The day the dollar died?

I arrived back in JHB on Monday last week to discover that the US dollar had slipped below the R10 to the US Dollar mark. I have to admit that I had mixed reactions to seeing this.

Will I look back on 22 December 2008 and see it as the Day the dollar died?

The dollar has only managed to gain 3.3% of value against the euro since the start of the year and has been under significant selling pressure in the last few months. Against the Yen the US dollar has seen the biggest annual decline for the last two decades, this year.

From my perspective I make some handy money from things like Google so a weaker Rand vs. the dollar is useful.
HOWEVER times are a changing and I guess its going to be interesting to see what happens in the global currency market over the next decade or so.

Can't remember if I blogged about it, but a few weeks back I sat through a presentation by one of these strategist types for one of SA's big banks and he was predicting a major shift away from not only US equities into Asian equities but also a move

away from the dollar as the world standard currency.

I can buy the theory that positioning yourself for movement in the Asian equity market makes sense and have been trying to angle a part of my portfolio this way

While the euro has been the early short term this strategist is expecting currencies like the Singapore dollar to become increasingly important in the bigger picture.

So lets take a look at this currency.

As of this morning, the Singapore dollar (SGD) is trading at 1.43870 SGD to US$1.

Not being a trader in the currency market I'm going to make a note of this figure and track it on a weekly basis and see whether the money is shifting into Asia.

I'm going to do the same for the Yen, Chinese Yuan Remimbi, the Hong Kong dollar, the Thailand Baht and the Vietnam Dong. For good measure I've thrown in the Indian Rupee because of India's growing importance in the bigger picture.

US$1 vs. Japanese Yen = 90.3261
US$1 vs. Chinese Yuan Remimbi = 6.82252
US$1 vs. Hong Kong Dollar = 7.75005
US$1 vs. Thailand Baht = 35.0630 (international rate)
US$1 vs. Vietnam Dong = 24,704.36
US$1 vs. Indian Rupee = 48.4366

I'm not totally convinced the dollar is "dead" - purely because many Asian economies remain heavily export dependant and it suits them to have weaker currencies.

Throw in the fact that in the short term there is political uncertainty in places like Thailand and war tension in India and Pakistan, I suspect that while these currencies make some ground vs the US dollar in the longer term there will be some issues counting against this basket of currencies.

Window-Dressing

I've been watching global equity markets tracking up in the last few days and I just want to make a quick observation before investors start getting too excited about a stock market rebound....

WINDOWDRESSING....

It's the end of the final quarter and its been a brutal time for investment managers who have enjoyed years of success and mega bonuses in December... Now that habit has been tipped on its head and suddenly the losses are mounting.

While managers deny the habit, most traders will point out that end of the quarters (particularly around December when volumes are thin), fund managers will try and nurse their performance figure by buying up equities...

My little piece of advice - don't buy a trend on the last few days of trading - the same problems still exist....

End of empire?

The price of gold has this morning surpassed the price of platinum.

Gold is now trading at US$813 and Platinum is trading at US$810.

This is the first time this has happened in the last 12 years. Its interesting times and it says a helluva lot about two things - the state of the global economy and the state of the US dollar.

Both of which I remain heavily negative toward.

Obama may change things in the US and perhaps reintroduce an age of dominance but perhaps its time to start considering the end of the US empire?

Let me know what you think?

Maybe I'm just a spoilsport, but watching the Dow rise above 9000 points STILL doesn't get my all that excited...

Ok I'll be the first to admit that it was a bit more pleasant to actually some green in my portfolio today, but like I said - I'm not all that certain that the rebound has the legs that traders think it does...

Tribune Co., publisher of the Chicago Tribune and Los Angeles Times, sought bankruptcy court protection from creditors and the New York Times may have to mortgage its Manhattan headquarters as a major debt repayment looms.

In between that a couple of smaller hedge funds went belly up and of course we have the impact of job losses both in SA and abroad...

I suppose one "bright" spark is that the Big 3 auto firms look like they're getting their chunk of the bailout money although what good it will do is beyond me...

PLEASE can somebody explain to me how this is why share prices could be justified at being at the bottom?!

Couple of topics I wanted to touch on this evening.

1. Zim endgame
What happens in Zim has enormous social ramifications for us - no matter how our leadership tries to dress it up. My personal opinion - Zim is hitting rock bottom now. Cholera is likely to spread rapidly and it is unfortunately going to be a major social problem, but unfortunately its the only way that Mad Bob is going to be replaced.

In amongst the chaos, there might just be some opportunities to start positioning assets?

2. Empowerment plays
A while back I blogged about the empowerment plays in South Africa. Many of the weakly capitalised empowerment groups are starting to take some serious pain around their investments.

However the two empowerment heavyweights who may just flourish in an environment like this are Brimstone (BRT) and the Mvelaphanda Group (MVG) which I currently have in my portfolio.

For the first time in a while these well capitalised businesses can get in when assets values are weaker and take some meaningful stakes of distressed businesses. This is part of the reason that I have them in my portfolio at the moment.

I think they are made for a situation like this.

Conclusion:
As I said - I don't particularly buy this rally and still think that there is some sideways and downward movement to come.

There is still a lot of change left in the global corporate landscape and it is going to be intriguing to watch.

Grindrod surges

It was a big rebound day for shipping firm Grindrod today. The share jumped 17.35% after lunch after initially trading down in the morning.

Seeing as I bought some Grindrod late last week, I'm not going to complain. Interesting move up - especially when one considers how many shares the directors have been buying.

Transportation indexes

It is not rocket science to work out that the ‘financial’ crisis has now spread to becoming a global economic crisis that has threatened thousands of jobs and businesses.

This is the problem that is facing stock pickers at the moment – if the problem was limited to a bit of a bit of ‘shock and awe’ as the markets tumbled, then you could feel pretty confident going in and buying some shares at what look like low price to earnings ratios and then sit back waiting for a rebound.

But what if the problem is deeper? What if all these people who are losing their jobs as the stock market shock starts to wear off?

Every time somebody loses their job, it is one more person that does not have a means to pay off any accumulated debt – be it cars, houses, credit cards or other personal debt. What looks like a good price to earnings ratio in 2008 would certainly not be applicable if clients have begun hauling in their spending and hoarding their cash going into 2009.

The reality is that economic activity has fallen off a cliff and nobody really has any idea when it is going to get restarted again.

Looking at a couple of trading boards, an interesting theory has been put forward – tracking the transportation and logistics indexes as a proxy for economic activity.

I thought I would start with the Baltic Dry Index because A) It has been in the news quite a lot recently and B) Being a Grindrod shareholder I’ve heard a lot about it in recent months:

Baltic Dry Index:
In a nutshell, the Baltic Dry Index (BDI) helps ascertain global freight rates based on demand for commodities, how much fleet supply is available to meet the demand and market sentiment for the global shipping industry.

Wikipedia simplifies it saying: “Every working day, the Baltic canvasses brokers around the world and asks how much it would cost to book various cargoes of raw materials on various routes (e.g. 100,000 tons of iron ore from San Francisco to Hong Kong, or 1,000,000 metric tons of rice from Bangkok to Tokyo)”

Local shipping company Grindrod has seen its share price absolutely decimated in recent months as many investors have tried to correlate that performance of the BDI with the anticipated earnings for the shipper.

While this isn’t exactly the case, you can see how much emphasis big firms have placed on using the BDI to track overall market sentiment.

Looking at the graph, you will see some correlation between the two.



Dow Jones Transportation Average
The Dow Jones Transportation Average (DJTA) is the oldest US index. The index includes 20 companies involved in the railroad, shipping, airline and trucking industries.

You can find the constituents here - http://www.djindexes.com/

Below I’ve printed out a graph for the last three years.

What I found interesting was that despite many consumers (retail, commercial and industrial) having slammed on breaks in the last few months, there seems to be a bit of sideways movements in both these indexes, which may indicate that a more ‘real’ level of economic activity has been found.

I am a big believer that historical data doesn’t necessarily point to what is going to happen going forward, but I think building in tools like this to review the ‘bigger picture’ might be very useful in making some investment decisions.

Anyone else using these tools or done any back-testing on this data?

