BLEEDING OR BOUNCING OR BOTH?

It would be odd if a broker’s letter this week did not make some reference to the market’s haemorrhaging, so here’s some thoughts about it. The JSE had only a four day week with which to play follow-my-leader behind the ups and downs of the Dow and it made for some very exciting moments. Wall Street opens each day just two hours before we close – which is plenty of time for traders to react to what is going on over there. Then of course our markets close and we go home and eat supper in front of the TV, glued to the financial news channels (often indistinguishable from the Cartoon Network) and get ourselves suitably worked up about what will happen in the morning here in Gwen Lane. If, as has been the case recently, the US markets are all over the place, then we can suffer a double whammy from just a single day in New York. And furthermore a local public holiday gives us a whole extra session to fret over. I suppose that we really should get out more.

Our market tends to overdo any international trend in both directions. For example our June 2004 to March 2005 bull was bigger than most and our bear since then has also been hairier than most. Our day-to-day moves can similarly be quite scary. Thursday’s 326 point fall in the All Share index is (fortunately) quite a rare event, seen on average only about a couple of times a year. It is my view that this year we may experience more than our average quota of such days. Just wait and see what happens when the Dow breaks below 10 000!

This month the All Share total return will be a miserable -4.5% with the Resources index coming in with about -8% – which illustrates where the major pain has been. Without dividends the overall market would be in negative territory for the year to date. I don’t believe that it is too late still to get some more liquidity into portfolios.

The problem with liquidity of course is that declining interest rates are ensuring very meagre interest income streams which are fully taxable as well. Let me remind you of the Investec preference share, trading today at 12215 cps and which I estimate will pay a 411 cps half year dividend in July. Not fantastic, but tax-exempt.

And while on the topic of tax have you yet encountered Ms Khanyisile Khumalo (KK for short)? She has been enlisted by the tax man to “promote awareness among taxpayers of their obligation to comply voluntarily (oxymoron?) with all tax…laws”. This lady really is a comic book character.

The week began with one of those particularly hard hailstorms in which cars and houses out here in the northern suburbs got pretty hammered. A similar experience may be in store for ABSA shareholders with the news that the very long awaited bid from Barclays is now imminent. A dawn raid that’s turned into a midnight feast for the advisors?

It’s too late to wish the Cats success; they have already lost this weekend’s game. The cricket from Antigua should compensate. Do enjoy the long weekend.

James Greener

29^th April 2005

HABEMUS URSUS*

If the real intention of last week’s unexpected interest rate cut was to weaken the rand, then the committee members must be looking pretty glum right now. It was two months after the cut in August before the currency regained the level it had before the cut. This time it was about two days.

The other thing interest rate cuts are supposed to do is lift everyone’s spirits and make them optimistic and buy shares. But it hasn’t done that either. What it has done is lured a large bear from his lair, and the All Share Index is now 6% off its March peak.

 Almost every day there is yet another announcement by a company explaining the details of their method for conferring chunks of ownership to those citizens whom the government has identified as being in need of such benefits. Each method seems more complex than the last. Unsurprisingly the common thread running through these deals is the fact that the beneficiaries are unable to pay anywhere near market value for these chunks. Presumably if they did have the money in the first place and if they did think the shares were worth owning in the second place they would have bought them already. But you know how it is with bureaucrats – always keen to improve people’s lives, especially if someone else is going to pay for it. Today’s deal involves assigning about R1bn worth of shares to about 45 000 beneficiaries via five trusts. This translates into an average individual shareholding of almost R23 000 that should pay about R750 per year in dividends. This calculation neglects entirely the costs of running those trusts.  I suspect the latter number is rather less than is being expected and it has not been explained how the individual will find/fund the former figure.

I am in no doubt that this meddling in the allocation of capital – however well-meaning the intention or well-deserved the beneficiary or guilt-ridden the donor – is distorting market prices.  My guess is that without all these charters and scorecards and financial sleight of hand, prices would be higher. But the truth will emerge only in a few years time when the shares trickle back to those who really want to own them.

Several months ago I mentioned that Telkom had popped up on the valuation model as looking interesting. Now we can see why. They are alleged to be charging four times more than the going rate for many of their services – particularly the high volume data lines needed for the internet. This news coincided with a report about how the world’s playing field was now flat and level, thanks to the internet. The amount of international outsourcing of intellectual services that is already taking place over the optic fibres of the world telecomms links is astonishing. Unless you are a barber or a waiter you can be sure that somewhere in the world there is a better qualified and harder working individual looking to do your job for less than half your wage! Down here on the southern tip we are mostly blissfully unaware of these developments. If my phone line is down and I can’t dial out, then it means those fellows can’t dial in either!

