FOR WHOM THE TOLLS TOLL

So just how much deeper could this bear drag the market?  Well the answer is a mighty long way. The declines suffered so far are really not yet at all severe when expressed in terms of valuation measures such as the price to earnings (PE) ratio. This bear has not yet destroyed even a half of the gains that the All Share index achieved since the little hiccup and low point in the middle of April, a mere two months ago. That index has so far scored a maximum decline of just 6.4% from its peak above 42 200 on the last day of May. Self respecting bears can do far more damage than that. At the low of the 2008/9 market correction, investors were paying an average of just R9.00 for R1.00 worth of historic earnings (that is the PE ratio was 9). Currently the cost of the same amount of earnings is about R16.00 (PE ratio now 16).  So if the market were to return to that lower PE ratio, prices would need to fall at least 40% from current levels. And that’s not the end of the gloomy news. Thanks mainly to the unfolding calamities and tragedies in the mining businesses listed on the JSE, average earnings of the overall market have been falling steeply. If this were to continue, average prices would also need to fall just to maintain the present PE ratio.

Even when using an index such as the Financial & Industrial, which excludes the mostly dismal mining and resource shares, the picture is equally concerning. While growth in the average earnings of these sectors has slowed a little, it is still satisfactorily positive but the index itself has outpaced that growth in the past few years. Therefore, to return to the PE ratios experienced in 2008/9, current prices in that index would need to pull back more than 50%. And then only a particularly bearish analyst will also point out that economic conditions are such that even the financial and industrial sectors might also soon begin to report negative earnings growth.

And that’s what has happened at Telkom where earnings apparently are down almost 75% despite holding a near monopoly on fixed line infrastructure and a stranglehold on almost all internet traffic for which they charge exorbitantly. The attitudes of the politicians who allegedly are in charge of our communications these days are an echo of a previous government who also felt no good would come of letting South Africans enjoy what the rest of the world had. On that occasion we were denied television. Now we are denied cheap and plentiful bandwidth.

Remember that fearsome price collapses like that suggested by these calculations do not take place overnight. Indeed they can take months and years to unwind and before they end many investors will have grown bored and gone to find something else to do. That is of course when we must all remember to buy.

There’s a nice little side-battle taking shape at the edge of the big one about the tolls on the lovely new roads around Joburg. The company that was responsible for installing the fancy kit that will scan the passing traffic and calculate the tolls due is based in Austria. It has been explaining to their shareholders there how things work in Africa. Despite having installed and tested the gear more than a year ago no actual money has yet been collected and everyone must wait for the dancing and singing to stop. Reportedly the company hopes that their share of the income will be some 50 million euros per year. Sanral, the local operator, however, would appear to have other ideas. They are telling everyone that no money from the tolls will leave the country. This could be fun, as long as you are not Austrian.

The roads around the bowling club are being cordoned off in preparation for a car show starring some alleged celebrities from the BBC. Huge excitement is promised and large crowds are expected. Hopefully, however, the Metro Police will stick to their promise and go on strike over this weekend. Without the clueless cops messing up the traffic it might still be possible to get there for a beer. Hopefully the rugby deprived folk of Nelspruit will turn out in better numbers than we managed at Kings Park last weekend for the back to back tests. It must be pretty dispiriting for two national sides both playing an away game to appear in a near empty stadium.  

Remember that Monday is a holiday. It’s when we celebrate being young again.

James Greener

14^th June 2013

BEAR BAITING

This bear is starting to grow up. It is now a week since the All Share set a record high and since then every day has seen a bit of value shaved off the market. Some days as much as 2% has been lost The major indices suggest that the declines have been more or less similar across the market with no area doing worse than another. Perhaps, however, prices of the mining shares will get a little extra battering now as a consequence of the very recent promulgation of yet another piece of legislation that will smear more layers of restrictions and costs on the already reeling industry. One executive in that business has publicly stated that the new laws will cause most mines to go “ex-growth”. Reaction from the Marxists who run the country but have never run a spaza shop has been predictably nil.

SARB Governor Marcus has revealed that she also is deeply concerned that the government is rapidly making matters worse. Her pointed reference to the lack of leadership from the top will almost certainly earn her a slew of hysterical and stinging rebukes from the various idiots and talking heads who feel the president is unable to speak for himself. It will be interesting to see if she manages to keep her job.

