NO BULL HERE

Yesterday I went to the JSE building on Megabuck Mountain (aka Exchange Square) for a meeting. Immediately after wafting through the large electrically powered revolving door and into the foyer I was confronted by an almost life size plastic cow. Glorying in full Friesland colours and splattered by some incongruous logos and slogans, it suffers the indignity of headgear in the form of a yellow hard hat and bafflingly, a soccer ball affixed to its nose.

After submitting to my own indignity of the typical office block entrance security requirements, I wandered over to take a closer look at this astonishing sight. It is, it seems, art.  The poor beast has a future under an auctioneer’s hammer to the benefit of some charitable cause and the good news ends there. I can just picture the scene of well lubricated over exuberant traders, disguised in black ties, vying with each other to pay too much to own a three quarter size model hollow plastic cow. Just what the sober buyer will tell his wife is less easy to imagine. I fear it will not be welcomed as a nursery ornament.

A covert glance confirmed that it was indeed a cow and not, as one might have hoped in such surroundings, a bull. What message can the JSE be trying to send, by permitting the installation of such a maligned bovine. Surely the brief to the artist should have hinted at the need for something a little more – shall we say – bullish? After all, in the immediate surrounds one will find the well known bronze of bull and bear in battle and outside there’s the rather more stylistic rendition of the same contest in a stainless steel and rotating fountain format.

And it rained on midwinter’s day in Johannesburg.

If ever there was a sign that the bull market is finished it has to be this!

I guess that another phenomenon that we all wish we could understand is the rand. Its strength has been amazing.  This week it re-visited multi-year record highs. Only against the Pound in December was it a bit better than it is now. The business papers and websites have been full of theories and explanations for this performance and some of them may be true. Whether any of them lead to an accurate forecast of how it goes on from here we shall have to wait and see. But what is certain is that there are very few exporters making more or even the same profits that they were a year ago and that the forthcoming reporting season will have many unhappy stories.

And there may not be just the same enthusiastic bidding for their shares as there will be for the cow.

James Greener

25^th June 2004

A BEAR IN THE BUSH

As those of you who have visited me here know, we work in the office tower above one of Joburg’s rather more upmarket shopping malls. This has a number of benefits including the quality of what my younger colleagues refer to as the “stock” on view flitting from boutique to boutique. Certain tables in the watering holes are noted for their prime viewing.

Another feature of the centre is the cost, size and power of the motor vehicles that fill the parking levels through the day. Sadly these two entities do not make a happy combination.

Admittedly the ramps are narrow but the nicks and gouges in the rails and parapet walls are numerous and impressive. No sooner do the owners of the mall apply plaster and paint to these wounds than another sleek number rearranges its bodywork with a clash of car and cement work. I have mulled the idea of opening a pub in the Centre named “The Chrome and Rubble” – but perhaps not.

As in life so in the markets.  You construct a really good looking portfolio with all the right statistics. You gun it down the ramp and into the market and then some fool bear causes you to lose concentration, and bang, the headlights are smashed and your poise is rubbish. It’s on to the cell phone to explain to the folk back home that you’ll be a little late while you sort out the mess and please can they send some more money.

Despite being a four day week (or perhaps because of it) it does seem to have been busy. The forthcoming Standard Bank preference share issue has deservedly excited a lot of interest. I have also been working on a chart that helps me see what is going on in the currency markets. I mean how do you know if the rand is getting stronger or if it is just the dollar getting weaker?  More on this later. So you will understand when I tell you that I am looking forward to sneaking off tomorrow to the Kruger Park for half term.

Which brings us back to the game viewing at the waterholes.

James Greener

18 June 2004

BULLS AND BUFFALOS AND PREFERENCE SHARES AND THINGS

I stayed at home on Tuesday and watched the rare transit of Venus. My solar telescope was a lash up of a pair of binoculars, a work bench and vice, and a computer monitor turntable all held together with a mess of cable ties. For a screen I used the back of the October page (the buffalo picture) from last year’s wildlife calendar, taped to the bread board. With this kit I managed to project a wonderfully clear image of the serene and stately progress of our sister planet across the disc of the sun. The buffalo didn’t seem to mind.

The bull in the market was this week similarly unmoved by events.  A contented looking Reserve Bank Governor made the predicted “no change to repo rate” announcement and this too failed to stir the oxpeckers perched on his mud-smeared flanks. The bull’s flanks that is. Most indices will end the week perhaps just a tad above where they were a week ago.