Value picking

Even though I think there is a bit more downside risk (particularly in the US) I've been doing some small 'value' picking to add to my portfolio.

Below I've just outlined the companies that I've added and some of the thinking behind it:

ApexHi-B - Listed property as an asset class has to make up a portion of your overall portfolio. It provides some diversification and it provides some income. ApexHi and Growthpoint are my prefered property stocks and have subsequently added some to the portfolio.

DBXUS - Even with some downside risk to the US, a lower risk entry via an exchange traded fund that tracks the US market makes sense to me. Initially just trying to get some exposure to the US market and will continue to build up the position from these levels / below.

Grinrod - Shipping firm Grindrod has been under a hell of a lot of selling pressure in the last few months. That hasn't stopped the company directors piling into the stock. Even with the slowing global economy, Grindrod simply looks out and out cheap.

Abil - African Bank impressed me at their recent results announcement. I think the dividend yield on the stock is good, management look sharp and have a plan for the business and most importantly they are well capitalised so I've decided to add a few to my portfolio...

That's where I'm at at the moment. Might add some of the ZSHARESGOVI for a diversification component as well, but we'll see how things go.

Hectic

Some pretty hectic trading action there in the US.

My data shows the Dow Jones down 679 points which puts it at 8149 ... Hectic mess...

Irrespective of the tough trading day today, I reckon the JSE is in line for some serious pain tomorrow.

A quick look at the commodities has me very worried. Gold has lost 41 dollars today to trade around US$770 and platinum has taken a big hit to be bid at US$804.

Not pretty...

The end of the year is nigh....

So even Donald Trump is now missing interest payments on some of his property developments?! Tut tut... For a guy who runs a reality TV show on how to make money running his own business, he often has to have his businesses taken away from him when he starts doing silly things...

But that's not the main focus of this blog posting...

... but I thought at least it would make you feel better if you happened to have just missed a R5000 instalment on your house... Trump just missed a US$334.2m payment so you're not that bad!

Last week I said I didn't buy into what I called a 'sucker rally'. It wasn't a great call if one considers that the Dow Jones has subsequently rallied some 10%, but I think we could still see a re-test of the 8000 level this week and more weakness in global equities in general.

I think it is fair to say that many traders (big and small money alike) are tired of 2008 and with the 1st of December now here, its time to pack up the trading console and drift through to the end of the year.

Throw in the issues around the terror attacks in India and the riots in Thailand and you can understand why nobody is wild about making in investments in the market. With the relationship between India and Pakistan on a knife edge and economic data out of China looking very unpleasant, it would be hard to see global equity markets go much higher before the end of the year - even in the "BRIC" economies.

Looking at the Asian markets, they're down over 1% - although I suspect everybody is waiting for the US to provide some direction. My first instinct though is that we're heading either sideways or down for the rest of 2008.

Platinum was up a bit which I thought was quite interesting, but Gold doesn't seem to be headed anywhere at the moment consolidating around the US$810 mark.

It has been a tough year for traders and I don't think we're anywhere near the bottom of the battle. The corporate landscape is likely to continue to shift for many years and I suspect we're still going to see some big names flounder.

Hopefully 2009 starts on a bit more positive note...

African Bank

Very quick blog post in this regard... South Africa's 'other' bank reported its full year results and once again they proved themselves the masters of risk management by keeping it simple and stupid.

By "The Other Bank" I of course refer to African Bank Investments Limited (ABIL - JSE:ABL).

This to me is a great, easy to understand and rewarding business to be involved. In a nutshell, they lend money that typically falls outside the ambit and risk models of the Big 4 banks.

supposedly these are supposed to be riskier clients but you never here the ABL guys yabbing about the tough environment and how difficult the NCA has made their lives or how tough it is to get ther money back.


They're a tough sharp bunch and at present the company is paying a dividend yield of just under 10%. Definately not the worst deal around and something I put in my share portfolio as something of a buy-and-hold investment....

The market liked the results and the share was up strongly about 6%

Just a thought - use it, don't use.

Gold shares fly

I'm sorry but somebody has to explain these markets to me and why a two-day record breaking rally on the Dow is all that exciting??

Locally SA markets took off like a bat outta hell with the Gold index adding some 17%.

The gold price rallied nicely on Friday and added a few more dollars today.

On the SA market the unhedged producers such as Harmony Gold (22%) and Gold Fields (21%) had a very pleasant day. The Newgold ETF also made some nice gains but nowhere near as spectacular....

In the bigger picture, the gold index isn't a particular heavyweight (but we did touch on it in a recent post), but I think South Africans just have this affinity with Gold...

But scrape beneath the surface and the safe haven metal is the one flying and getting everyone all worked up in the last 72 hours. The reality is that the market is on the move because the US government has agreed to bail out another financial services firm....

These are the headlines on Bloomberg to prove my point:

- Citigroup Gets $306 Billion Shield From Losses, Capital After Stock Dive
- Home Resales in U.S. Fall as Foreclosures Push Prices Down Most on Record
- BlackRock Fires Four Managers, Six Analysts in First Cuts in Its History
- Fed Must Speed Aid to Auto Credit Units, Schumer Says
- AIG Auto Unit to Drop Damaged Brand to Help Sale
- New York May Lose 225,000 Jobs, Comptroller Says
- Obama Vows Bold Moves to Avoid Millions of Lost Jobs

And this is grounds for a rebound??

Two solid days of gains is pretty hard to disagree with but I still maintain that you're buying into a sucker rally in the short term.....

With the day belonging to Harmony, I thought it only appropriate to post a picture of their Doornkop operations to brighten the blog up a bit....

Citigroup - Brink of failure

Just when we thought we were out of the woods, the bear comes snarling along with a prospect of failure that threatens to shake the whole system to its roots.

Last week, with the all attention being focused on the Big 3 Detroit auto manufacturers, another major drama was playing itself out. Citigroup - one of the worlds' largest banking institutions was fighting for its life - its failure would rock the global banking sector to its core.

I took this excerpt from an article from Martin Weiss to highlight the issue:

Citigroup, the nation’s second largest banking conglomerate, is on the brink of failure.

Its stock price collapse is the canary in the coal mine, wiping out over nine-tenths of the company’s market cap since its 2007 peak, decimating two-thirds of its value just last week alone.

At the same time, the collapse in its market cap is also the bank’s nail in the coffin, making it virtually impossible for it to raise the capital it desperately needs to save itself.

If it fails, it will be, by far, the largest banking disaster in history, involving $2 trillion in assets. That makes it approximately six times larger than Washington Mutual and three times bigger than Wachovia.

Moreover, the prospect of a failure by Citigroup poses far greater challenges to regulators than a typical large bank. Due to its massive derivatives holdings — side bets on interest rates, currencies, and the probability of defaults by other large corporations — it could be extremely difficult to save Citigroup without serious disruptions, raising serious questions about the global banking system and the world economy.

Read the complete article here...

http://www.moneyandmarkets.com/citigroup-failure-imminent-6-28244

The market commentators have come out with that usual line - 'Citi is too big to fail...'

But lets remember that Citi has already announced it is shedding 52000 jobs - sounds like at least something of a failure of circumstances to me... That's a massive figure and when 52000 people come into the unemployment queue or line up outside a soup kitchen, THEN the reality will start to bite.

Forget the auto manufacturers - their 'failure' in one form or another is almost guaranteed - failure of Citi will provide another serious shock to the markets.

I said it on Saturday - don't buy the US rally because there are more shocks in store in the short term....

Love it!

Loved this quote from Mark Carney - the Bank of Canada's governor.

Carney was discussing the fallout of the global financial crisis and the number of senior banking executives who have become persona non grata in recent times...

From this article on Bloomberg:

“There is vicious natural selection going on right now in the financial services industry, and it’s appropriate,” Carney said in the interview. “Those who weren’t on top of things are gone or going.”

Here Be Dragons...

In late US trade yesterday, stocks on the Dow Jones and S&P500 surged in excess of 6% as President-elect Barack Obama picked New York Federal Reserve Bank chief Timothy Geithner to replace Henry Paulson.

I don’t follow US people too much, but judging from the market reaction, he comes with a good reputation. But on the subject of whether one man can stop what is fast looking like a protracted financial crisis – the jury is still out.

