THINGS ARE GETTING OLD AND SMELLY

I have had lots of fun catching up with all the market activity that took place while I was away. Prices have been all over the place haven’t they? As expected, the stories from the US of A tell of rapidly growing piles of rotting investments although amazingly, so far, not too much has been unearthed in their equities markets. I am, certain, however, that the soft and nasty stuff is there and will stink all the worse for being left so long in the dark. Nothing especially bad in any market here in SA has yet been reported and hopefully we are in better shape. I do, however, think that we are being rather naïve about our currency.

For several reasons, most of us focus on how many rands we need to buy a US dollar and it has been around the level of just over 7 for so long now that it sort of feels “right”. Against other currencies, however, there is no cause for such misplaced and benign complacency. The rand is a runt.

Although ridiculed by more sophisticated analysts than I, the behaviour of the price of  a well-known metal called gold provides an interesting and frightening measure of what has happened to our money. These days you need more rands than ever before to buy yourself some of this gold. In fact something like R153 000 per kg (and you thought biltong was expensive!) Smart folk will ask why you would want to and my simple reply is that 18 months ago, a kilo of gold cost just R100 000, and it was half that price when we were welcoming the new millennium. Now before you race out and fill your boots with the metal, I should point out that the stock market has performed even better than that in this time. That of course is the same as saying that the JSE has provided a positive return after inflation. This note is just an illustration of the falling worth of our currency.

Talking of stuff that has gone down the drain, what are we to make of the Gauteng Government’s call for tenders to provide a Status Quo Analysis of the Municipal Sewerage Treatment Plants (sic) Capacity? Don’t we have anyone working for those municipalities who can do that as part of their job anyway? Can’t they be trusted to tell us the depth of ordure we are in?

One of the cell phone network operators reported this week and the fact that they have 13.5m subscribers in SA alone is not entirely good news. You may have noticed that the bureaucrats got their way and phone FICA is upon us. In what we are assured is a move to bust crime, every cell phone owner will have to provide the usual nonsense of certified copies of ID, address (so the crooks will know where to go to get which model phone) and doubtless other guff. Chalk up a plus for photocopier and paper and storage suppliers, but a huge minus for the time and cost of this stupidity. Can’t you just see the mess when you take your papers to one shop only to be warned months later by some call centre in India that they have been lost and your phone will be blocked! Who believes this will have any effect on decreasing crime? Not me. In fact I predict an increase in the assault of cell phone shop staff.

Also in need of  some firm clips around the ear are the buffoons who scheduled the Twenty-20 Cricket World Cup at the same time as the Rugby event. Circus Cricket hadn’t even been invented four years ago so could it have been all that hard to have glanced at a calendar and picked something different from 2007?

The trip to see the Namaqua flowers was a great success although it was a bit alarming to look around at one fellow tourists and realise that this trip is a sort of rite of passage for greying empty-nesters!

James Greener

31^st August 2007

DEAD WOOD, BOUNCING MARKETS & INTERESTING TIMES

I did warn that my leave commitments in August would probably mean a lengthy break in the production of Tidemarks. However, there is so much happening now that I could not resist popping in to the office to jot down a few thoughts.

Naturally, the premier story is about the markets where eye-popping price moves have seized everyone’s attention and some people’s wallets. It seems that my long-standing suspicions that things were going bad in the US housing and debt markets are turning out to be correct. I am a bit embarrassed to admit that I am really enjoying the stories and reports of astonishment, anguish, apoplexy, and arrogance that are increasingly coming to light. Unfortunately, there are innocent victims at the end of the food chain who are now finding out that they had been paying too much attention and far too many fees to investment “experts” who knew no more than anyone else what the future held in store. In an alarming number of examples, it seems that investors were being encouraged to buy instruments of such dazzling complexity that no one knew what they were or especially what they were worth. Almost nothing is the answer to the last question in most cases. And my greatest glee is reserved for those asinine comments from glib spokesman who assure us that the $20bn loss that they have (so far) admitted to have taken in this or that department will have no impact at all on their overall business. If this is so, why were they involved in that area of activity in the first place?  