Regular readers will know that I am continually searching the US news for evidence of the bursting of all the various bubbles that I believe to be rife in those markets. But this week they were busy entertaining a crowd of poor people from Africa at a working lunch and preparing to say good bye to Ronald Regan. Remember that for us, next week will also have just four working days.

On Monday, Standard Bank will be publishing the details of the retail placing leg of their new preference share. Already we do know that they have exploited their premier rating relative to the other two banks that have already come to the market with such an issue. The dividend rate on the Standard Bank pref  will be a mere 70% of the current prime lending rate (11.5%pa), not the 75% that Investec and Nedbank are paying. My back of the envelope sums suggest that with a dividend of 8.1%pa on the 1000cps offer, the price of the pref, after listing, could rise to around 1050cps. I shall keep you informed on how to go about applying. I believe the minimum application could be as large as R100000.

There’s no rain forecast for Bloemfontein so I guess that muddy flanks will not be a problem when the ‘boks meet the Irish there tomorrow. A party of my colleagues are attempting to travel to the match via the dubious approach of floating a bus in beer. But I think that “It will get untidy”.

Have a warm weekend.

James Greener

11 June 2004

THE TAX MAN COMETH

I am rather bemused by the number and tone of the current advertisements that urge me to get down to the task of completing my tax return. As I mentioned last week the gap between the income and expenditure numbers for the government is large and getting larger. There would seem to be a spot of panic creeping into the suggestions that we should tot up what we owe and get the cheque in the mail to Mr Manuel soonest. It’s not cheap this business of supplying board and lodging to democrats whose electorate put the x in the wrong box.

Now can you name the country – no let’s make it easy – the continent, that is referred to in this part of a newspaper story about a speech made by that nation’s leader?

“……his countries USD 30bn external debt was “burdensome, unsustainable and unpayable” and appealed for leniency from its creditors.”

Mind you, this kind of money is trivial compared to what seems to be owed by all the good folk of the US of A. And it is this huge debt bubble that is the main basis for my bearish sentiment towards the local stock market. I have neither the skill nor the inclination to prepare a well reasoned treatise on how it will all unscramble. My simple view is that inevitably higher interest rates in the US will cause great hardship to the hugely indebted folk and government. A consequence of this pain will be a fall in Wall Street (irretrievably overvalued in my view) and …….. Well you know the story. I warned you it was simple.

I believe that symptoms of this forthcoming showdown are already visible in our own market. The index leaps about all day with apparently random reactions to data such as the rand or the inflation rates or GDP or whatever the panic of the moment might be.  It is impossible to decide beforehand what news might be good or bad and come to that – why it should matter very much to investors. The trouble is that an investor can get badly whipsawed when his carefully researched action that’s planned to take him through for a few years, suddenly deposits 15% of egg on his face the next day – or even the next minute.

So rather than stock picking this weekend  I think I’ll apply my mind to a short note to the tax man that will make good use of words like burdensome, unsustainable and unpayable. I might even try leniency too.

James Greener

4 June 2004

NOTHING TO BUY – YET

I did some “proper” analysis this week and what did it reveal? Well just that there are really no nice clear themes in the markets at the moment. There are no “gimme” situations.

Bonds are looking dreadful. My worry is that the government has a great deal of borrowing to do. My estimate is that expenditure this year will be at least R50bn greater than revenue. Last year the deficit was less than R30bn. That’s a big jump.

So the country’s biggest borrower will be making plenty of trips around town with the slotted tin. (He does of course borrow offshore as well – different tin) And I am sure you have noticed all the new borrowers (e.g. Joburg city) who have crawled out of the woodwork after being attracted by the low interest rates. It seems to me that the price (interest rates) of the commodity (money!) in demand is very likely to rise. Not what a bond investor needs to see.

The picture for the share market is not all that peachy either.  Dividend yields are admittedly not in “no value at all” territory – but what is interesting is that they have been maintained only by a savaging of dividend cover ratios.  That is, companies have been holding or growing their dividend payouts only by paying more and more and retaining less and less of their earnings.

I guess that this means that when earnings growth resumes (did you realise that the earnings of the shares in the Top 40 index are down 20% year on year?) dividends will not increase in unison. Companies will try to restore the cover ratio. The good news is the pleasing number of companies that in the current reporting season have been coming out with some rather fine results.

On a relative basis the analysis suggested that the financial sector is the best of an uninspiring bunch. But on a fundamental level I wonder how much time and attention that industry has to devote to collecting all that “know your client” data. Did you see that some bank branches are going to stay open late to try and meet the deadline? It’s an industry right in the cross hairs of all the bureaucrats, politicians, and other assorted freeloaders who are “following the money”. That must be costly and irksome.

