UNCLE SAM MEETS FISCAL CLIFF

The JSE All Share index set a new high on US Election Day. Whether it was disappointed in the outcome of that contest we can’t say but it has been dribbling away from that peak ever since. Nothing as sharp as Wall Street itself, mind you, from where confident sightings of a huge bear are being recorded. Also the senior suits in the euro zone have talking tough this week but the euro would appear to be losing the courage and strength it conjured up during its summer hols. That drama is going to be an annoying background hum for the world’s financial markets for a long time.

Reporting season is hotting up, with about three dozen companies either releasing results or issuing so-called trading statements that are supposed to warn investors of larger than normal earnings changes. Fewer than ten of these announcements have been disappointing which unsurprisingly include gold and platinum miners who have been experiencing torrid labour issues. Here and there are grumbles about how slow and difficult the government infrastructural spending program is becoming but oddly not every company in the affected sectors have that complaint. Mostly, however, while acknowledging that business conditions are tough, management teams are finding ways to keep earnings growing and dividends flowing. Many are looking outside the borders for new customers and even new offices and bases. As the saying goes, the boere are making plans.

The fellow who came up with the phrase Fiscal Cliff to describe the latest crisis in the US economy must be delighted with the way it has caught on. Opponents of President Obama are giving him no time to savour his election victory and are pushing him to the edge of the precipice as hard as possible. But whatever the name it’s the same old story told for centuries. No good can come from spending more than you earn, year after year. The problem is that while increasing income by raising taxes always yields less than expected, (folk are very adept at discovering loopholes), decreasing spending is really really unpopular with just about everyone. Not least, are the elderly, ill and indigent who have become totally reliant on the government paying the bills. And then there are government employees, and the politicians themselves, who have little appetite for taking a pay cut or perhaps being fired. No newly elected politician has ever been brave enough to start his or her regime by slashing expenditure in the hope that memories will have faded by the time the victims next enter a polling booth.

Here on the southern tip our tax collector has embarked on a program of sending banal and emotion-filled messages to taxpayers thanking them for funding tax eaters. TV ads, phone text messages and a website provide heart-warming stories of people who, because of the government’s allegedly wise and effective provision of education, health services and other nice goodies, were able to fulfil their hopes and achievements. Fine, but note that it is also the hope of every taxpayer that they can achieve invisibility. Which is not something the new bank notes can claim; their colouring is rather aggressive.

The inflation rate plays a large part in our lives, with so many things compared against it as a bench mark. That it is an very poorly understood statistic was highlighted this week when a new set of weights for its calculation was released. One has to trust the skills and accuracy of the compilers of this data but various oddities do come to light. For example the average consumer spends more on tobacco than on health services! We spend less on paying for education than we do on buying clothes, and our booze bill is greater than our electricity bill. Our spending on recreational equipment is greater than what we need for dairy products. The average SA consumer sounds like a smartly dressed party animal dancing in the dark.

The cricket in Brisbane has started slowly but satisfactorily. However, the ‘bokke test against Ireland starts so late tomorrow that many of the Natal faithful may not be in fit shape to notice that their baa lamb is in the starting line up.

James Greener

9^th November 2012

COUNTING GROWS

It has all gone ominously quiet – except here on the southern tip where the All Share marches on and upwards. Investors obviously can see no reason why earnings should not keep improving and anyway cash these days is definitely not king but pauper!  Already the bold are sniffing out recovery situations among the miners where the high wage settlements are starting to be followed by the inevitable and tragic retrenchments. The platinum sector gained over 6% in October. Banks, on the other hand, were eschewed.

One cause of the reigning peace was of course the closure of markets and near closure of everything else on the eastern seaboard of the US where cyclone Sandy demonstrated that not even presidential candidates have as much power as nature. In Europe the squabbling about who should pay for whom to do what has subsided for the moment as well. But not for long I suspect. There are some deep and heart-felt bitterness’s dying for an airing.

Overseas players have slowed their rush for the exits. The rand has settled down, although at weaker levels. Most people are getting resigned to the near inevitability of having Jacob Zuma staying on as president. There really doesn’t seem to be a candidate brave enough to mount a challenge. And anyone slightly competent chooses to feed at the trough from outside the sty.