What I thought was an interesting ‘leading’ indicator was the difference in price movements in the platinum and gold prices yesterday. Gold the traditional safe haven, platinum the industrial and ‘luxury’ metal for jewellery.

The gold price shoots up to US$801 an ounce while platinum is marginally firmer around US$824… So in other words the ‘safe’ metal has gone up while the industrial metal (or luxury metal – depending on how you look at it) – which is supposed to indicate that consumer and business confidence may be returning hasn’t got near the same level of ‘emotional’ support from the markets.

Hhhhhmmmmm wonder if the real market is telling us something there>

Don’t get me wrong, I think at these levels the market may be offering some value for long term investors. I’ve been buying index tracking funds for some offshore exposure as well as some SA equities for a while now – but those have got a longer term investment horizon. The point is – if you’re planning to buy in on the rally in the US – I get the sneaky suspicion on my investor map that it should be marked with the Here Be Dragons (HBD) symbol.

Just something else that is worrying me around short term shocks to the SA market… Maria Ramos has just been appointed as the new CEO of Absa (As of 1 March 2009). Ramos and Gill Marcus have denied that there will be any conflict of interest with Trevor Manuel (Ramos’ partner). There is some concern that Ramos being appointed to a major bank may indicate that Manuel may step down next year – we all remember what happened the last time rumours started circulating that he had resigned with all the other cabinet ministers….

Gold and (SPlat)inum

After my atrocious call on Impala Platinum as a screaming buy at R180, I’ve tended to stay away from commodity stocks.

Having said that, there’s an interesting thing that I have been watching with half an eye – the gold price is rapidly sneaking up on the platinum price – something that would have sounded completely unrealistic a few months back when platinum was at nearly 2000 dollars an ounce.

This morning, gold was within 31 dollars of platinum. Both metals have moved up a bit on European trade.

Currently gold is trading at 756.6 dollars (up 12 from yesterday) and platinum is trading at 806 (up 37).

The Gold Exchange Traded Fund (ETF) – GLD – is showing some real strength since September – while most other asset classes are taking stick, the Gold ETF has added value and I don’t think its finished yet either.

The ETF has climbed from around R60 to around R78 which is a pretty healthy return in these tough times. The Gold price itself seems to have established a base at around US$720 and is gaining momentum, the more apparent the trouble in the global economy becomes and the stronger the dollar goes – the better the return on the ETF becomes.

Can’t say whether it will continue to offer good returns for investors but I have added a few to my portfolio in recent months as a form of capital protection.

Funny - just got mailed to me

The Somali pirates, renegade Somalis known for hijacking ships for ransom in the Gulf of Aden, are negotiating a purchase of Citigroup.

The pirates would buy Citigroup with new debt and their existing cash stockpiles, earned most recently from hijacking numerous ships, including most recently a $200 million Saudi Arabian oil tanker. The Somali pirates are offering up to $0.10 per share for Citigroup, pirate spokesman Sugule Ali said earlier today. The negotiations have entered the final stage, Ali said. ``You may not like our price, but we are not in the business of paying for things. Be happy we are in the mood to offer the shareholders anything," said Ali.

The pirates will finance part of the purchase by selling new Pirate Ransom Backed Securities. The PRBS`s are backed by the cash flows from future ransom payments from hijackings in the Gulf of Aden. Moody`s and S&P have already issued their top investment grade ratings for the PRBS`s.

Head pirate, Ubu Kalid

8000 broken

8000 points has been broken on the Dow with the industrial average now down 427 points...

Up until 3pm in the US, the index was treading water down around 180 points, but looks like the game is over and there is no support - capitulation methinks.

A close below 8000 points is likely to see some continued down side selling pressure in the short term.

A close above 8000 might mean some consolidation here, but I wouldn't be surprised to see continued selling on this index down to at least 7400 in the very near term...

No sympathy

A good chirp from one of the old fogeys who was listening to the pleas from the big 3 Detroit auto manufacturers - There's a delicious irony watching private jets flying into Chicago and watching the chief executive officers of the big three Detroit auto manufacturers climb off the planes with their begging bowls out...

Sorry I got no sympathy for these guys - let the market sort out their rubbish....

Why AVI shareholders must reject Tiger Brands advances

Earlier this week, Tiger Brands made an unsolicited bid for - or more correctly they said they MIGHT be interested in - listed counterpart AVI Limited. Initially the offer looks like a healthy premium for AVI shareholders and would make sense from a Tiger Brands perspective, but we believe shareholders and management of AVI would be short sighted to accept the deal in the current economic climate.

Read the complete article here.

Sappi / Interwaste and the state of play

Ouch! Poor old Sappi shareholders. Over the last few months, they've seen the company share price battered by the storm on global markets, then there was the announcement that Sappi would buy some of M-Real's European assets which sounded like a good deal until they realised that it would be funded by a highly dilutionary rights issue that saw the price fall to R36 (ex-rights) on Monday.

Let's be real, when your share price has fallen from around R100 a share to R36 a share, your shareholders are going to need a really good excuse to trust you. Reading through the financial press in the last few weeks, pretty much everybody is criticising Sappi for the deal.

But I have an alternative take on it that might make the analysts shiver... but heck what do they know anyway?

My opinion is based on the mentality of The Bigger the Problem, The Bigger the Hammer...

Let's be honest Sappi have a HUGE problem in Europe with a very fragmented paper sector - if they don't sort this situation out, they're going to die a slow death. It's not a great situation to be in, but sometimes a ballsy operator needs to flex its muscles and crack some skulls. I think this is what Sappi has done with this deal - screw the short term cost issues - if they break the back of the fragmented market, then they're well placed for the next upturn in the cycle. I don't think it's the worst deal around.

Interwaste
My other play that I chatted about a while back was Interwaste - I had mentioned that the directors were buying with the share around 40c a share. The share had been hammered down from above R1 after they had missed their earnings forecast twice this year.

Waste management is a no-brainer industry in the long term. The sector can only grow as the world continues to generate more and more waste products that need to be managed.

As the only listed option - with Enviroserv having been delisted - a bit of interest in the Interwaste offering might be justified.

The SA market currently has 3 players in the sector that dominate the large contracts. Barriers to entry are high anyway so this situation is probably not going to change in the next few years.

The share has bounced a bit in the last few weeks to trade around 70c. Might be an interesting play for long term value investors.

Banking job cuts

Wow! Citigroup is planning to slash around 50000 jobs in the next few months, that’s an enormous figure in any job landscape but will be particular noticeable in the banking landscape.

HSBC, the other banking firm confirmed it was in the process of cutting another 500 jobs as well which highlights just how serious the problem is becoming.

Pondering on whether to go short on SA banks going forward…

Storm has passed? I don't think so....

I know I keep yapping on about the subject, but watching this rally in the US and Asia markets makes me laugh...

We can yab on about how the G20 is going to get together at their tea party and talk about resolving the financial crisis and maybe throw a bit more money at the big companies like GM, but at the end of the day, if you want a leading indicator to why we're going to keep heading down - you look at the job market...

The US yesterday reported its highest level of people applying for unemployment insurance.

Read the headlines on Bloomberg and other news sites and you'll start to see the problem coming:

- Investec headcount under scrutiny
- BT to slash 10000 jobs
- RBS to cut 3000 jobs by March 09
- If GM goes bankrupt - US unemployment would jump by 3%
- General Motors in South Africa slashes jobs
- SA Post Office (and SAA) cut jobs
- Chelsea football club has to sell players before it can buy new ones

Etc Etc... blah blah blah...

I watched Steven Koseff of Investec on TV presenting his company's interim results yesterday and I laughed when he said: "The eye of the storm has passed."

How in the world can the eye of the storm have passed when the companies are only just STARTING to announce their job cuts?!

The economics of it are simple - jobs are disappearing from the market and they are not being replaced. In the US consumers are drowing under 900 billion dollars of credit card debt alone. The situation in SA is nowhere near the same levels per creditor, but its big enough for the bankers to worry.

Those creditors who owe hundreds of millions on their credit cards, are the ones going out of jobs. When their cash flow disappears and they can't limp from month to month then what? They're certainly not going to be buying houses, using your banking infrastructure, credit bingeing, investing or any of the like.

