the wrong price so that the folk who made the first mistakes will magically be cleansed of their folly and be able to claim large bonuses? Only a politician could invent something like this. Do we not demonstrably already have more than enough “bad banks”?

Gratefully here on the southern tip we have so far neither too much snow nor any bad banks. We do, however, seem to have bad busses. Unsurprisingly an acrimonious squabble is growing out of a government plan to regulate public transport. Taxi drivers are reportedly displaying their contempt of these regulations in their traditional manner. The count-down screen at the airport shows there are now less than 500 days to World Cup kick off. Hopefully that should be enough time to disarm the drivers and teach them about stop signs and red traffic lights. One-way streets can wait.

The pace of the release of company results and trading statements is hotting up. This week around half of them showed or predicted declining profitability but there have also been some pleasant positive surprises. I stay with my suggestion that cash heavy portfolios should be doing selected buying during weak periods. I like the Satrix Fini as it removes from me the problem of choosing which counters in this sector are the most bombed out.

Despite the KZN heat there is a distinct increase in the number of black and white rugby jerseys being worn. Much satisfaction resulted from victory in a warm-up game over a team of school boys from the Transvaal. I shall devote more time to the Super 14 only once I have understood why some English cricketer named KP should be priced at R10m. Has his country just beaten the Aussies at home?

James Greener

6^th February 2009.

SNOWBALLS VERSUS BEACHBALLS

There are two quite similar annual migration events that take place in the northern hemisphere. I have long wished that I could have taken part in one of them, but the closest I got was when it was suggested that I really ought to attend the other. Both events require travel to exotic locations where delegates and attendees assure the people that they leave behind, who are usually also the ones footing the bill, that they will behave properly, meet interesting and useful people and get to bed early. At both gatherings hot air and effort goes into putting on a show that will excite and encourage everyone within earshot, especially the powerful, the interesting and the rich to request more details, preferably in a more private setting.  The differences between these two gatherings, however, consists principally in the age of the participants and the number of clothes items they packed.  The World Economic Forum in Davos attracts people who score high in both areas. The Spring Break festivities are famous for the paucity of both. No prizes for guessing which one I wish I had been able to get to and which one I was lucky to escape being sent to.

My sole question about the current proceedings on the snowy Swiss slopes is that if these guys and gals are so good at this economics business why, at last year’s meeting, did they set a program that has lead us into the present economic swamp?

When it comes to programs I must admit to being pretty alarmed at the news that the taxman and the banks have shaken hands upon the latter promising to use the very loopholes that they have exploited in the past to pay more tax in the future.  Leaving aside the implication that this makes about possible prior infringements of the law, it does mean that depositors and shareholders are probably the ones being committed actually to paying for this lofty ideal. I am sure that salary cuts for bank directors will not be the source of funds for this forelock-tugging exercise. But we may never know.

Banking companies are always a very difficult area for investment analysts. The business is intrinsically very simple with only one product, which should make stock taking simple. Naturally in real life where clients, customers, competitors, tax collectors, shareholders and staff all would like to see different things, the accounts are usually a monument to human ingenuity and a delight for the printing company. Standard Bank’s annual report weighed over 1kg last year.

Back here south of the Limpopo, inflation has all but been declared dead. I am not so sure. The fact is that prices for mostly everything except fuel are still way higher than they were a year ago even if they are not going up as fast. Nevertheless, several rent-a-quotes have forecast that Governor Mboweni and his committee are sure to drop the price of money itself by at least 100 basis points when they meet next week. This will certainly be welcomed by the indebted amongst us but I can’t see it staving off the inexorable closing in of the global recession on our sunny (once the rain goes away) shores. Like being a president, being a central banker these days can have very few attractions beyond free catering and a nice entry to have on the CV.

One CV entry that no one should ever be allowed is the boast that they were a minister of sport (or culture or recreation). Government has absolutely no part to play in any of these areas and the reports of intended forthcoming legislation are terrifying. We already know that the selectors of our national teams steadfastly ignore the collected wisdom of millions of us bar room experts some of whom have even played the game. The minister’s sign-off of the team sheet will not guarantee a winning side Or am I naïve in thinking that is what he wants?