Many folk have linked the upcoming mid-week public holiday with the May Day one (shifted to the Monday) to create a giant long weekend. It’s going to be pretty quiet for a while here, but I think the bear won’t be sleeping.

James Greener

22^nd April 2005

* = “We have a bear”

BIRDIES, BULLS, BEARS and BEHEMOTHS

Most of us began the week not in the best of condition. We had been up ‘til all hours the previous night supervising the Masters golf  beaming in from far-off Atlanta  And the rest of the week sort of bumbled along in cruise mode – well perhaps more coasting downhill than exactly cruising. Until late Thursday afternoon when Governor Mboweni’s bimonthly TV appearance suddenly became more electrifying than his choice of tie. Just as in August, from out of nowhere, a rate cut of 50 basis points was dropped in our laps.

Immediate market reaction was as if a particularly venomous and ill tempered serpent had slithered up its trouser leg. Amidst the shouting and yelling and frantic slapping at the body parts, the currency went off a cliff and the share price charts took off like the space shuttle. However, this morning, things calmed down a lot, almost to the point of torpor.

The text books probably tell you that lower interest rates should be good for share prices, the property market and pretty well anyone borrowing money. The argument continues that foreigners especially, will dislike the lower rates of return on their cash and sell rands in favour of some other currency. It does seem to be working so far as the rand is down at least 1% against all major currencies and 2.5% against the USD this week. This swooning currency is just what the SARB needs to please exporters and placate local manufacturers trying to compete against cheap imports. It is only us elderly citizens trying to live on our savings who seem to be unhappy about rate cuts!

However, it is as ever, all much trickier than that. Wall Street has seen some fairly sharp down days and more and more commentators are starting to talk about the things that have worried me for so long. Firstly I don’t think that the rand will begin a serious weakening phase from here. It didn’t after the last cut in August. In fact it strengthened to the point where the citizens were threatening toyi-toyi sessions again. Secondly, I think that my long awaited bear has definitely emerged from hibernation in the US. It has been my tedious view that here in SA we will be unable to resist his depredations when that happens – regardless of what the rates are doing. The way the market sulked and the rand began to recover today was very interesting.

Note that the prices of the popular banking sector preference shares should not show too much reaction to the rate cut. Obviously the nominal coupon rates of all of them will now decline by the appropriate fraction of the 50bp cut in the prime rate. But the effective dividend yield of the prefs must now be compared to alternative investments that themselves will now be yielding half a percent less than they used to.

Keep an eye on Sunday’s London Marathon for an SA flag flying from a rhino’s horn. Inside will be a very good and but quite crazy friend of ours raising money for preservation of the species. He would welcome your sponsorship on www.justgiving.com/rhinothomas

James Greener

15^th April 2005

LECTURE TOUR

This time last week I was submerged in the halls of academia. It is wonderful how all the pomp and ceremony and tradition and gowns and hoods seem to work despite the 21^st century African setting. I am still wearing that silly grin of pride that began when I watched my daughter experience and enjoy the same rituals that both her parents went through a while back. I had a wonderful time and caught up with several old friends who remained behind at the university when I was prised out of the comfort zone that I had been in for a decade. I wandered out into the real world to see if anyone needed a geophysicist. Not all that much, was the answer, which is why I went stockbroking.

I returned to my desk after the Grahamstown trip, fired up to do some educating (of myself at least) and began with the latest set of government revenue and expenditure numbers.

In the last 12 months the National Treasury has collected (almost all from tax of one sort or another) an awe-inspiring R336bn of revenue This is 14% higher than the figure for the comparable period last year and about R11bn more than forecast way back in the February 2004 Budget. This sort of growth must be very pleasing for Minister Manuel. Many other financial directors will be very envious.

Over on the “Requisitions” side of the page the number is R366bn. This is up just 11% year-on-year. Leaving aside the problem that government and provincial departments and their “structures” are reported to be unable actually to spend this money allocated to them [ref. the story that some nurses are threatening to “expose half their stomachs if government fails to pay them enough money for uniforms”], the shortfall between in and out is still some R30bn. This too is a big number, but not a record. That was seen in August when it reached R41bn. Since then revenue has enjoyed a much publicised surge. Much of it apparently from the tax arising from increased consumer spending.