Job losses are now a reality - the longer and deeper they go on for, the tougher things become.

Sorry - I can't believe that the storm has passed and we're anywhere near the bottom.

Too big to fail?

With the US automakers in dire straits at the moment, I’ve read a lot of commentary that says General Motors, Ford and Chrysler are “too big to fail” and the government HAS to bail them out. In Old Mutual, South Africa has its own business that in theory is “too big to fail”, but one that I am going to stick my neck out and say can and will fail.

Do I think the US carmakers will be bailed out? Yes I do.
Do I think it will solve their problem? Not a sausage.

Let’s be realistic – the operating environments for these car manufacturers is not going to change over 2009. The reality is that even if they cut some costs, shut down some lines etc, the US tax payer is going to have to acknowledge that when they cross that fat black line of bailouts, they’re going to be tied into paying at least another year of bailouts to make for an orderly exit.

Lets pick an arbitrary figure of US$15bn per quarter to keep these 3 firms afloat – that is 60 BILLION dollars a year just to keep 3 businesses afloat. With the GM and Ford Credit arms being so stretched, I see this house of cards collapsing and THAT will be the shock to the system that leads me to my next assertion – the straw that breaks the back of Old Mutual.

Old Mutual is a funny business. Very successful in the Nordic regions and South Africa, management instead has decided that its real future lies in places like China and the US. So far the expansion plans have been littered with very expensive failures, that the company has been able to gloss over with the impressive gains in the equity markets.

Over the last few 12 months the company has plummeted from R23 odd a share to around R8.50 a share. Ouch. In the meantime they paid over the top for an acquisition in China and they’ve been pissing into the wind with something like US$400m in capital to deal with problems in their Bermuda book and the US life operations.

The company has said that shareholders shouldn’t worry because it has US0.8bn in capital reserves but this figure does exclude money they need to still release for their Chinese acquisition and a final dividend which now looks increasingly under threat.

But something occurred to me the other day – Old Mutual’s capital problem is two-fold. They may have the capital – but where does that capital sit? In London or in SA? The answer is that a big chunk of that capital in fact sits in South Africa (one of the few places where they are making good money).

Foreign exchange regulations are going to be very tough to move that capital off shore should their international ops take much more strain. At the end of the day, if they sell off Mutual & Federal, the capital will remain in South Africa, as would a big chunk of an asset such as Nedbank.

I personally don’t think Old Mutual’s (international operations) can survive the shocks to the system that another (sudden) 15% decline in equity markets could produce. But more importantly it’s the operating environment that has me the most worried.

A mistake I think is being made, in that we’re not giving enough credit to the ‘suddenness’ of events.

Six months ago, we didn’t ‘expect’ to be discussion trillion dollar bailouts and the failure of some of the world biggest companies.

People are going to lose their jobs and it is not going to be a gradual dip spread out over next year, where systems can adjust. People are losing their jobs NOW, businesses are closing down NOW, governments are retrenching people NOW.

Consumers are stretched beyond breaking point – there is no savings base of any kind behind them – their cash is gone and the only way they can keep going is to source credit. When that tap is turned off they cut expenses – insurance, medical aid, pension fund contributions (which they will cash out irrespective of tax consequences – when you need money you need money).

Conclusion
While Old Mutual’s South African operations will probably survive, I suspect that the risk of failure in its international businesses must be extremely high at the moment. SA will probably be cushioned by a pretty strong business model (despite the grief they are given) and the cash flow from the sale of Mutual & Federal, even if they walk away with far less than the business should be worth….

I noticed that Asia has opened up quite strongly this morning on the back of the China announcing it will be injecting US$586bn into its economy to provide the ‘noodle powerhouse’ from slipping into recession.

Reading the other news headlines on Bloomberg, here is some of the other news making the headlines today:

• Japan Machine Orders Have Biggest Quarterly Drop in Decade as Exports Slow
• Franklin Bank of Houston, Controlled by Ranieri, Seized by U.S. Regulator
• Zero-Interest-Rate World Looms as King, Trichet Race to Salvage Economies
• Dublin's Early Christmas Lights Fail to Boost `Basket Case' Irish Economy
• GMAC Leaves `Mom and Pop Investors' With $15 Billion of Auto Lender's Junk
• Disney Retreats After Iger Says Theme-Park Bookings Decline `Considerably'
• Down and Out in Beverly Hills: Rolexes, Picassos, Ferraris Hit Pawn Shops

In between this we know that the motor companies are looking for at least ten billion US dollars of ‘cash flow’ to help them through the last quarter of the financial year.

I don’t care how much ‘stimulus’ (read tax payer money) you throw at the economy to keep it going, if the demand isn’t there and its simply keeping the consumer tied to credit repayments, then you’re not making any inroads into the core problem.

The way I see it, the banks have flopped which has put the squeeze on the economy… BUT … this is not where the real threat to the markets is coming from. All of these ‘stimulus’ packages have tossed an absolute bucket load of credit at the markets and they’ve simply sucked it up and reverted to the downward trend.

I read the headlines in South Africa and I see the mines, retailers, auto manufacturers, car dealerships all hitting the skids. These jobs are being pulled out of the economy and don’t be surprised to see our banks and insurers start another round of retrenchments.

Here are a couple that spring to mind:

- Fascination books closed its doors costing around 300 jobs

- SAA is ‘retrenching’ 200+ call centre workers that MIGHT be absorbed by their outsourcing partner

- Mutual & Federal has shed 600 back office jobs since July this year

- Ford is looking at 800+ jobs over the next few months

- General Motors SA is looking at 2000 jobs before Christmas this year

- A local fluorspar mine has closed down – 200+ jobs

- The chairman of Anglo American has said that more half the world’s zinc and nickel mines are non profitable due to the fall in commodity prices

- The super profitable platinum mines of 6 months ago are now trading sorely in the red with the fall in the commodity prices… and the motor industry which is a major purchaser of their product is in a very bad way (even Toyota has slashed its profit estimates by 56%!)

- The number of motor dealerships in South Africa has declined by 12% and if the protracted downturn continues, that figure is estimated to rise to around 20% (worst estimates around 30%).

Let’s be very conservative and say that the SA economy will lose 5000 jobs alone based just on the examples I’ve cited above.

5000 pension plans linked to the SA stock market indirectly, 5000 people who have debt of some level or other to service. 5000 people who will look to any investments they have and liquidate them to provide cash to cover their living expenses….

And this from an economy that is ‘sheltered’…

We seem to be looking at the problem saying: “Ah well we’ve sorted out the capital levels of the banks, so we should be fine.”

What crap…

Reinforcing the capital structures was crucial to preventing a collapse, but let’s be very clear on this – the economic problems are still to come.

If you ask me whether I think there is some good longer term value in the market, then my answer is that of course there is. But I said it before – these rally’s are not the start of the next bull market. As far as I am concerned, these rally’s are spikes on the way down and they should be viewed as such.

Sekunjalo

I’ve blogged on Sekunjalo before saying I quite like the story. About two months back I sold out of my holdings to enter another trading position.

Last week they announced that they had taken an equity stake in BTSA and the market suddenly got a little excited about them and they started to trade up ahead of their results which are due out shortly.

For what it is worth, I chatted to somebody who was at the press announcement where Sekunjalo and BT announced their deal and the feedback was that the Sekunjalo team had no idea what they actually had bought and couldn’t really discuss what the advantage of the transaction was.

Obviously this is second hand feedback but my source is normally a pretty good judge and if he wasn’t convinced, then neither am I…

Just an FYI…

NinjaTrader

Following a number of the local trading boards in South Africa, I've been hearing a lot of talk about this NinjaTrader platform.

I haven't used it but from the feedback I've received and the things I've read, I believe that it is extremely successful.

If you are a user of NinjaTrader please put your comments below about how successful this platform is and some of its strengths and weaknesses.