James Greener

30^th January 2009

PRESIDENT PARTY TIME

There can be little doubt that our very own presidential inauguration later this year will be a whole lot more fun and colourful than what we watched in Washington this week. The musical items will definitely be jollier with the president himself doubtless joining in for the choruses. He might even be excited (and unwise) enough to launch into a solo piece about the delivery of automatic weapons. I have yet to grasp Zulu praise singing, so unfortunately the poetry reading will be just as impenetrable. Women’s hats will surely be more numerous, larger and spectacular and the weather in Pretoria should be warm enough to allow for the wearing of both sharp and furry bits of various traditional wildlife species. The platform, however, will not be large enough to accommodate the president’s immediate dependants, which is probably just as well as it will avoid unseemly squabbles about precedence, such as who gets to hold the bible.

The inaugural address at the Union Buildings while not as polished will leave me just as sceptical. There are such impossibly high expectations of what the man in the top spot will achieve that even modest fulfilment of their promises will cause huge disappointment. Their intentions, whether explicit or implied, of carrying out socialist programs of redistributing wealth are going to be very hampered by the rapid disappearance of the alleged wealth and the supposedly wealthy as the recession bites. The US version is particularly odd as many of those laying claim to the handouts were previously wealthy anyway and their downfall and rescue can surely not be the responsibility of the taxpayers and their grandchildren? Is it true that some of the banks who are receiving these bail-out packages are still awarding bonuses to the staff that managed to lose them all the money in the first place? In my day stock broking just didn’t work that way. Anyone who did not put the client’s interest first – and that meant not taking positions for the firm or oneself ahead of the client – was out of the door as soon as it was discovered; even and perhaps especially if there was a profit in the trade. There is much to be said for agency-only dealing in this business.

The trickle of company reports and trading statements is growing every day and with just one exception, there have been no absolute shockers. Earnings growth is generally modestly positive. The puzzling one was a short term insurer who cautioned that earnings could be as much as 120% down. Does this rather unusual maths mean that they are expecting to report a loss 20% as big as last year’s profits?

The markets seem to be inclined to think, as I do, that bad earnings numbers are inevitable and most indices are searching for the bottom. This makes investing very frustrating as what seems like an excellent purchase one day looks pretty silly a week later. Nevertheless, because I know that neither I nor most people will be able to spot the actual bottom, let alone do all my buying there, I continue to suggest a program of top-ups in periods of weakness, like now.

It now seems that suspicion is falling on a member of the SAA cabin crew being responsible for trying to smuggle at least 50kg of Transkei Gold into England. Now I battle to handle my legitimate 20kg suitcase, how did this lass manage with more than double that amount?  This is one stewardess that you would not argue with when it came to getting another drink.

The ODI series is developing satisfactorily. Why have the Aussies adopted camo green for their outfits?  I hope the umpires are checking that there are just 11 of them in the field.

James Greener

23rd January 2009.

KICKING TO STAY AFLOAT

Which president in waiting has the bigger problems? The one in the US gets to stand in the cold in Washington next week, declare a public holiday and tell his two daughters that they will not be seeing a whole lot of their daddy for at least 4 years. He is going to be really busy doling out money all over the country. Back here on the southern tip the front-running candidate for the top job has run into a spot of legal bother and may also have to tell his children (number in dispute, but a dozen is a fair opening bid) that he could be out of touch for a while if he has to go to prison. Come to think of it neither post should have much attraction for any sensible person. Just about the only incentive for wanting to be on that payroll must be the rapidly growing lines of unemployed people worldwide and the fact that you will not have to bring sandwiches to work for lunch. I guess the opportunity for allowing your constituents to guide your decisions with thoughtful and appropriate tokens of appreciation is also attractive.

Proposing to spend GBP 100m to buy a football player named Kaka will be considered outrageous in some circles. But I rather welcome the news as it provides a useful benchmark in what has become an avalanche of meaningless and massive sums. Firstly note that the buyer of this young man is going to use his own (or rather the shareholders) loot for this purchase. Secondly the proposed deal sets a market level for a pair of feet with a track record of being able to hoof a ball into a net. This contrasts markedly with many of the other schemes where mostly public money, which in many cases has yet to be printed, is being handed out to people who have already demonstrated that they are extraordinarily good at wasting and losing the stuff. You do have to wonder whether the US government guarantee of 2600 Kakas ($400bn) to bail out a bank or two is really value for money. In my view there are quite a few bankers who not only should be eating sandwiches for lunch but would be lucky to get a job making them.

South Africa has been demonstrating its ability to lag the rest of the world in most things when the first of the year’s company reports have included retailers who enjoyed quite reasonable sales growth at Christmas. So far there have been no results which have shocked or scared the markets. Recent dividend declarations have been equal to or greater than last year’s. However, I do think we will in time see bad news which is not expected or discounted in the prices already. That’s fine. That will create opportunities to resume the small buying program that I have suggested people ought to be adopting. I believe that most prices obtained this year will, in three years time, be seen as bargains.