This gap – or fiscal deficit, to give it its posh name – is made to look small by expressing it as a percentage of some very large number. Economists have chosen the Gross Domestic Product (GDP) as this large number, which in South Africa is in the region of R1 400bn. Bingo! The deficit is now just a perfectly manageable and internationally praiseworthy 2.1% or so.

Government plugs this gap by borrowing – principally in the local bond market, but also overseas. And here’s an interesting problem. If you borrow dollars and euros today, when the rand is strong, what happens when the rand weakens? That overseas debt becomes a whole lot more expensive is what happens. So I agree with the economists who suggest that Manuel should to use his revenue windfall to pay off old foreign debts and not take many new ones. By the way, that should be good for the rand, which will not please those who are calling for it to weaken. What a dilemma. Why do people want to get into government, with these kinds of problems to solve? Please do buy those nurses their uniforms, quickly.

Lots of sport to watch this weekend. The Cats seem doomed. Ernie for the Green Jacket? Can we find any bowlers?

James Greener

8^th April 2005

TIME TO TAKE SOME EGGS OUT OF THE BASKET

Have you ever had a good look at one of those “Withdrawal of Cautionary” Announcements”? Usually there is a bit of cryptic waffle, the gist of which is that whatever it was that was troubling management will no longer do so. And then there is that little gem of a phrase along the lines of “…caution is no longer required to be exercised by shareholders when dealing in …”.  Now I am all for disclosure of every little snippet of news about the companies whose shares I might own or buy and I have no wish to decry the Cautionary Notice system but the legal wording is a little misleading if not quite cynical. It implies that as long as a company is not “under cautionary” then life for the shareholder is a breeze.

In my view you had better exercise caution WHENEVER you contemplate a share transaction. The problem is that the unexpected price jump (or so called “black swan event”) is just as likely to be caused by developments that occur well beyond the company’s own control or knowledge. And very often by something that is never identified. All it takes is for there to be more buyers than sellers (or vice versa) and bingo – a price move.

This week the US Federal Reserve did exactly what everyone in the market predicted and expected and raised rates 25 basis points. However, the rate announcement was accompanied by some faintly gloomy observations about inflation. Apparently this was not in the script and suddenly people are starting to ask; “The oil price is HOW high?”.  This is not the only item that is attracting long overdue attention. There are many other indicators and numbers that us bears and doom-mongers have been fretting over for several months already. This seems to have unsettled further the US markets, and the next thing there were bucket loads of caution being needed by investors.

Our own Top 40 index is nosing about just beneath the 12 000 level after a high of 12 500 odd just before that close-out shindig I told you about last week. I also told you that neither I nor anyone else know if this is the beginning of the end but I do know that it marks the end of the beginning that started at the 9 000 level in July last year. So there’s no need to be shy about taking a few profits and pushing the portfolio liquidity levels up. Do remember that I regard the banking sector preference shares as near-cash instruments and their price should not move much at all even if ordinary shares take a thrashing.

These short weeks are undoubtedly making it harder to remain focussed and to keep in touch with news from overseas markets, which are not taking off quite as much time as we are.  Usually this four day Paschal break is one of my favourites and I give no thought of prices and portfolios. However, this time I might even be tempted to seize control of the TV remote from time to time to see what Wall Street is doing. Just “exercising caution” you see.

Please have a happy and peaceful long weekend.

James Greener

24^th March 2005

IS THAT A BEAR IN THE EASTER BUNNY SUIT?

Now that was a pretty hectic week. On St Patrick’s Day the market endured one of those quarterly futures close-out events. This means that share prices dance to the tune on the fiddles of leprechaun-like derivatives traders. Normally these fellows keep away from the rest of us and lurk in dark places muttering about “the greeks”.  I am not ever going to try and explain what these are, except to assure you that there is nothing in the least xenophobic about it. But for a few days ahead of close out and on the day itself, market moves were being described as “irrational” – which is code for “no longer going straight up”. In fact some shares – notably the rand hedge ones – were reasonably strong, while many other market favourites were a bit wobbly. Which also describes the condition of some of the dealers who even now are just returning from the infamous close-out party.  Just as well there are only four per year.