It is worth remembering that the indices that I used for this work contain no companies with a market cap. of below about R200m. (Anglo has a market cap of R200bn) To some extent, that is a reasonable cut off, especially in respect of liquidity as well. But it doesn’t mean there are no good ideas below that level – especially if one is looking for a home for R50k or so. So there’s some more “proper” analysis in the offing. Watch this space.

Final thought: “Will the bank freeze my overdrawn account if I don’t show them my ID book?”

James Greener

Watermark Securities

28 May 2004

BEAR GORED – BUT NOT FATAL

Eish! This has been one tough market this week. Anglo, Billiton and SAB Miller have each risen enough to add more than R10bn to their market cap.  At the other end of the league table Kumba shed just R350m so it was a no-contest game for the bull. The Top 40 Index looks as if it will be up around more than 5% on the week. That hides the fact that on Tuesday we saw a low which was 8% below today’s high. Absolute roller coaster stuff and very very difficult for investors. It also didn’t help that Thursday’s main financial newspaper fussed over the story of worthless MBAs (is this news?) and relegated to page 18 the information that the previous day’s 3.5% up tick in the all share index was the biggest in several years!

Even for traders, who sit glued to the screens all day (except for restoring trips to the gym or the pub), it was not an easy market. Using the INet charting system I have devised what I call the pain index (well, I am a bear!) that calculates the losses involved if one were to do absolutely the wrong trades day after day. That is to sell at today’s low what you bought at yesterday’s high and then also to cover yesterday’s sale at to today’s high. This is not a recommended trading strategy but seems often to be pretty much the outcome for the trader who is both stupid AND unlucky. The current picture is that the pain index is well over double its long term average. Call the stretcher bearers! Naturally the joy index for the clever and lucky trader is identical but positive. The index is really just a crude form of measuring market moves.

There have been all kinds of stories doing the rounds about why this volatility has happened. The most popular one (probably because it involves someone else in trouble) has to do with those big players who have large derivative books. Now you and I think a derivative book is one where the author is guilty of plagiarism but apparently in this context it is a portfolio of options and futures.  These babies are very sensitive to market movements and can burst into tears if mom is just the slightest bit inattentive to their nappy or feeding time.  It is being gleefully rumoured that severe neglect has allowed both starvation and rash to occur in some nurseries. And major tears are happening.

Whether or not this week really was a case of a bull trap followed by a bear squeeze we will not learn for several weeks until the bandages come off the burned fingers and the stories get leaked over a calming brew. It does not alter my view that the bear will run out as the king this year. Just watch that US 10 year bond yield!

This seems to be a good point to share with you a bumper sticker plastered on a bakkie in the garage here: “Beer is not just a Breakfast Drink”.

James Greener

Watermark Securities

21 May 2004  

IT’S ALL ABOUT THE CATERING

I have been reading the report-back from our tireless city councillor about the month’s events in the civic pile on Braamfontein Hill. The phrase above seemed to encapsulate the workings of local (and probably all) government quite perfectly. I was intrigued by the ingenuity and number of pretexts that the elected officials had devised to reward themselves with a spot of sluicing and browsing.

Virtually any meeting, however small or trivial could be organised only if the caterers had first been alerted to be on hand with a suitable selection of viands and beverages. Pre, post and preferably mid meeting munchies are an absolute must if one is to keep up one’s strength for proper consideration of the introduction of the 210 litre wheelie refuse bin. A trip to the depot to view the bin coincided neatly with lunch. Don’t even mention the celebratory party for the delivery of the first bin.

Catering (note the capital letter, this is now a pet topic of mine) ranges from the simple and not much liked, cup of tea and plain biscuit right through to a poolside shellfish and champagne brunch at a tropical resort playing host to an international conference.

The overriding characteristic of Catering is that those who pay for it almost never get to taste it.

A current fine example of the genre was the  farewell party that was held for the intrepid 2010 Soccer World Cup bid team due to leave for Zurich a few days later.

But I suppose if Danny and the guys, not forgetting Charlize joining the team as decoy, bring it home this week end, we will forgive them all their excesses – because a new round of super-Catering will be about to begin.

[This piece should have been a reasoned list of shares that will benefit from the World Cup effect. But you’ll have to go to a proper analyst for that. In my view, any run next week will be far too premature]

James Greener

PS Thanks so much to the folk who responded to our “where do you live” and “know your client” requests by sending a photograph of their house or long letters detailing their habits and social needs. We have filed them.