We have also not grasped how to play the shortest of the cricketing codes where division by 20 is the necessary skill. It did take ages to learn the 50 times table. Today’s win was very pleasing. The sky outside is full of small planes practicing tricks. Landing on water is happily not one of them although they will be on hand over the river to welcome the Dusi paddlers when they arrive on Sunday. Other excitement here in the kingdom, is the appearance of a small tree on the crest of a big steel arch to signal that the construction of the soccer stadium has reached its highest point. Sadly the same is probably not true for the national soccer side.

James Greener

16th January 2009

KEEP A TIGHT HOLD ON YOUR WALLET IN 2009

This is my first letter of the year and deliberately it is too late to drone with forecasts of performance to the second decimal point. I doubt that anyone a year ago got even the sign of the 2008 performance correct so why should any of us be better today?. I will, however, offer the view that most listed companies will report considerably smaller profits than they boasted of last year and in some cases even the year before that. Dividends may survive a little better but only until the reserves are depleted. The probable official response of reducing interest rates will have no discernable effect. The bull will return when the bear is exhausted.

 Despite the promises of those seeking office in the forthcoming elections, job and wages can not be created by government. Lamp pole poster placers will be almost the sole growth business in 2009 I’m afraid.

I would have thought that now the distraction of the holidays and festivities are long gone, just the smallest bit of sense might return to the markets. The biggest puzzle for me is the enormous esteem in which the world seems to hold the mighty dollar. President-elect Obama has told his nation and the world that his new government will take over the job of spending now that the tapped out consumers of that country have retired hurt. Even reducing the cost of money to zero has not tempted folk back into the stores and car showrooms. People who  are now living with the growing threat if not reality of job losses are grasping the fact that even if there is no interest to pay, any lenders silly enough to loan cash under those conditions will still want to see the capital returned in due course. Paying money back while still servicing existing debts and while possibly out of work is a very unattractive idea.

There are only three places where the young president can get the funds he plans to devote to on huge projects with the aim of getting the country back to work. Income tax in an environment of falling employment is not a good one and anyway he has already won everyone over with a promise to cut taxes. Borrowing is the next possibility but the idea of lending money at these tiny yields is not catching on amongst the folk who do have spare cash. A complicating factor in this route is the annoying fact that much of that cash is in the hands of people who don’t like the US a great deal.

Happily, for the new boy, however, down the street at the Federal Reserve is governor who as a lad was taken on a visitor’s tour around the mint and has never forgotten the excitement and speed with which cash can be printed. Years later Governor Bernanke added a keen insight of logistics to this youthful impression and pointed out that choppers would be the ideal method for rapid distribution of the crisp folding stuff. Barack and Ben, the helicopter men.

The US dollar’s steady decline as the world’s store of value must surely continue. Have you seen the stories about China using their own Yuan for settlement of bills that hitherto were quoted in dollars?

Adding to the investor’s troubles is the worry that despite the annoying requirements for sending the banks and brokers our proof of residence and ID it is still possible to wake up to find that the widely respected Bernie has made off (acknowledgment DGB) with your money. And even if you choose not to, your government is anyway investing your loot in banks, insurers and car makers and their pension funds. What we really need to know is where all those miscreants live.

James Greener

9^th January 2009.

THE BUMPY ROAD TO CHRISTMAS

Governor Mboweni seemed rather distracted yesterday when he rambled his way through the speech and finally got to the bit about cutting rates by a half percent. His heart was clearly not in the task and he almost failed to read out the crucial bit. Perhaps he, like the rest of us, has no interest in the long list of meaningless numbers and alleged facts and statistics that someone has laboriously copied onto the page for him. Or maybe he is looking forward to a spell in a garish shirt on the beach close to a supply of drinks with fruit and little umbrellas in them.

In fact no one was that worried by what our central bank governor had to say but strangely later in the day everyone panicked on the news that the US government decided that it was not keen to hand over cash to the chaps who make cars that US citizens don’t buy. The issues about supporting that once great industry are deep and complex and I am sure that other areas of manufacturing will soon also be getting on their bikes to Washington with a hard-luck story. Understandably these metal-bashers are aggrieved that the bankers were right at the front of the queue and received considerable state-support for their anxiety about their vulnerable bonuses. They just can’t understand why no one will send Ben Bernanke to hover over Detroit with large sacks of notes

For most of the week JSE investors chose to declare that the bear was dead and that they could see nothing but value wherever they looked. Resource shares enjoyed particular attention. The All Share index made a determined run at the 22 000 level. But the aforementioned news has reversed things a bit as we start the silly season. Next Tuesday’s public holiday really sets the mood until about the middle of January!