Sasol continued to run and run as shareholders failed to join in the government’s concern about the company’s promotion policy. I have yet to see any report from the US that Washington is disappointed that Disney’s new CEO isn’t Mickey Mouse.

In addition to an oil price setting lifetime highs almost every day, the rand has been leaking a bit and is trying on a new big figure coat in the dollar department (i.e. it’s over 6 to the USD!) and looking quite stylish.

Remember that if you would like to take a simple position on a weak rand and strong gold price, then the Exchange Traded Fund (ETF) called New Gold is listed on the JSE and trades just like a share. Its theoretical price is 1/100^th of the gold price in rands and this month has run from 2550 cps to 2725cps. Another ETF, called New Rand (and also TrackHedge)  is a basket of shares with rand hedge characteristics has run from 940 cps to 1000 cps in the same period.

The usual question is being asked with slightly more urgency these days. Is the bull market over? No one knows of course. It sounds clever, until you think about it, to say that the end is definitely getting closer. I am intrigued to hear just how many traders have been getting short (code for selling) or buying protection (put options).

For a reason that I haven’t worked out yet – and probably won’t bother to – the number of short weeks and long weekends at this time of year seems a bit fewer than in the past. Nevertheless, I am going to take some days off here and there. I have a graduation in Grahamstown to go to and a tent trip in the bush to try out. I shall not be taking a fishing rod on either excursion. I will take a cell phone though. I am worried that in the confusion created by the close-out and these holidays, the bear might just sneak in and set up camp. And he could cause more unhappiness than even the prospect of having to watch four South African sides competing for the wooden spoon in the Super 12. Fortunately there’s a Grand Prix early on Sunday.

Have a safe and happy long weekend.

James Greener

18^th March 2005

ONE PLUS I TO THE POWER OF N*

It was reported this week that the President of Nigeria has expressed the opinion that compound interest is “the worst thing in the world”. People like me who are fans of that everlasting market commentator, Richard Russell, will know his view that the compound interest tables are just about the best reading one could wish for. One of these gentlemen is a borrower, the other is an investor. Tax free compounding is the only simple and certain way to grow wealthy from investing, which is why I tediously harp on about dividend yields. One really should take every advantage possible from these tax exempt morsels that the tax man throws to us under his table.

Of course buying cheap and selling expensive is also a certain route to investment satisfaction, but it is hard to do properly. It does look and feel easy when much of the market is seized by a bull of the size and longevity of the one that I believe is now tiring. And to quote an old friend, “never confuse genius with a bull market”.

Whether or not it was the threat from Nigeria to default on its USD 34bn foreign debt that caused our own bond yields to rise quite sharply this week, one can’t be sure. There has been some net foreign selling of the bonds; not big amounts, but I suppose the rising yields tell you that locals were not in any hurry to soak up the supply that was appearing from across the water. Yields in fact seem to be on the up in many other places as well; most critically the US, where higher interest rates must be alarming for the world’s largest borrower. So far there have been no significant reactions in the equity markets to these developments. But we need to watch them carefully.

This month the majority of the bigger sector indices are up. However, the really big sector, Other Mining, where both Anglo and Billiton reside (the latter now less than 3% behind the former in size) is down about 4%. This cancels out the nice gains in Richemont, Sasol and SABMiller and the All Share index is pretty flat on the month. The banking sector index is also unchanged despite stellar results from Standard Bank and others. My valuation toy suggests that RMB Holdings and FirstRand are the pick of that bunch. If you fancy a stab at the exporters then Anglo itself seems to me to have done too little for too long and Metorex looks as if it produces many of the minerals that the Chinese need! A slug of rand weakness will do neither of these any harm at all.

The rand is one of the worst performing currencies so far this month, losing almost 0.5% against the USD. This is small stuff, however, compared to the greenback itself which has crumbled almost 1.5% against the Euro and 0.8% against the Swissie in the same period. No wonder Bush took his own kit, fuel and food along with him when he popped over to Euroland to say “Bonjour” recently. I reckon he might also be muttering about the evils of compound interest in Japanese and Mandarin some day soon. It is the kind folk who speak those languages that have lent the States so much money these last few years.

I shall be at Ellis Park tomorrow to see for myself if my hope for the Cats has any foundation. May your weekend be more fun.

James Greener

11^th March 2005

 *The basic compound interest formula in words.