These announcements display the same level of contempt for their audience that our own state-owned airline did with the news that they would in future not serve any alcohol to passengers on domestic flights before noon. This move, the statement smoothly assured us, “was aimed at improving customer service and comfort”. I beg your pardon? Just how does the denial of a comforting service improve that service? That outfit is doomed.

Why is it that innovative investment instruments are launched in the market at the very moment when most investors are thinking about running away? In the next few weeks, two interesting new Exchange Traded Funds (ETFs) will be listed. One will track the SA Listed Property Index (J253) and the other the Dividend Plus (J259) index. One can spend an unprofitable few hours researching the construction and behaviour of these indices in order to decide whether they suit your portfolio, but the reality is that they will pretty much deliver what they promise. Readers know that I rather like these things, with the proviso that there are occasions when one would choose not to increase exposure to the markets in any way at all. There is an opportunity to climb aboard these funds at their launch and so avoid dealing costs. This is always a tempting offer but should not prevent you first thinking if now is when you want to buy them. For me, the Dividend Plus is the more intriguing of the two, but its price will still fall if, as I think, the present market corrections are still far from over.

Before leaving on my trip to view the living and vibrant spring flowers on the West coast I invite you to consider the following challenge thrown down by a political group yesterday. It concerns the invitation to identify “untouchable deadwood” within the cabinet and “to provide evidence to any dereliction of duty by any deceased or current serving minister.” Might I be so bold as to suggest that any deceased minister is no longer doing a good job and is undoubtedly deadwood? Don’t get me started on the living ones.

James Greener

15^th August 2007

FLOWERY BEAR

You will not be surprised to learn that the “pain index’ that I calculate for JSE market from time to time is soaring way up towards record highs. This indicator tries to quantify the losses that could be suffered by a short term trader who managed to get the intra-day and day to day market moves utterly wrong. In the past ten trading days there have been seven with a range in the All Share index of more than about 500 points. The first day of August bared its teeth with a massive 986 point range. These are huge and savage moves, especially when superimposed on the absolute decline of almost 2500 points that has hurt even conservative investors. Fortunately, only the insanely unlucky punters will have suffered all of the pain but there have still been enough injuries for the stretcher parties to have been needed here and there. We have yet to see any local reports like those emanating from the US where funds have told their clients not to bother asking for their money back as there isn’t any left!

I think that neither these bouts of massive volatility nor the sharp declines are over. This is the reason for my reluctance to suggest that anyone commit large amounts of new money to the market at this time. Just be patient and wait for the better values that will certainly reappear in due course. Existing portfolios that have reasonably balanced holdings in well-managed dividend-paying companies can sit out this storm. Inevitably investors will see valuations fall for a while but probably not below where they were even two years ago. In my view there is little merit is trying to get too clever and sell off large chunks of the portfolio with the intention of buying it back when the bear has done his worst. Firstly, I note that perfect timing is probably impossible and secondly, capital gains tax and dealing costs are eager supporters of frequent trading strategies! If you are convinced that the market is going to plunge a long way and would like to benefit from that move, then there are derivative products on the JSE that allow you to place that bet. And betting is what it amounts to.

While watching a program about China’s preparations for next year’s Olympic Games I began to wonder why had not yet seen any speculation about will happen in that country when it is over. Down here in SA, we have already expended acres of newsprint and gales of hot air on fretting about post-2010. Might the global slowdown begin when the flame goes out in Beijing next year?

Local slowdown, however, is not evident as the reporting season hots up and double-digit earnings growth rates are being trumpeted by all sectors. Construction company growth rates are even threatening to get into treble figures!