The insistence of our leaders that a socialist program WILL be the only one permitted is terrifying and of course assured of failure. The reasons why this bear might turn into the real deal with claws capable of tearing 25% or more out of this market are starting to gather out in the open at the evacuation assembly points.  Parts of this nation’s structure are now burning fiercely.

But the conflagration has not been spotted by everybody. This week brought news that the effects of a law passed 100 years ago are to be investigated. Reportedly that legislation, like so many today alas, proposed a political allocation of assets – in that case, land. Probably, like the ones that are being crammed into the statute books today, it was bad law. But there are much more pressing problems to which the state should direct its very limited resources than something that the market is now free to sort out on its own. Today there is no barrier to any citizen owning any piece land – except for the tens of thousands of hectares owned by the state which, in some places, are entrusted to the care and whim of unelected traditional leaders. Now that’s a problem in need of a solution. Just imagine the mobilisation of capital that would result if true owners were granted freehold and so able to raise mortgages.

The rand recovered a little as earnest talking heads declared that its collapse had been over done. The problem when a true bear market arrives is that sellers get jammed in the exit doors each offering to sell their bit for less than the previous offer. The actual true value – if indeed there is such a thing – is nothing more that a number  scribbled on a scrap of paper pinned to a notice board in a draughty corridor. No one pays much attention. The sole price is the one just agreed. This is true in all free markets.

The rather unusual event of a double header test match program takes place at Kings Park this weekend. For the price of a single ticket fans will get the opportunity to watch a test between  Scotland and Samoa before the Springboks take on Italy. Leaving aside  the fact that the current state of school geography will have many of the younger fans utterly baffled by the origins of two nations where the men don skirts as formal wear,  the real pre-match interest will again be focussed on the demonstrated inability of the stadium organisers to provide a pilsner in a parking lot.. A belated attempt to apply liquor licensing laws that for decades have been far more breached than observed has resulted in large numbers of unhappy and thirsty fans. Confusion about who can drink what where is widespread. It will be even worse if Italy manage the unthinkable. Much as India did to our bowlers.

James Greener

7^th June 2013

GEYSER ABOUT TO BLOW?

The Nenana River in Alaska freezes over every winter. As the spring thaw approaches the gamblers of the area erect a large wooden tripod structure on the ice in the middle of the river and then place bets on the date and time when the structure will collapse and be swept away by the resumption of the river’s flow. This year the ice broke up only on 20^th May (thereby apparently breaking a 97 year old record). Some thing similar is staring to happen in the markets. Stuff which has been steady for sometime is beginning to crack apart and people are falling into pretty cold water.

Our poor runt has lost more than 7% this week against the Yen and the Swiss Franc. Against the other majors the damage is above 6%. Blame for this has been placed on non-resident sellers of our bonds because that market has also been taking a pasting with yields soaring and prices plunging. The President called people over to listen to a speech which presumably was supposed to allay the widespread fears that his government had no clue what was happening or what they could do about it.  Unfortunately his words were taken to confirm exactly those concerns and the prices of bonds and the currency tanked even further. Now concepts such as interest rates and foreign exchange rates baffle even us pundits so it is little wonder, especially in view of who our pres. chooses as his financial advisors, that he too is all at sea.

In the USA the yield on the 10 year bond has popped sharply above 2%, and this has caused an outbreak of jargon-speak. If indeed there is a bear market beginning there too it is going to annoy and disappoint many officials  who were sure than programs such as Quantitative Easing, Sequesters, Fiscal Cliffs and dropping dollars from helicopters would ensure that things kept going smoothly.

At home the JSE share market may or may not be witnessing the death throes of a bull market. Prices have been swinging wildly up and down with the All Share index daily range rarely recording less than 500 points while daily highs and lows through the week have been fairly similar. Traders are engaged in a large and gruesome tussle and the volatility will be providing some hair-raising war stories about gains and losses. Investors should be content to sit wide-eyed in the grandstands and wait for the blood and dust to settle.

Total return of the All Share index in May is going to come out above 7%. This is an exceptionally high performance especially as there has been little in the overall economic landscape which normally might be expected to drive such optimism and excitement. Indeed first quarter GDP growth was announced this week at a measly 0.9%.

Despite yesterday being International No Smoking Day our largest listed share, British American Tobacco tops the week’s list of value gained through share price appreciation. Biggest loser on this list is First National Bank. I trust has more to do with the boss retiring than my application to them for a credit card.