The Statistician-General – in reality a just a mid ranking government employee with a preposterously grand title  – but much respected  for being one of the few in government who is able to do sums, got to wear his dubious yellow suit again and handed over a lavish tome of Census results to anyone within reach. As well as generating the usual froth of disbelief and criticism it seemed to tell us nothing that hadn’t already been guessed. Within a day, however, the pres. started to fret about accusations that his government had failed to reduce wealth disparity but seemed unable to find any numbers in the great work to contradict the charges. Odd that.

 The government is now spending at an average rate of more than R2.5bn a day – including weekends. That’s a great deal of money and furthermore is R400 million a day more than the taxes it collects. Now I know that the borrowing requirement is OK and the deficit is within manageable proportions but it is still worrying to this old bear to think that every morning the nation wakes to find its debt has increased by nearly half a billion compared to yesterday. Some talking head in government has suggested that bankers need to take sociology courses. He believes that this will make them realise the callousness and dangers of lending money to poor people. The bankers should agree but only if he first attends courses on economics and finance so that he can realise the callousness and dangers of talking nonsense.

That bankers are indeed heartless fiends was demonstrated vividly by the way that one outfit in the City simply deactivated the key cards of a number of employees overnight so that they first discovered that they were unemployed only when they were unable to get in the front door of their offices the following day. Can you just imagine arriving at work to see your colleagues milling about outside and having to try your own key in the slot? They were not even afforded the opportunity to fetch the photo of the kids from their desk, sneak a copy of the client phone list or leave rude messages on the internal email system. Bang. Thanks for coming. Have a nice day.

I am delighted that Sebastian Vettel is looking set to retain his world championship in Formula 1. It provides a sporting topic which is not rugby. You won’t believe how many Province supporters have appeared from the readership of this column to jeer at my trashed claim about the deserved new home for the Currie Cup.

James Greener

2^nd November 2012

EXCEPT FOR THE SHARKS – PRETTY GLOOMY

If dividends are included, the JSE All Share index is standing on a year to date performance of 20%. Of course it is like the parson’s egg where some sectors have been excellent performers but others have been stinking. The index itself  seems content to lurk around the 37 000 level at present  but assuredly some news whether good or bad will happen along in due course and probably push things up some more,  This week it was revealed that consumer inflation had climbed a bit and so the attraction of keeping cash in the bank diminished again.

Unlike the USA, it is not really company reporting season here but some very pleasing numbers have been released. The smart and nimble are still finding customers and clients who need their goods and services and, importantly, are actually paying for them.

How they are paying came back into the spotlight as it seems that many consumers are faced with the dreadful need to have to borrow to put food on the table. There is an enormous socio-economic catastrophe brewing up here, and if and when the government tries to do something about it, their likely recourse will be to grow their programs of redistribution. However, as revealed yesterday, there is a problem with that plan. The goose’s golden eggs are shrinking and revenue is not flowing in as strongly as hoped. Capacity and interest in funding the increasingly corrupt and inept state is on the wane.

During the so-called medium term budget Minister Gordhan rearranged the departmental money allocations and revealed some interesting trends. Losers included Trade and Industry, Human Settlements and Public Works. These last two presumably are surely where the “massive” infrastructural spend is supposed to be coming from, so that’s a puzzle. Biggest winner proportionally was Sport and Recreation who obviously had been round at National Treasury with a very good story about why government should help fund a tournament for the continent’s football players. Failure by the sportsmen to sell enough tickets or squeeze sufficient from their sponsors seems like a poor reason to cosh the taxpayers  The Department of Transport was assigned an extra R820m and without reading the fine print I wonder if this might have something to do with the ongoing Gauteng toll road debacle. That one seems to be reaching some sort of resolution as the trade unions are backing off, but still the mini-bus taxis appear to be exempt.

Alarmingly, the government believes that the number of cases deserving social grants will grow by nearly half a million a year for the next several years. By 2015 over 17 million hands will be outstretched towards the 5 million odd taxpayers. It’s notable that this is the item of government expenditure that Gordhan believes will grow the fastest. Also growing fast are the numbers of state employees, many of whom, except for the size of their monthly stipends, are largely indistinguishable from the grantees. Wouldn’t it be wonderful if governments stopped trying to do everything for everyone and just let us all get on with our lives.