I do not expect to be able to send you Tidemarks for the next three weeks. Firstly, in unison with most of the nation, I have decided that the Women’s Day public holiday next Thursday would be discriminatory unless accompanied by a Man’s Day on Friday. I will be using that long weekend to carry out an experiment into the travelling qualities of Castle lager by transporting several cases to the Umfolozi. This, however, will not be the end of my self-indulgence. Immediately thereafter, I shall be off to Namaqualand. With luck, the spring flowers will be in bloom and shares will be far from my mind. Please keep good care of the markets during my absence and ensure that there will be something for me to write about when I return.

Keep safe.

James Greener

3^rd August 2007

RIDING AND A FALL

Well that’s July done and dusted. The JSE’s month-end runs will take place tonight and portfolios are going to have a rather tattered look to them. The All Share index has retreated more than 2 000 points in the last few days as substantial selling has taken place. At last, people have noticed that huge amounts of the US debt mountain are either already in default or likely to go that way soon. Several major borrowers this week have had to rethink their plans when they failed to find lenders. Suddenly cash has become scarce and those who have it have become rather careful about where to place it. Even here in SA, we have had the rather unexpected sight of a new listing failing to raise all the cash it required. On the other hand, there has also been one that was many times oversubscribed, so it is not yet an undoubted bear market as defined in the Bear Market Control Act of 1969 (amended 1987).

Talking of legislation, did you notice the near hysterical reaction of the tax man to the rather appealing suggestion that house owners should deduct the cost of their security installations from their tax payments? As one who has recently shelled out large sums for just these things, the idea looks good. However, SARS had no hesitation in warning that this sort of criminal act was far more severe than the assaults and robberies that I am trying to prevent happening in my own home.

I have always enjoyed watching the Tour de France on TV, mainly for the simply wonderful views and panoramas that one can glimpse in the background. The caravan of cyclists, motorbikes and cars weaving through the landscape can also be very exciting. For several years, I felt a special affinity with the race leader as he too had managed to defeat a dread disease after a year of rather toxic drugs. My particular chemical regime, however, did nothing to improve my cycling skills. But nowadays, it seems that virtually all the participants are in need of continuous medication. But because this is against the rules, the judges have been waving decks of red cards and the field of competitors has been thinned almost every day. Pretty much anyone who turns up on the Champs-Elysees on two wheels on Sunday will have a good chance of hoisting a trophy and getting a bouquet to toss at the photographers.

The other good news is any prize money that the lone South African rider, Mr Hunter, may pocket,  will be now be worth a lot more back home than it was when the race started. The rand has suffered very badly this month especially against sterling and the euro, a factor which has also helped foreign investors take a dim view of the JSE and the bond market. Gold too has stopped taking the steroids it was on earlier.

The next scheduled interest rate decision by the Reserve Bank is less than three weeks away. All the tired old reasons for and against a hike are being taken out for an airing. I am interested by the quiet reappearance of the practice of disintermediation. This is when borrowers and lenders negotiate directly and leave the banks out of the deal. It sometimes is an indicator of high rates. We shall have to wait and see what it means this time.

Have a safe weekend and remember not to use any of the copyrighted phrases, words and numbers when referring to the sporting event that will take place at the southern tip of Africa in the year after 2009 between 32 international teams of 11 men, each selected for their desire and/or ability to propel with their feet a spherical bladder into a net.

James Greener

27^th July 2007

CAN ANYONE ELSE HEAR THAT NOISE?