About NinjaTrader
Founded in 2003, NinjaTrader, LLC is a leading developer of high-performance trading software for the active trader. The company’s NinjaTrader software is a complete end to end trading platform serving discretionary and automated traders of futures, equities and forex markets. NinjaTrader is available at over 100 brokerages worldwide and is promoted by the industry’s leading trading educators and providers of 3rd party technical indicators and trading systems. The NinjaTrader platform is free to use for advanced charting, analytics, system development and trade simulation.

NinjaTrader sets the benchmark for trading software and continues to invest in new product development. Based in Denver, CO, NinjaTrader serves the global trading community with locations in Grand Rapids, MI, Rotterdam, The Netherlands, and Bamberg, Germany.

Hahahhahaha

For all the bulls out there who reckon we've hit a bottom in global equity markets and its safe to come out of hiding....

This picture was mailed to me from a trading colleague!

Hhhhmmmm - the bear still got some pretty sharp teeth huh??

I don't get it!

But Barack Obama has won, the world should be rejoicing that the leader of the free world is back in sensible hands... we hope...

Since Obama won the election, the Dow Jones has declined nearly 1000 points (more than 9%) - there's no patriot rally going on here.

A big contributor to this was the announcement by Toyota that it expected operating profit to decline some 56% next year. If it had been BMW or Mercedes or one of the luxury brands, then yeah maybe I could have understood it - but Toyota which services the ordinary 'pleb' market - geez things must be bad...

Ok - if you haven't worked it out, I'm in something of a sarky mood this morning. But I'll live.

The JSE all share index fell more than 3.4% yesterday resuming the downward trend. My personal opinion is that we are going to see the All Share Index trading at or around the 18 000 level by the end of 2008.

The way I see it playing out is that we're going to see the odd big down day, followed by some bottom feeders coming into the market and then after the middle of November, the fund managers are going to say - 'enough! We're going to sit on the sidelines until 2009 starts'. This is probably going to have the affect of a gradual downward drift.

My Strategy
Is it going to create opportunities? I think so - but don't expect to see any returns on it during 2009.

I read a report that SA asset manager Allan Gray was expecting the JSE to move down to the mid 16000 level over the next four years. A couple of other investors I know indicate that this is likely to continue lower than this.

Tough one to call, but logically if you have nice spread of assets, you should be able to generate some income and with any luck position yourself at relatively low entry points, to take advantage of the next upward moves in markets.

As mentioned in my previous post, I've got my grubby little paws on small cap pharma firm Bioscience Brands. I've discussed the prospects for this business in previous posts, so I'm not going to touch on it again.

Next on my shopping list is to add to my Exchange Traded Fund (ETF) and Property (Fixed income) holdings.

I've got some exposure to the Japanese economy through my DBXJP and to balance it out I'm going to switch my attention to the US economy. My logic is very simple and basic here - for all the doom and gloom that America is a dying economy, it is also one of the world's biggest and most sophisticated - Getting some exposure to the hard dollar earnings here is attractive for a South African investor, particularly when the US is out of favour. For this reason, I'm going to pick up a few of the DBXUS, exchange traded fund.

Property and fixed income are also an important component of any balanced portfolio. The distributions that these guys throw off, mean that you can benefit from some capital appreciation as well as the cash flow. My prefered property stock is the Apexhi-B units. I'm a little bit worried about the increasing vacancies in the shopping malls around the country, but not worried enough to stop me buying into quality portfolios such as those managed by Apex-hi and Growthpoint.

I think for many of us ordinary investors who don't have benchmarks to beat, we have to accept that we are buying into downward trends, but we are not trying to pick the bottom of the market - we're trying to build a valuable portfolio, one small brick at a time....

Bioscience Brands

Just as an update, I picked up some shares in small cap listed pharma company, Bioscience Brands. I have covered it before as a company I think holds quite a lot of long term potential.

Tried to move my bid around to try and pick them up between 4c and 6c yesterday, but ultimately got them at 7c.

Not a big component of the portfolio but they are definately something that I believe hold some potential to improve strongly over the next few years for the patient investor.

Interesting stat...

Using the Dow Jones industrial average as the benchmark, Stock Trader`s Almanac shows a $10,000 investment compounded during Democratic presidencies since 1901 would be worth $279,705 after 48 years. The same $10,000 investment during 56 Republican years would have been worth just $78,699....

(I think this was calculated as at July 2008 and excludes the tumble that we saw in October...)

Justrade.com

Bond Exchange of South Africa Limited rolls out the first online binary options exchange in Africa

The Bond Exchange of South Africa Limited (BESA), through a joint venture with Market Tech (Pty) Ltd (Market Tech), is proud to announce the rollout of Africa’s first online binary options exchange, Justrade.com.

Garth Greubel, BESA’s CEO explains, “The rollout of Justrade.com is an important component in the continued growth of our business as we maintain our focus of building better markets and the development of new product lines and revenue streams beyond the realm of our traditional bond franchise.”

The platform is the brainchild of co-founders and directors of Market Tech, Rory Mackay and Michael Franze. Before starting the company, Rory spent his career in financial markets, trading currency, commodities, bonds and interest rate derivatives at ABSA, Standard Bank (SCMB) and Investec. Michael has a thorough understanding of telecommunications and has operated as a consultant in the past two years, particularly fixed mobile convergence, whilst at the same time developing the online platform for Justrade.

Says Mackay, “Justrade.com opens the door to trading for individuals and institutions in an efficient, affordable and exciting way.

By allowing our users to choose the way they want to transact via the Justrade or Protrade platforms, both easily accessible on www.justrade.com, we hope to be able to satisfy the needs of novices new to the workings of financial markets, as well as those who are experienced market participants.”

The concept of binary options exchanges, although new to domestic markets, is well established internationally, particularly in the US and the UK. Says Mackay, “In 2007, the Options Clearing Corporation proposed a rule to allow trade in binary options. In 2008, several exchanges began to adopt binary options, including the Chicago Board Options Exchange (CBOT) and American Stock Exchange. So, whilst binary options are relatively new, their potential has been noticed and embraced by some of the biggest names in the Exchange business.”

Online binary options markets such as Betfair.com in the UK and Intrade.com and HedgeStreet.com in the US are well established. Betfair.com trades more transactions per day than the London Stock Exchange. Intrade.com has turned over USD4 billion since 2002. “Whilst these markets allow for trading in a range of contracts (political, sports or financial), our platform is differentiated by the fact that we offer trade in financial contracts only.” continues Mackay.

Greubel adds, “The joint venture with Market Tech has allowed us to unlock the value inherent in our exchange license, whilst allowing our partners to bring valuable trading and technical expertise to the table. Collectively, these ingredients have been combined to produce Justrade.com, which we look forward to seeing grow in depth and liquidity in coming months.”

Shopping list

With equity markets finally taking a bit of a breather from the non-stop selling pressure, quite a few people have been talking about what shares are on their shopping lists.

You've seen my previous posts about not believing that we have seen the bottom of this sell-off so I thought I would take the time to touch on the 6 shares that are on my shopping list and provide some idea as to why I thought they were attractive.

BioScience Brands (BIO) - This is a high risk pick but I like the story and I think at its current levels it should be 'money for jam'now that new management has been installed and pushing for corporate action to build mass here. Given time I can see this share comfortably trebling.

ApexHi-B (APB) Units - A big part of my strategy has revolved around portfolio rebuilding and developing a consistent supply of income and dividends for reinvestment. My two prefered property picks were Apexhi-B and Growthpoint properties and APB happened to be next on my shopping list.

Deutsche Bank US index X-Tracker (DBXUS) - I'm a fan of exchange traded funds (ETF) and I've already taken a position in the Japanese markets, so I've hedged a bit with some exposure to the US market now. Quarterly US distributions and the US dollar 'hard currency' exposure are a theme in my portfolio.

African Bank Ltd (ABL) - Abil has been a favourite stock of mine, despite the segment of the market that they serve (micro-lending) / higher risk clients. Credit where credit is due - these guys have managed to handle risk better than any of the big four banks despite playing in a very tough segment of the market. The company is also very cash generative, generous with their dividends and are well positioned to buy up some nice assets should the opportunity present itself.

Grindrod (GND) - I've touched on my reasons why I like Grindrod in a previous post, so I'm not going to repeat it.