The back cover of one of the those large glossy so-called life-style magazines that fall out of the morning paper from time to time, carries an advertisement from Eskom in which the power utility implicitly admits to failing in their task to supply the nation with sufficient electricity. The ad requests consumers to reduce energy demand by switching off hot-water geysers every evening. The odd thing about this undoubtedly expensive message is that it appears to be delivered by someone dressed to look like a geyser sitting on a smart leather couch. The rest of the surroundings also hint of comfort, but the effect is compromised by an untidy pile of exam scripts awaiting marking on the table within reach of Mr. (or it may be Mrs.) Geyser. Very strange. (No, its not a boiler suit.)

James Greener

South Africa’s 103^rd Birthday

IGNORE IT AND IT MIGHT GO AWAY

It was astonishing that neither of the newspapers I looked at this morning bothered to devote any headlines of consequence to the fact that the All Share index shed more than 1000 points on Thursday. There was a bit of space devoted to Governor Marcus’ “no change” announcement on the repo rate. And of course acres of space is devoted to coverage of the wonderful scrap amongst the politicians about last month’s Indian airborne invasion of our air force base in Pretoria. The funniest idea to have emerged from this fracas is the suggestion that name-dropping should be designated “a gross misconduct”. The bigger the name, the greater the infraction? Or does the height one drops it from also count?

 It is of course way too soon to see if this share price correction merits the title of a bear market but it does have a different feel to it. Some bad stuff has been happening to offshore markets particularly in Japan and the USA. In America there have been self-congratulationary noises that all the official interventions since 2008 have worked and the economy is now good to go. However, the merest suggestion that the Federal Reserve might slow down the flow of crisp new notes into the market spooked a few people and the recovery suddenly looked rather ropey. .

Labour difficulties on the mines – especially the platinum ones at present – are growing larger by the minute. It is hard to sort out who is speaking for whom when at least two rival unions are claiming to represent the workers. Wouldn’t it help to identify the real union support if the current patronising and archaic system of using the employer to deduct the union membership fees from worker’s salaries was scrapped? The sole beneficiary of this system is the union treasury, while it is difficult for any worker to withhold their subscription because they don’t think that they are getting value from their membership and they have something else they would like to spend the money on.  In an era when labour oversupply is a tragic reality it is important that workers are free to derive the maximum value from their efforts and not have to share it with layers of bureaucracy. Investors obviously also don’t think the present system works very well. Only the very bold and eternally optimistic are buying for a recovery at this stage.

In the light of the JSE and other authorities tightening the compliance requirements on people who work in this investment industry, the news from England is deeply worrying. Reportedly an investment advisor was unable to show that it was giving clients the right advice, and so the Financial Conduct Authority handed them a three million pound fine. Undoubtedly the devil of this story is in the detail but it does make one wary of telling folk anything beyond what the weather in Durban is like today.  Suddenly those 500 word disclaimers at the end of an email which end with an invitation to visit a website for even more disclaiming don’t look so silly. Fear not, Tidemarks will continue to say what it thinks. After all it’s priced right and you don’t have to read it. How’s that for a disclaimer?

With sell-out soccer match taking place simultaneously at the Moses basket next door and the first real test of the booze ban it is going to be rather tense at Kings Park when the Sharks host the Bulls tomorrow. Allegedly there is an arithmetic possibility that the Sharks could win the Super 15 this year. However it is much more likely that they will rain heavily on the Bulls parade. Sports Minister Mbalula will not be watching. He is far too busy planning how to spend R65m of taxpayer’s money on the next South African Sports Awards event. He has warned oppositions MPs that they will need “good suits and proper shoes” if they hope to attend.

Foolishly I sent the yacht in to have its bottom scraped this week, completely forgetting that it is the Monaco GP weekend. Ah well I shall just have to watch on TV like everyone else. I doubt there were any berths left alongside the Swimming Pool Straight anyway.

James Greener

24^th May 2013

DID YOU GOT A LICENCE?

One of the stellar large capitalisation performers in the market has been SAB Miller. A single share these days will cost you more than R510 which is R110 up on its price at the start of the year. That’s a gain of almost 30%. In a trading update, published a month ago, the company suggested that its forthcoming results (now due next week) would show only single figure (i.e. less than 10%) growth. The average forecast by the analysts who do this sort of thing, is that annual earnings will be around R20 per share and the annual dividend will be close to R8.70 a share. On these numbers, the price to earnings ratio of SAB Miller is almost 26 and it offers a (pre-tax) dividend yield of only 1.7%. In my book, that’s very very rich. But despite this data, day after day, for several months, buyers have been happy to pay more and more in order to own shares in this company. Undeniably it is a great company with a great product and with great management (the recently retired CEO and I shared a school desk for 4 years) but it is impossible to justify buying them at these levels unless you plan to sell them and reap a capital profit. But beware the day when more profit takers than buyers call their broker.