A new reader of Tidemarks has suggested that I should devote more space to good news. Well, I suppose so, but it is difficult when I have to start by noting that the All Share index did not set a new record high this week. The market was very patchy with no particular trend or sector yelling for attention. However, the rand did manage to strengthen quite considerably against the US dollar. Some commentators suggested that this might be because of the strong rumour that the suits from Standard Chartered in London were down the Rivonia Road measuring Nedbank headquarters for curtains. If this were true, would not the rand improve versus sterling as well? This it certainly has not done. This is the time of year when there is a dearth of company reporting and it leaves the stage clear for any number of one-act wonders to tread the market boards. At least we have been able to tune the dealing room TVs to the cycling (how about the good news there?) and of course the golf (where we are ever hopeful of good news )

Did you note the Guateng MEC who explained that “only 2% of municipalities managed a clean bill of (financial) health” and that this hinders their access to commercial credit? By this, he presumably means the banks won’t lend them any money. However, he cheered himself up with the observation that Joburg had managed to place several bonds with the private sector recently and that this seemed an excellent source of funds for the cash-strapped local authorities. By this, he presumably means that fund managers are a soft touch and are quite inclined to consign their client’s money to never-never land. He may be surprised.

I wonder why the main news media are not devoting more time and space to the quite amazing amount of value that appears to be vanishing from the US housing and credit markets. Even Governor Bernanke’s brow is said to bead up when he is asked to comment about this area of the financial landscape. Maybe they don’t want to frighten their readers. Or perhaps it is that they don’t grasp the nature and the implication of it all. I think it must be a bit of both. For a start, there are these confusing units of millions and billions and now even trillions. Without even fretting about the now very boring issue of whether they are the trivial English billions or the other proper kind, these are all impossibly big numbers. Most folk, and especially journalists, get mightily confused with any sum that they haven’t themselves actually handled. One can see breathless stories of outrage when someone spends their own money on a suspiciously extravagant indulgence while on the opposite page the disappearance of tens of billions is passed over with scarcely a mention. Maybe the nonchalant way that the official who announces the event, will airily dismiss the loss as “unlikely to impact earnings/the budget/our policy” is successful and puts people off the scent of the real scandal. Sadly, despite my reader’s request, I must reiterate that I think that the situation unfolding in the US will be extremely serious for financial markets. You just can’t ignore the elephant in the room forever. Especially when his tummy starts to rumble.

I suggest that the department of Home Affairs should immediately set up desks at all the holes in the fence along the Limpopo and in return for a set of fingerprints and a photograph, issue everyone with an ID Book and a tax number. Lets face it, these fellows aren’t going back home anytime soon so, let’s catch them up in the system as soon as possible. Oh, yes, and give them each a R200 note, so they don’t immediately have to come and take mine.

James Greener

20^th July 2007

POISON PEN

“There is no news so bad that the market will not get bullish over it.” This remark says it all. The bad news items that the markets are currently ignoring include the rapid fall in the value of a US dollar, the entirely predictable and predicted sub-prime mortgage melt-down and back home, the calamity that is Zimbabwe. Traditional wisdom – which is proving as useless as any other sort – would have us believe that investors should be terrified by these and other events and would be selling at least those shares which appear to be exposed to these kinds of events.

Not a bit of it. The All Share has broken above 30 000 and the hottest investments in Wall Street are the shares being offered by the listing of Private Equity Firms and Hedge Funds. The former businesses specialise in buying companies cheap, shuffling the assets, and then selling them expensive. Surely, their strategy is no different when it comes to selling their own company? Hedge Funds have caught the public imagination with the mega billions in fees they have extracted from their clients. Now can it be that the hedge fund whiz-kids have been seized by a fit of altruism and are going to share that income with shareholders? I doubt it. Rather I think that the clever lads and lasses are exiting the game at the time when they see those fees collapsing.

One of the great luxuries that I enjoy these days is the time to read and think. And I read a great deal. I visit probably upwards of two dozen websites daily. Of course, not all of them concern the markets. I found a wonderful explanation of the mechanics of knitting yesterday. And then I enjoy the sites that are devoted to trashing antipodean rugby referees.