ZSHARESGOVI - This is another ETF that is issued by Investec. Basically this is tracking the South African bond market. For some exposure to the bond market, I think this is a nice way to split up the portfolio a bit.

Anyways that's where I'm looking - you probably won't find those on the shopping list of too many other institutional fund management experts (except maybe Grindrod), but I'm happy with those calls...

10% moves?!

I'll confess - some of these 10% daily moves have me completely confounded.

How can things suddenly be that much better than they were the day before?

Going down, I can believe because I think the selling pressure is justified but a 10% move up in markets when we have yet to feel the ECONOMIC IMPACT of this financial crunch.

I'm just a simple guy and certainly don't have the same insight that these fund managers and analysts enjoy, but just for a minute indulge me.

Just look at the South African economy:

1. The third biggest book retail chain yesterday went into liquidation yesterday - this affects 300 odd people working across 33 chains.

2. 7000 cars per month are being repossessed and something ridiculous like 70 000 people are more than 2 months behind on mortgage repayments.

3. A local fluorspar mine and a uranium mine have been mothballed in the last two weeks - 350+ people out of jobs

4. The local marketing sector probably doesn't want to believe it, but lets assume for a moment that at least R1bn will leave the sector in 2009. (Or more specifically won't be spent and rather hoarded for better times)

5. Ask around - how many of your mates have seen their Christmas bonuses and 13th cheques disappear into smoke?

My theory is that you can get as excited as you want about these big spikes up, but just remember that so far we've had a corresponding plunge a few days after a big spike.

There's bad economic news which is going to have to find its way through the system and by trying to chase good news all the time, you might find yourself being suckered.

I appreciate that the longer you are in the market, the better your returns ultimately will be (as much as many other traders dispute this!) but ask the tough questions of your financial advisors who are encouraging you to pile back into equities because SURELY ITS HIT A BOTTOM.

Point out to them that we haven't had a chance for the economy to absorb the above - how is it that things can look rosy now?

Grindrod

Well another trashing on the markets yesterday - there is no shelter for anybody at the moment. Gold price at US$732 and Platinum price at US$792.... A race for $650?

Before I get onto my fundamental play that I wanted to throw out into the world, I have to touch on a phone call I received yesterday. One of my mates is the MD of the South African arm of a multi-national leisure business. In line with the rest of the company's international operations, he yesterday had to break the news to his staff that there would be no 13th cheques or bonuses this year. He said it was heartbreaking to see people's faces because a number of them are hugely dependant on it to either fund Christmas or to just try and keep their debt under control.

As soon as the meeting was over he had staff asking to setup meetings around company loans which had also been dismissed by the head office. Like I said in a previous post - bad news is here and you would do well to focus hard on cutting costs and saving wherever possible.

Very quickly, lets just assume that 50% of his staff are the primary breadwinners and those bonuses would have provided them cash flow for December so they weren't servicing debt. That buffer is now gone. The recession / slow down has hit SA and there is no two ways about it...

Having now spoilt your breakfast, I would like to move onto something that I believe could provide a nice fundamental story which piqued my interest while skimming the JSE SENS announcements yesterday.

The announcement read:
Shareholders are advised that Grindrod Bank Limited:
- has disposed of its minority interest in Exchange Sponsors (Pty) Limited;
- has been approved by the JSE Limited as Designated Advisors; and
- will be assuming the role of the company`s Designated Advisor with effect
from 1 November 2008.

This announcement was made for two firms (FinBond and Imuniti) and I suspect that this will be repeated with a few other firms.

As most of you know, Grindrod (JSE: GND) is a shipping company. Currently its trading on a PE of around 3.26 times earnings. Attached to that, there is a small Grindrod bank arm which has been steadily developing. If Grindrod is starting to position itself as a diversified group that handles both industrial and finance arms, then this could be very interesting. The company has great cash flow which means it could pick up some very nice assets cheaply.

Would put it in a very good position to diversify its business - lets remember it was double its current price not so long ago and that only put it on a PE of 6... diversified portfolio of investments could make it very attractive.

Dunno - it was just something that stood out for me. Will look at it some more and see if I pick out any other angles that stand out.

Carnage continued

But I don't understand - the fund managers promised us we were "near the bottom" and South Africa was insulated from the rest of the world.

They told us Gordon Brown was a HERO who had saved us from financial armageddon. Everytime he came on to TV I heard Tina Turner blaring out the Mad Max soundtrack.

I don't understand what went wrong....

Ok that was me taking the piss because its Friday.

Some pretty spectacular stuff yesterday. Gold index lost another 5.6% and we now have the platinum price within 100 dollars of the gold price and both are continuing to head south... So much for the "safe haven" theory for now.

Currencies are all over the show and problems in Argentina, Russia and other emerging markets is proving to be a bigger problem than most people expected.

The All Share index dropped below 20 000 points for the first time in a long while and if you're trying to pick a bottom to this then you're a braver man or woman than I am.... Ever tried to catch a falling piano??

Here's a hint - D O N T

That DBXJP X-Tracker has held up nicely actually moving ahead of where I bought it. That I suspect is largely a function of currency moves but I'll take the security its provided.

For the rest things look a little messy and the deluge of selling pressure doesn't seem to want to let up.

I'm pretty sure there are pockets of value out there. Things that look good to me include Standard Bank, Absa, Tiger Brands, Pioneer and PikWik. They're all pretty defensive, even if the banks do take some pain the next few weeks.

I also quite like the Mvelephanda Group (MVG) story. They're a nice diversified group and yet the share price has also been under a lot of pressure now. I bought MVG at around R5.60 and its now sitting at R4.90 (after paying out a dividend and special divvie). I think there is value in this story.

But if you are buying short term and you expecting the market to stage a big turnaround then like I said - go and stand underneath Ponte and have a mate drop a piano toward you - if you can catch it then we MIGHT have hit the bottom...

Investments

So what actually constitutes an investment? I think its fine while the stock market was on the charge and you consistently saw your portfolio value increasing and you can turn around and say "my investments are up" - but how many of those 'investments' that you bought are now worth significantly less?

Are they still investments if the value is now worth less than what you bought them for?

I guess thats a tough one to answer.

My theory is that it becomes an investment when the PASSIVE (Emphasis here) income that you generate from it provides you with free cash to buy other investments or income streams.

As an example - if I have bought Remgro or PSG or Bidvest shares over the last few years, the share price of these instruments has gone up and down. Let's say that the price of the shares has gone nowhere over the period that I have held them but the dividend yielded from the investment has given me cash to buy more of these shares - then I think this is an investment. (Not sure who agrees or disagrees).

On another issue - over the last few weeks there have been a number of bad jokes made about Iceland and how it has fallen to pieces and is now buried in debt.

A UK banker posted a note on one of the trading boards that read:

The next domino's to fall in order will be

Argentina
Pakistan
Ukraine
Hungary
Serbia

..... scary stuff....

Hhhhmmm....

Hark! Hark! The trouble has gone and the world stock markets can get back to printing money for investors - oh joy oh happy tidings...

Whatever....

Global stock markets have kicked off Monday in slightly more positive territory and traders and investors are tentatively putting a few bucks back into the market.

Just remember before you decide to dive back into the market with highly geared positions that last week the market bounced nicely one day and then broke all records again on the downside.

While the rebound is encouraging that we may have hit a short term bottom, remember that the damage has been done and things are not turning around economically for a while...

It is all good and well pointing out that there is a bucket load of liquidity now in the financial system, but lets remember the jobs that have been shed recently.

Wherever I look, I am reading stories about huge numbers of jobs being shed. If it is not the financial or motor manufacturers in America, its the mines right here on our own doorstep.

I was pretty bullish on Impala Platinum a few weeks back but the platinum price has been slaughtered and suddenly the mines are cutting back on jobs and their capital expenditure projects.

I keep saying it but WHAT IS GOING TO HAPPEN WHEN THESE UNEMPLOYED PEOPLE COME INTO THE SOUTH AFRICAN ECONOMY?!

I chatted to one of the CEO's of SA's big 4 banks and he said (a little more bluntly) - there is groot kak (big trouble) coming.

According to him - anyone who says that we're at the bottom of the house price and credit cycle better think again.