The pleasure of the internet as a source of information is that one can filter out all views counter to ones own prejudices and revel in reading the ranting of like-minded cynics. This week I was able to unearth a really powerful and substantiated analysis of the US share market. Much of the document concerned the quality and reliability of the data we use to make our decisions – a very dear topic of my own. Things, the writer concluded, are not as all-fired wonderful as the populists would have us believe and there are still massive financial tensions in the USA which Federal Reserve rescue programs like the current QE3 only disguise but don’t cure. Ultimately buyers of shares will realise that the future streams of income they hope to be buying into are turning out to be far less than they were told to expect and asset prices will fall.

Now that the Lions have fallen ignominiously from the SA rugby scene until who knows when, it is necessary to inform readers that the Currie Cup like me is moving to Durban.

James Greener

26^th October 2012

WHAT IF THE BALLOON SHOULD POP?

One should be grateful for all the people who happily buy and consume the egregiously expensive Red Bull drink. The obviously fantastic profits generated from selling this brilliantly marketed so-called energy drink are used to support a large number of people who are eager to do dangerous but very entertaining things. The world would be a much duller place without Red Bull sponsoring Grand Prix teams, and assorted crazies on bicycles, boards and balloons. Last Sunday a fearless fellow called Felix stepped out of a capsule floating under a helium balloon nearly 40 km up.  He whistled back to earth, setting all kinds of records some of which will stand until this bull market finally expires and the bear pulls on his pressure suit and also steps into space.

This particular display has again been delayed by some heroic meddling and a great deal of hard work with the Thesaurus. It is really all very simple A group of worthies – some of whom get awarded Nobel Prizes for this sort of thinking – observe that  there are people, businesses, institutions and governments who have spent (or have promised to spend) far more than they ever will have or collect.  The worthies then point out that in their opinion certain of these deadbeats and their clients and creditors don’t deserve to find out where or how this particular business model might end and so should therefore either be lent or given (the distinction often emerges only much later) some money to tide them over what is almost certainly (!) merely a temporary embarrassment that will disappear when “things get better”. This is where the creativity comes in, as words like bust, bail-out, and rescue are considered way too direct and even offensive for the parties concerned. The sole certainty in this piece of theatre is that the source of the funds for these exercises will be those citizens (both living and yet to be born) who conduct their lives in such a way that they have savings and, simply put, spend less than they earn. Be aware of course that there can be many acts and scenes in the show and the bear may never get on stage while you are watching.

These sleights of hand are taking place all over Euro Land and in celebration of calamity postponed globally most investors are enthusiastically pushing equity prices higher. In the US the quarterly results season is in full swing with more companies than ever beating earnings expectations. This expected versus actual is another cute piece of theatre which can be put to very good effect if required to disguise reality. Interestingly, this time it seems to be largely genuine. The US may actually be growing a little, although it seems possible that its days of leading the global economy back to health may be nearly over. Increasingly the rest of us are taking our cues from China but the real problem there is credibility. Who knows what is actually happening there? Our own lefty cabinet ministers have no doubts, however, and are letting agreements with traditional western trading partners’ lapse in favour of expectations of great things from our new best friends.

Sadly the labour crises back home are definitely genuine with management resorting to desperate measures to try and keep mines open and businesses ticking over. Next week we get to hear one of those odd second tier budget speeches from Minister Gordhan and the main interest there must be whether he will be brave enough again to point out that the government is not delivering anything other than a deeply divided nation of tax payers and tax eaters. Not to mention the growing third force of people who are tax invisibles.

As a fellow survivor of the cancer and treatment that Lance Armstrong conquered and endured I have always fervently believed that he would have avoided any other interventions from the pharmaceutical industry. The current news is devastating and confirms that I will never need to enter a bike race to prove my own remission. Instead I can anticipate the terrors of the Lions playing an away final in the Shark Tank.

James Greener

19^th October 2012

LOTS OF QUESTIONS. NO ANSWERS

No wonder I stopped trying to be an analyst all those years ago. Against the background of a  growing appreciation that in the name of socialism and transformation, our political leaders are intent on crafting a business- and employment- unfriendly environment, there are violent strikes in critical sectors of the economy. The rand has taken a battering and is as much as 10% off recent levels against all the major currencies. The rating agencies are still doling out report cards full of Fs. Many important industrial companies are mumbling about earnings downgrades and what is the All Share doing? Very nicely thank you. It has been consolidating above the 36 000 level without seemingly a care in the world. And still the “Buy” recommendations roll off the research assembly lines. Reportedly a survey has also discovered that banking confidence is at a record high. Very strange stuff. Is this a case of ABC investing? Anything But Cash.