It would be interesting to compile a list of events that are alleged to have caused a noticeable reaction in the markets in these last few months of overall collapse. I suspect that there has been no predictable response in the various markets to items which were apparently broadly similar. One day a failing bank is bullish the next day a flailing regulator is bearish. One day tax collection shortfalls are good news but then the next day the rising government borrowing requirement is bad for interest rates. But through all this noise there shines one crystal clear signal. Business is slowing down quickly and profit growth if not profits themselves are under severe threat.

One day of course this economic cycle will reach the bottom and a recovery will start. It is alleged in some circles that the market’s recent recovery is an example of its ability to forecast the future. In other words the market now judges that the worst is over and it can see that bottom if not the recovery already. We bears are never sure about this. We fret about pessimistic trading statements and rising unemployment and are doubtful that the prime interest rate at 15% rather than 15.5% will have any effect except to make income earners feel poorer and less inclined to spend. We also are horrified by having one’s neighbours dying of thirst and illness and feel that denial is an appalling response. I therefore see no need to rush about buying into this run which I believe will soon become exhausted. Just wait for those pull back periods and new lows and resume the nibbling and topping-up program.

The next edition of Tidemarks will I hope be written while gazing at the Indian Ocean over the keyboard. When that will be is hard to predict, however, as the forthcoming house move is not unfolding as a smooth and well-marked highway. Internet connection is one of the many potholes to be negotiated. Getting the fridge plugged in and the Castle quarts into it enjoys a much higher priority.

James Greener

12^th December 2008.

SOLID SUPPORT DISCARDED

The UK base rate was crushed down to 2% this week and the pound sterling disappeared into a hole, losing more than 5% of its value against most other currencies including our own battered runt. Dropping interest rates would appear to be the only remedy occurring to central bankers when they watch with horror as people stop spending and start saving. The concept of punishing the wise and encouraging the profligate is rather cruel and unusual and I think that somewhere there are rules against that sort of thing.

But rules are discarded when the leaders sense that they are in great danger of it being found out that they really are powerless against the momentum of the approaching recession. They will of course deny that they and their predecessors of the last few decades were responsible for the endless and numerous small tweaks of policy that have slowly accumulated until the present crisis became inevitable.

My opinion that the political allocation of resources is unsustainable is now getting tested. Suddenly several of the world’s most important economies have reached the point where too many citizens were benefiting while too few were contributing.  It is simply not possible for everyone simultaneously to ignore the boring old saws like “neither a lender nor a borrower be” or “ save for a rainy day” or even “buy cheap and sell expensive, but not necessarily in that order”. It is of course simply splendid if you are one of those who can travel upstream against this wisdom for a while and to do so is one of the great benefits of entering a career in politics.

But now the contributors are losing their jobs and their homes and that will mean that the beneficiaries will soon also start to feel chilly which is why they are frantically yelling at people over at the central bank to turn up the heat. In the USA the president-elect appears to have given Governor Bernanke instructions to get the engines on the helicopter warmed up and the sacks of money loaded. Inauguration Day in Washington will see the crowds showered with dollar bills. No wonder it is a sell-out affair.

Although it might feel as if the JSE has been indulging in a bit of a recovery the truth is that it has been a bad week for most of the big names. The all share index is hovering about midway between its recent high and low points. There is no reason to believe that the bear has been banished to his lair. With next week’s interest rate announcement by Governor Mboweni and futures close out a week after that there are still several matters available in 2008 for investors to fret over. Share volumes have not yet really displayed any sign of slumping into their holiday trough. Stockbrokers are obviously still making a decent living.

The elderly are, however, battling in this environment. Why else would Mr Roderick Stewart be strutting around a large stage last night rasping out his greatest hits? It was wonderful to attend a gathering at Kings Park where the star was older than me but I did rather worry about him slipping on the wet stage and breaking a hip or something as he scrambled about collecting the female undergarments being thrown at him. Given the average age of the audience some of the flimsies looked rather stouter than he might have wished.

This weekend’s ball sport is golf from Sun City. I shall watch if only for the sight of blue skies and the great yellow orb. This Durban overcast weather is getting tiresome.

James Greener

5^th December 2008.