Wouldn’t it be fun to watch the communist-infested Cabinet reach the conclusion that they need to sell off state assets. When it comes to raising money, ideology takes a back seat. Left-wing politicians are going to have to wrestle with their ideals when they decide how much of which assets they are prepared to sell to the dreaded capitalists. They will find few takers if they choose to “do a Telkom” and retain control and the right to appoint management. From where I sit, with a view of the many ships waiting to enter Durban harbour, the ports are clearly a candidate for privatisation as indeed should be the state owned airline and airports. Doubtless there are others and developments will be interesting and maybe even tempting. But don’t hold your breath. The pictures of Marx, Lenin and Castro are still hanging in the Cabinet room.

Also in the vein of scratching for cash is the looming deadline for anyone who tries to earn a crust by helping other people with the ridiculously difficult task of completing a tax return. Within a few weeks these advisors must not only be registered with the taxman but also be a member a professional accounting body. It is totally unclear what risk the government is attempting to cover with this new law. Presumably they are worried that physicists like me might find a worm-hole in the space-time continuum where we can hide our income.

This old bear’s lack of a financial education continues to hinder his progress in understanding matters such as the need to “recapitalise” the National Empowerment Fund. Despite assurances that it is a going concern and has reserves it appears to have run out of money. Apparently this is not the same as “broke”. An entertaining squabble between itself and the National Treasury has broken out and in the meantime the outfits to which it makes “disbursements” are left waiting for their money. Are they required to pay it back ever? How does this all work? Who will recapitalise me?

Here in the kingdom, the head that wears the crown surprised his subjects, especially those in need of healthcare, by raising the priority of renaming the hospitals above that of getting them actually to provide medical services. It is unclear why naming health department facilities after his ancestors is a necessary step for attracting suitably qualified and dedicated staff. Assuredly the sick people have no interest in what the place is called as long as it’s open and they can find it. Puzzlingly, however, the boss of the provincial health department supports the program but did add that “we are focussing on changing the names of the mortuaries first.” It’s really not encouraging to think that these sorts of items fill the agendas of those whom we elect.

The Sharks at last have broken the run of ignominious losses which various uncharitable fellows at the bowling club had begun to attribute to my support for the team. I trust I will be able to drink there unmolested tonight.

James Greener

World Information Society Day 2013.

COMPETITIVE DISADVANTAGE

The bull is very alive and supremely fit. Anyone still plotting share prices by hand on graph paper will have been busy with the scissors and sticky tape tacking extensions on the top of their pages to accommodate the latest points. The US share market surge has been exceptionally steep as investors become convinced that growth is gaining traction in that land. Closer to home the yields on local bonds have plunged to levels seen before only by much older people. Lending money for 10 years to the South African government at less than 7% displays considerable optimism I think. The All Share Index is also very perky and attempting to test the March highs around 41 000. Fascinating stuff. 

Reporting season for February year-end companies is hotting up. The impression is that quite a few of them are finding business is rather tough and not everyone is boasting of double digit earnings increases. One bank scared the market quite badly with the news that it is becoming harder to get people without jobs and money to repay their loans. Hence, they warned, the bank was not being as profitable as everyone was hoping. Some of us were unsurprised by these revelations.

I wonder if the JSE is satisfied that all shareholders are getting equal access to company results now that companies are no longer compelled to publish them in a newspaper. While it is true (perhaps) that the dreadful Stock Exchange News Service (SENS) offers simultaneous and equal access to everyone, those people who actually want to use and study the data are now far worse off.  Anyone who disagrees ought to be forced to compile a report on a company using only the results as they appear in that utterly dreadful SENS format. It’s about time that the JSE outsourced that service to someone who understands style, layout and format.

Cape Town has been hosting one of those World Economic Forum shindigs. Those are events when people who have loads of theoretical experience dish out advice about how we ought to be running our lives, businesses and countries. Such a large gathering of busybodies and analysts is hard to beat for creating wonderfully rich and thick seams of foolishness for old cynics like me to mine. Despite the revelation that the austerity measures now being forced on the Greeks and others arose from an error-filled spreadsheet model of how economies are supposed to work, the nannycrats have not skipped a beat. The buzzword of the moment is no longer “sustainable”. Apparently we should now all strive for “competitiveness”. Those of us who actually have clients and customers who will take their business to someone else in a heartbeat if we cease to be competitive are bemused by this instruction.