I hate being negative but its something to bear in mind that the crisis seems to have moved from being a financial crisis into the realm of an economic crisis and THAT will not be fun for anyone involved...

More trouble...

If you don't laugh you're going to cry!

One moment everybody is harping on that Gordon Brown has saved the day and the markets rebound and the next you've got the JSE all share index down 7%... Pretty tough to manage your portfolio when you're getting mood swings like this.

I have been chatting to quite a few senior execs in JSE listed companies in the last few weeks and I get the sense that while they are trying to put on a brave face, many of them see real trouble ahead.

A lot of people are talking dropped local interest rates in 2009 followed up by an economic rebound toward the end of next year. I tend to disagree - there is quite simply too much bad news coming into the market for the to simply shrug it off...

We might have gotten a little excited and bounced strongly on Monday / Tuesday but reality is now setting in...

Property and stock market correlation

An interesting piece was run on Realestateweb yesterday with two rather big name property players giving contrasting views on whether the stock market collapse would have a negative impact on housing prices in South Africa.

Saul Geffen, the CEO of ooba, the country's biggest mortgage originator, apparently described the property market as compelling and argued that investors that were tired of the uncertainty of the stock market would instead move back into property because it was something tangible because they could touch and feel it.

Samuel Seeff, chairman of the Seeff Properties on the other hand argues that the uncertainty and economic downturn would probably further depress prices and keep investors out of the market.

Now obviously Geffen has to ‘talk his book’ to some extent so I guess we have to try and look at the real factors to find out whose right.

First and foremost, I suspect that many ‘paper millionaires’ have seen much of their wealth get obliterated with the stock market tumble. That obviously affects their credit records.

I don’t think it is rocket science to work out that if you previously had R1m in assets listed on the stock market and those are now worth R700k, you credit score will have decreased. This obviously makes you more of a credit risk than it did than before and the credit you qualify for will be lower.

If one just looks at the general economic consensus going forward, one would think that it gives you some idea of how property is likely to perform…

Yes interest rates may drop next year but lets remember that overall GDO growth is expected to halve for the next two years. That would mean a lot more delinquencies and businesses closing up shop – just in general a lot less extra cash in the consumers hands.

I just don’t buy anybody arguing that property demand and prices is likely to increase in the middle of an economic slowdown that will halve growth prospects.

In terms of prudent capital management, I also don’t expect Absa to be the only bank to put the brakes on clients drawing against their access bonds. There is going to be a hell of a lot less free cash available to draw on.

My final comment on this is as follows:

If you have R10 000 cash and you want exposure to the property market, you are probably faced with 2 options:

A) Put the R10k down as a deposit and apply for a loan which you might or might not get. Lets be blunt – if you are paying a R10k deposit on an investment property, you are probably going to be cash negative on the transaction

B) You put R10k into a quality listed property fund (such as Apexhi or Growthpoint) where you might find your unit price being buffeted a bit depending on the mood of the stock market but you are pretty much guaranteed an 8 – 10% cash positive return

Sorry I don’t buy it – the performance of the stock market would lead the performance of the property market from where I stand….

Dead Cat

Hate to say it but don't get too excited about this bounce today. I see the JSE and world markets are all trading up a bit as the European rescue plan is mooted...

But just think for a minute - what has fundamentally changed since today and Friday? Yes Europe has agreed to shovel money into equity markets to try and prevent future collapses, but this doesn't mean much in the bigger scheme of things.

Read the JSE Sens announcements this morning and you will see where the real problem is coming for South Africa.

Sallies - the fluorspar miner - has confirmed they will be closing down its Buffalo operations putting 130 people out of work. Banks are either cutting jobs or at the very least not hiring.
Miners are seeing their base and precious metals get prices get slaughtered - why would they be hiring?

What is going to happen when these people come into the ranks of the unemployed?
Who is going to pay their bills? This is the problem that SA businesses are likely to face going forward? Unemployment is already an issue in South Africa, a recession, depression or "global slowdown" as the strategists like to call it will be the catastrophe our system didn't need.
If we are repossessing 6-7000 cars a month at the moment, then what is going to be the case when the unemployment figures start to bite?

I heard a figure today at lunch that 130 motor dealerships had closed up in the last few weeks. More jobs disappear from the system?

You walked through many of the shopping centres in the last few weeks? Look at the number of shops closing their doors and doing closing down sales...

Lets not get too excited about a little bit of a bounce in the stock markets... the pressure remains to the downside....

Savings and Asia

I had an interesting chat to one of these "global strategy" types recently.

Normally I take what these guys have to say, with a pinch of salt, but this guy did raise some interesting financial / economic factors that I thought might be interesting to throw into the mix.

First and foremost he seemed to buck the trend of economists / corporate investment strategists who are predicting that the US will bounce back sharply in 2009.

He has tracked a number of 'bubble' financial events like the gold boom, tech bubble etc over the course of history and his model 'seems' to have been able to give some idea of how the markets are likely to perform going forward.

(I say 'seems' because in my experience it is easy to make models and data fit a pattern and say SEE I TOLD YOU SO....)

According to his model we're likely to see a liquidity driven rally hit our markets shortly but we're in all likelihood going to see a flat to negative return from now until 2013 (specifically in first world American and European markets).

In terms of client portfolios though, they are beginning to look to Asia and more specifically Japan as the area where the recovery is likely to come from.

Their thinking is that with the very high natural savings rate of people living in the Asian countries, personal and corporate balance sheets are significantly less geared than their US and European counterparts, i.e. once the dust has settled on this financial crisis, there will be a lot of
liquidity on the sidelines waiting to be injected. Simply put - INVESTORS WILL HAVE THE FREE CASH TO BE ABLE TO PARTICIPATE IN THE ECONOMIC / STOCK MARKET RECOVERY....

and THAT dear reader is the lesson that we as South Africans need to take from recent financial events.

In places like Japan, Taiwan and Singapore (and even Australia to a lesser extent) - people are saving up to 40% of their salary each month. In South Africa, the figure is something ridiculous like 2%.

(And I know at least 2 middle class white families where that figure is a big fat 0% - every cent they earn is being channeled into repaying credit cards and debt).

At the end of the day, it is a mindset that we need to change - person by person. There cannot be such an enormous divide between one savings culture and another.

But that decision to start building a mindset of saving has to be taken by you. The South African government is not going to introduce an effective savings regime in the near term - therefore you need to take responsibility for it yourself.

As your personal savings column grows - so do the opportunities to take advantage of rebounds in the stock market or the property market or whatever.

You have given yourself the opportunity to participate.

Participating in Japan?
For those South Africans who like the Japan, your options are pretty limited in terms of direct participation. Apart from some regional unit trusts which you could investigate (check out www.equinox.co.za) your only other bet is the Deutsche Bank issued X-Tracker ETF product which we have touched on briefly before.

The share code for this instrument is DBXJP and basically it lets you buy the best performing shares in the Japanese index. It requires no active investment - the same as the local SATRIX40 for example. Chat to Deutsche Bank or an investment professional if you believe this is something you could be interested in.

Ouch!

I called that bloody Impala Platinum VERY wrong.

Lucky I had the stop loss or my trade would be worth nothing.

Ouch!

Stop losses

Stop losses - those bloody things we love to hate.

Today reminded me why we had them and why they need to be there even if we 'think' we know better.

As mentioned yesterday, I exited my Impala Platinum calls after they took a bit of a pasting in early morning trade. The moment I sold out, I had this 'sellers remorse' and was certain that the US bailout would all be approved and the market would turn around and fly.

Bailout occured
Market bounced... A bit
The next day market lost momentum
Impala started trading down even further

Nobody likes selling at a loss and feeling like they called it wrong. But we all do it and the sooner we get over ourselves and admit that we made a mistake the better it is for our trading sanity.

It might not feel like it at the time but stop losses really are there to help you preserve your capital. Find your system and stick to it.

Wow!

Wow! The Dow Jones Industrial Average sank 770.59 points (6.92%) yesterday as the US congress failed to approve the terms for the proposed US$700bn bailout that was supposed to save sinking financial markets.

The tech heavy Nasdaq went down 199.61 points (9.14%). Unless a miracle happens today, we're likely to get trashed.