A growing share of the country’s business is being conducted in sectors that are hard to  observe and measure directly and which are dominated by cash transactions. There is a glorious common misconception that anyone conducting a cash business is exempt from registering for tax! Reports coming out of Limpopo about tender corruption reveal how easy it is to obtain a meaningless and false tax compliance certificate. Sadly of course the source of increasingly more of this money is corrupt government contracts where the business model allows for immediate, frequent and large dividend payments to everyone awarding and winning the tender, which leaves nothing left for hiring someone to do the actual job. Presumably this model figures large in the “economic freedom” plan being touted by certain politicians. As we have presumed before, the sole good news is that, unlike earlier regimes, little of the stolen money is yet being sent to homes in Switzerland and Lichtenstein, instead it is bolstering the domestic consumer economy. Here in KZN it is very common to see all building activity on a new house or renovation cease for several months. The explanation is that the owner is building up his cash pile before recalling the artisans and launching the next phase.

Our government has embarked on a program of insulting its citizens. This is a whole lot easier than actually operating an administration that delivers services. We have been told that although it looks as if things are falling apart at SAA, in fact things are NOT falling apart and actually the sudden departure of a dozen board members and top executives is a good thing for the airline as it makes space for people who really know how to run an airline. Again. We have been told that the cost and motivation for a nice new road in the heart of Zululand has absolutely nothing to do with us and we may enquire no further. And also the huge Zuma family compound that has blossomed at the end of that road is vital for the well being and security of the president and therefore the country. Reportedly the pres himself paid for much of it. Really? We have already discussed the relatively meagre presidential salary and it sure doesn’t extend to helipads, clinics, underground bunkers and tunnels. We citizens are certainly being kept in the dark about how powerful are enemies are.

A sign of how cowed we are by the state’s relentless interference in our commercial activities was the hailing as a victory a court’s decision to reduce to just R200m (from R500m) the contribution (fine) Wal-Mart has to pay in order to complete its linkup with Massmart. The money is to be used to “assist existing and potential South African suppliers to Massmart”. Very courteously Wal-Mart / Massmart have refrained from pointing out that these suppliers can quite easily use this assistance in also supplying the competition.

There is absolutely nothing to say about rugby this week.

James Greener

12^th October 2012.

QUIET BEFORE THE STORM?

Interestingly, even though labour unrest continues to swirl around the country, politicians in general have mostly kept their heads down and their mouths shut. Similarly there has been scant official reaction the slew of credit rating downgrades that Moody’s have been dealing out to numerous local institutions and businesses. What has happened? Has the pres issued an instruction to government people not to comment on things they don’t understand?  Even this morning’s anticipated announcement about the way the state will toll motorists for using the splendid new roads around Joburg has been politely delayed until a noisy and cross labour organisation has had its say. All very restrained and statesmanlike. Maybe it has to do with keeping everyone under control until the much feared party congress in Bloemfontein takes place in a few weeks time.

Reported earnings of the 30 companies that comprise the JSE’s top Financial and Industrial Index are 14% higher than a year ago. This is rather good given the poor performance of the wider economy both here and abroad. The index itself, however, has outpaced this growth by a factor of almost two and this has propelled at least one measure of value into very unappealing territory. The index historic pe ratio is above 17 times.  Optimists of course see this as the market merely discounting an improvement in earnings to a growth rate of 20% or better. Bears and pragmatists have their doubts and would prefer to let other people do the buying here.

Remember that an index represents a sort of average which means that there are always individual shares which lie either below or above that average. Insistent buyers (or indeed sellers) should perhaps look for those counters which occasionally and momentarily stray far from that average. There are no particularly obvious candidates for that category at present. Over in the resources though there are a great number of shares bumping along at multi-year lows. Buyers will need great courage and also perhaps a sign that the government has stopped giving the miners a hard time.