I recently spent a few happy hours learning about the structure of the US mortgage industry and the array of complicated investment products that it has spawned. I was delighted to discover the existence of “toxic waste”, the value of which is certainly a whole lot less than what is shown in the portfolios of the funds that own the stuff. The general idea is that everyone acknowledges and recognizes that within the vast credit industry there are certain to be loans that will not and cannot be serviced. However, the plan is that these worthless credits are mixed thoroughly into a bouillabaisse of other (allegedly) better quality loans. This soup is then ladled into the savings funds of widows and orphans. In theory the risk of default will now be spread so thin so as to go unnoticed! Aiding and abetting this fiction is the whole industry of “Rating Agencies’ who (for a fee, naturally) anoint the gruel with a code that denotes their judgement of the risk that the investment will not pay the promised interest or the principal amount. I have always fretted about the way in which a simple binary “pay’ versus ‘not pay” situation can be captured by a spectrum of symbols ranging from AAA to D with + and – signs sprinkled in for added value! Sadly, now, fund managers and their clients are discovering that their investment grade investments are filled with rather more of that toxic waste than they thought and the rating agencies are not very interested in this development (except, presumably, that for another fee they will downgrade the original rating). I await the next chapter of this story with interest. I think it will not be a comedy.

I am also not finding any humour in this long and deep cold spell. Thank you Mother Nature. You have made your point about climate change. Now please can we have our temperature back? It would also be nice if the All Blacks exhaust themselves with the haka tomorrow morning.

James Greener

13^th July 2007

A BIG SPORTS DATE

There is almost as much nonsense being written about tomorrow’s triple seven date as there is about the market. My view is that it is merely one of the few occasions when we agree with the USA on how to write it down. In years to come people on this side of the Atlantic will wonder what happened in New York on the 9^th November. One day too there be a time when we look back at the time that the big bear market of 2007 or 2008 or ? began and recognise with perfect clarity the warning signs. Right now, of course, every possible warning sign has turned out to be wrong. Interest rate hikes, declining confidence, imploding housing markets, messy wars, strikes and snow on the highveld have all failed to stop the buying. The All Share has not quite yet returned to its habit of setting record highs each week, but the June scare seems to have gone away. Even the rand has been lurking below 7 to the USD which might indicate that overseas buyers are returning.

The market is also the scene of several large corporate actions that are sewing dismay and confusion among shareholders as the prices of old favourites seem to drop suddenly. In most cases, what has happened is that the holding has spawned shares in a newly listed company. Although these are commonly recognised as unbundling transactions, the investment advisors are scoring points and big fees by dreaming up all sorts of different names to describe the events. Adding to the mess is the fact that the registration system fails to allocate shareholders the new shares immediately they are created and so portfolios seem to be out of balance. I wonder if this rash of disposal of so-called “non-core” assets to shareholders is a sign that the directors feel that now is a good time to pass them on because the future as they see it is not so rosy.

The SABC, Telkom and the government are spending public money to encourage us all to vote for Timbuktu as the sole African site to be one of the seven wonders of the world. I have no view on the appropriateness of this candidate but suggest that there are other amazing things on this continent that deserve nomination. Like SA’s crime statistics, or Zimbabwe’s inflation, or Nigeria’s fuel shortage or even the Gautrain.

Last week’s letter brought the greatest response that I have ever enjoyed. I was very touched to see how many people were concerned that I am joining the flow of refugees leaving Joburg. I assure everyone that there will be phones and computers where I am going and that provided people don’t mind dialling a different number and using a new email address it is my intention to carry on my client friendships and relationships unchanged. For some of you the trip to visit me will be a bit more onerous and the view from the office will be different. For a large number of reasons I don’t think the move will take place until early next year, so we all have lots of time to see how things might work out.

The first weekend in July is always packed with sporting event to supervise from the armchair. The only certainties are that the opening stage of the Tour de France will be won by a man on a bicycle, the Durban July will be won by a horse and that both winners will be tested for suspicious substances. I guess that rain at Wimbledon and Silverstone is a good bet too. But most importantly, it would be especially gratifying if the ‘bokke give the Wallabies a hiding, after all the nasty things they have said about us.

James Greener

6^th July 2007