The African Development Bank has reportedly spotted a “pool of surplus funds  ... globally” that they believe they can tempt into investing in a USD 50 billion bond. The money would be used for infrastructure financing. That’s a whole heap of money, but it could be a great deal less if municipalities and councils began collecting the billions they are owed by people using the existing infrastructure. It’s odd that many of those who owe that money will complain bitterly if their pension fund was to invest in this bond and it failed to perform.

It is probably mathematically let alone physically impossible for the Sharks to reach the Super 15 playoffs. Their only hope would be if Australia quietly slipped under the sea one night but that would probably cause more excitement than simply promotion for a few underperforming South African rugby teams. It’s so nice that the Formula 1 season has returned to the old European tracks for a while. Those long and carefully designed circuits seem a little soulless.

James Greener

New Moon May 2013

TOUCHY TOUCHDOWN

I am not sure what all the fuss is about. It’s not as if our own air force is making much use of Waterkloof Airbase these days. The arrival of a foreign wide-bodied civilian passenger plane loaded with wedding guests at the military base must have provided a welcome distraction for the folk who hang about this National Key Point all day. Except for those planes that are used to ferry cabinet ministers to junkets, the rest of our air force is reportedly mostly in mothballs awaiting pilots and fuel allowance.  Reportedly this breach in security and absence of customs controls was unconnected with President JZ’s close friendship with the family holding the wedding. The scampering for the exits by officials who claim that they were not involved in the incident is very amusing. Nevertheless, we must all hope that the bride did enjoy the dream wedding that her father organised for her. Hopefully she will not be disappointed to learn that the blue light convoy between Waterkloof and Sun City might have been escorted by impostors posing as policemen. Presumably they ignored all traffic rules like proper police anyway.

The European Central bank has decided that the economies of the region are all in the doldrums because the price of money is too high. Accordingly it lopped a third off that price and will now charge its clients just 0.5%pa. The immediate effect of this was that the euro currency declined in value a bit against other currencies. It will take far longer to reveal whether the rate cut will trigger a renaissance of business and consumer confidence and activity. Personally I don’t think the price of money is the biggest problem. I believe the increasing transfer of risk-taking and decision-making to governments is dampening personal enterprise and enthusiasm both in Europe and in many other places. The recent obituaries and memories of the late Baroness Margaret Thatcher offered a reminder of how the dead hand of bureaucracy needs to be removed in order to allow growth to happen.

Much has been said about the report that at least R1bn of public money is stolen each year. This is indeed disgraceful and the real crime is that the thieves are rarely sought and almost never properly disciplined. The bright side, however, is that unlike other corrupt regimes the majority of the cash seems to remain in the country and not disappear into bank accounts in Lichtenstein and Switzerland. Our thieves it seems are happy to spend the money locally and that must surly be a factor in explaining the rather rude and robust health of all types of consumer consumption statistics. Car sales are up, most stores are reporting growth and even private schooling demand is strong. Data on the sales of premium brands of single malts is not easily found but it probably shows that whisky drinkers are not in danger of dying of thirst. Let’s remind ourselves also that R1bn is just a tenth of a percent of the state’s budget or around R1 trillion. The real waste is actually to be found in the regiments of unproductive and incompetent civil servants drawing a salary.

Whenever tax collectors world-wide gather for their annual conferences they must set aside a special time for a minute of silence and contemplation in grateful thanks for the scientists who came up with the thesis that carbon dioxide is bad for us. Here is a commodity that is ubiquitous and universal and produced by everyone in huge quantities but apparently really ought to be controlled. And what better way to control it than by taxing it. Most of us are pretty hazy on what the stuff actually is; after all it is colourless, odourless and pretty much weightless. We have no way to challenge the models and equations that confidently state how much harm we are causing by going about our daily lives. This week a local tax official even suggested that carbon dioxide could be responsible for delaying the government’s poverty reduction plans. There is no limit to the idiocy that a state in desperate need of money will display.

The Sharks (and the Stormers) are in the Antipodes. That means that their matches are being played when it is still breakfast time here. It is difficult to be excited about rugby without a Castle in the hand. I stopped having Castle for breakfast a few years ago. Pity.

James Greener

World Press Freedom Day 2013