Cash returns after tax and inflation are negative so that area too is best avoided. Now that the mess created by the drop in repo rate taking place so shortly after the introduction of a dividend withholding tax is starting to clear, the variable dividend pref share market is coming back into focus. Pre-tax dividend yields above 7% (and even 8% if you think micro lending is a great business) are available. Remember of course that there is no possibility of capital growth from these preference shares because the prices remain in a band roughly 10-12% wide.

Normally SARS are depressingly on top of their game. But their ruling that taxpayers my keep electronic records of their affairs provided they are in a place physically inside SA is rather quaint. What happens if they are on a flash stick in my pocket which I take along when I go fishing in Mozambique? And the famous “cloud” where so much electronic stuff is now sent to spend its days. Where is that? Oh dear no SARS, this idea is not going to work.

Last weeks ‘bok home win over the Wallabies has calmed the din of complaints from the 10 million unofficial selectors to a soft rumble. If they manage the same against the All Blacks tomorrow it will be very satisfactory. The Protea’s ignominious departure from the T20 World Cup with not a single win in the second round of the tournament was disgraceful. It seems our cricket players are not very good at doing the division sums required for understanding run rate. Is cricket another victim of the crumbling school system?

This is the 400^th Tidemarks I have published. That’s a quarter of a million words. And I still type with just two fingers.

James Greener

5^th October 2012

WEEKEND ESSAY TOPIC

Despite having just four working days, this week handed out quite a lot for investors to think about. The All Share Index backed off from its tentative foray above 36 000 quite sharply but then appeared to think better of its timidity. Another development is that the daily value of shares traded, is now regularly well above R15bn, A month ago days that busy were rare. Have the dreaded High Frequency Traders at last put in their threatened appearance?

 Another of the supposedly omniscient and all-powerful ratings agency last night smacked SA down a notch for its estimated credit-worthiness. Moody’s made the not unreasonable observation that the government is not actually showing any ability to control and improve the economic situation even if they can talk eloquently about what they plan to do. The timing of the downgrade is interesting. The local bond market is about to make an (infinitesimal) debut in a world index. Bond markets are more interesting than they look!

It is now well over a year since the census happened and as yet I don’t think a single result has been published. This delay speaks volumes about the process as the head-counters are obviously encountering some pretty thorny problems with their raw data. Much the same has happened over at SAA, the national state owned airline, where they are reluctant to publish the financial results for a 12 month period that began in April last year!  Most of the board have now stormed off in a huff complaining that the shareholder doesn’t care about them. On the contrary the shareholder is appalled that they have managed to lose so much money that they are not even sure how much of a bail-out they need. “Between R4bn and R6bn” is the rumoured amount. A 50% variance suggests a total lack of control of where the money is going. The shareholder must be desperately wondering who will take this very sick albatross off their hands. Noticeably, any government official who thinks they are important enough chooses a VIP charter over a seat on SAA.

Its is a great shame that the prosecutors appear to have missed most of the targets that were presented by Julius Malema’s mysterious and meteoric amassing of massive moolah. Mere money laundering is now the sole charge against the man and any politician worth the name feels that this sort of activity is a résumé requirement and not a crime. Similarly it looks as if losing one’s firearm is a necessary event before any policeman can feel part of the squad. 1200 police weapons have gone missing in the last 18 months  which somewhat highlights the near irrelevancy of  imposing ever stricter controls on those who have actually paid to own a gun and are obviously far more focussed on keeping it safe.

Not even the most optimistic and naïve believer in the notion that political institutions are a force for good can have survived the United Nations’ appointment of our president Jacob Zuma as champion of education. This supremely perverse decision indicates nothing less than stupidity and also disrespect for the people of this country who are desperate to achieve some learning. Maybe actually not having too much education should not be a barrier to such an appointment, though it is hard to argue this position. But choosing a man who represents a government that has so swiftly dragged the country to the foot of almost every global league table of literacy and numeracy is definitely wrong. We citizens should demand that every appointee to this dubious position be required to write, unaided and in their own hand an essay  of not less than 500 words on the subject:” Why I am a Champion of Education.” Marks for neatness AND spelling will be awarded.

Lions supporters are torn between the obvious need that the ‘bokke have for talented players and the difficulty of defending the top spot in the Currie Cup log without some stars. Nevertheless it has been fun up to now. Who thought the monsoon season was a good time for a cricket tournament in Sri Lanka? What sense does an innings of just seven overs make?

James Greener

28^th September 2012