Interestingly though - the Rand is slipping quite drastically and is now trading at around R8.33 to the US dollar.

I'll be he honest - I don't think we have even begun to see the real moves in the Rand / Dollar rate.

The question though is going to be twofold:

- What are our resources going to do with the weaker Rand? (Will the Rand buffer boost them or will they just keep being sold down)

- When the hell are these commodities supposed to bounce?!

Commodities such as base and precious metals were supposed to bounce on the back of increased demand from China following the Olympics. But this doesn't seem to be the case OR the

There is a palpable excitement building around Gold shares / the gold price at the moment and this failed bailout may just be the tonic that is needed to light some serious fires in the precious metals markets.

Gold is now above the psychological barrier of US$900 an ounce. A sliding Rand and a rising gold price is fuel for a run on these shares which creates some great opportunities for traders.

I maintain my exposure to the precious metals / Rand Hedge market through a small call position on Impala Platinum. For the rest of the market it still looks pretty grim.

Options and Wealth?

The recent trouncing of the stock market has led me to a great internal debate / struggle...

Up until the start of September I had a nice little strategy going. Buy little blocks of shares, each time adding another dividend stream and try and grow my wealth that way.

Then I got all excited by the market volatility and fancied a bit of day trading and I sold out of 3 dividend producing shares to buy some call options on Impala Platinum and WHAM! I got the direction wrong.

Apart from losing money on the trade (I kept a portion of the position open though because I still think its the right call given the anticipated emerging market currency issues), I have also lost 3 dividend streams.

The irony of all of this though is that the shares that I have sold out of, have actually weathered the storm quite well.

The whole situation got me thinking - why do I bother to try and time the market to make "quick bucks" off of futures or options trading when a strategy of accumulation seems to work better?!

I had previously enjoyed some good successes trading in the options market, but at the end of the day, chasing a quick buck has actually moved me backwards.

Maybe its a fools game?

Stock brokers consistently tell stories about clients who churn their accounts over each year. Sometimes they end up, sometimes they end down - but at the end of the day, they don't consistently make any money by trading options.

Their is nothing scientific about my statement and I don't for a moment think that you can't make real money trading in the options and futures market. I do however wonder whether traders sometimes delude themselves that they are building WEALTH when they're actually gambling on trading profits...?

Gold vs. Platinum

Why is Gold a safe haven and platinum is not??

This was a question I posed on one of the local trading boards, because in my head, I just can't work it out.

Gold has gone bananas this afternoon as the US financial system can no longer plaster over its cracks. Gold shares are on the fly and the metal itself has jumped over 11% in the last few hours.

Interestingly the price of platinum has also started to tick up and so has silver...

Now when things start hitting the wall, the traditional response has been to pile into Gold which is supposed to be more 'secure' than traditional money.

But apart a brief trip up to US$1000 an ounce, gold has hardly set the world alight and in the last few months has given up most of those gains... Until this afternoon.

And now the trouble really has hit the fan and the traders are looking to Gold and (maybe) Platinum and silver and some people are getting slightly excited - opportunities amongst the carnage!

I'm buying into this idea of a perfect storm of precious metals (Gold, Platinum and Silver) and a big klap for the emerging market currencies...

Interesting times indeed

Rand to be hit?

Does anyone else get the schnarkies that the Rand is about to take an almighty klap??

I've been watching the action in the US and locally and suddenly in the last few minutes Gold has rocketed some 50 odd dollars and the gold shares are on a mission.

Harmony, Gold Fields and AngloGold Ashanti are up in excess of 10% and gold doesn't look like its planning to stop.

In between this the Rand has slipped to R8.22 to the US dollar...

This is great for my Impala shares and for my dollar earnings but will play absolute havoc with the local South African economy (Inflation and debt issues will continue to rise).

I just get the horrible feeling we're about to see a huge selloff of emerging market currencies as people pull their money back into their home balance sheets.

I think I will just keep patting my IMP on the head for the moment... Time for these things to fly....

Food and Pharma investments

For investors looking at the South African Food or Pharmaceutical industries as places to make investments they may be interested in the following:

SA listed pharmaceuticals assessed

SA listed Food & Chemical companies assessed

Impala - cheap punt

Traders lick their lips when a bit of turmoil hits the markets. The collapse of Lehman Brothers and the 'rescue' of Merrill Lynch has been just the catalyst for a decent sell off and I reckon this is creating some very nice opportunities.

One trade that I have been eyeing for a while has been going long Platinum producer Impala Platinum.

The thinking around this is three fold.
1. The currency - The Rand / Dollar is slipping. SA resources run hard when the Rand slips. I believe that breaking the R8 mark was critical and I'm thinking we are about to see some sell off of the Rand. (Although I cant say where the money is going to).

We have seen emerging market currency sell offs before and when they happen, they happen FAST.

2. Plat stocks have taken a bit of a hit in the last few weeks and the junior miners are taking some pain. I think there is time for a bit of consolidation

3. Impala has some very nice assets that the market has completely discounted in Zim. IF this power sharing detail provides even a semblance of political stability and its game on for these assets.

Bit of a cheap and nasty punt but lets see how it goes. Entered a call warrant with IMP trading at R189....

Nice quote

I am not one of those guys or girls who take Robert Kiyosaki ('Rich Dad, Poor Dad') word as gospel, but every now and then he puts some things nice and simply.

I loved this quote though that came from his book "Cash Flow Quadrant":

'Most people struggle to live from paycheck to paycheck, and yet, US$1.4 trillion flies around the world every day looking for somebody who wants it..."

Hahhahahahaha doesn't that make you feel good?!

Where to?

Its a pretty sickly looking equity market at the moment. It doesn't seem to matter where you look, the bad news just keeps on coming.

The BRIC (Brazil, Russia, China and India) seem to chug along but this isn't really helping the ordinary South African investors who are just trying to work out how to PROTECT some of their money.

A couple of people have asked me what I was planning to do next from an investment perspective and I stuck to the theme about diversification for my portfolio building.

Next on my shopping list is my first exposure to the Deutsche Bank X-Tracker ETF's.

Basically the ETF's are there to try and give me a bit of protected brain dead 'basket' exposure to the major markets. Would have loved exposure to the BRIC economies via ETF's but no such luck so I guess I have to go with what I've got.

It is nice to also have some offshore exposure and enjoy the quarterly distributions that these ETF's provide (Even if the yield is relatively low).

My buying order for these instruments is likely to be
DBXJP (Japan)
DBXUS (US)
DBXWD (World)
DBXUK (UK)

I think the systematic adding of these to the portfolio will provide some nice spread to the portfolio and at least let me look at some offshore assets without dipping into my offshore allowance.

Something a little different
I don't have any plans to buy any (no funds available) but Sterling Waterford will be issuing the second of their Carbon Credit Notes. These worked quite well the last time providing investors with a return of 150%+. Second time around in a tougher economy I think will be slightly trickier, but still believe they are something different while still providing a nice investment.

I guess thats just something to stick in the back of your head...

What do you make?

Late on Sunday the US government confirmed that they would be providing a bail out service for Freddie Mac and Fannie Mae, the US based mortgage lenders.

In a nutshell, the credit crisis has become so deep, that two of the worlds biggest lenders are in such serious trouble that the US government has had to come to the party to help keep them afloat. The reality is that if they collapse, then a massive chunk of the US lending market goes with them.

I'm torn on the issue - not sure whether they should be allowed to die a 'natural' death as a result of their own lending practices or whether they should be bailed out for the greater good...

What do you guys think?

Empowerment Foursome

It has been an interesting week for my 'empowerment foursome"

Mvelaphanda Group
As per my last post, I got my paws on some Mvelaphanda Group (MVG) shares. My initial bid was a cheeky R5.95 but when it became apparent that it wasn't dropping below R6 I was happy to pay the R6.30.

The motivating factors for buying this company were:

A) The special dividend coming up in the middle of the month
B) The quality assets they seem to have under them that are being discounted by the market. You seem to be getting a lot of future earnings for next to nothing.

One of the things I like about the MVG story is that the general perception in the market, is that they don't think of themselves as an 'empowerment company'. They view themselves as an industrial company that happens to have a large black representation.

Personal opinion - over the next 10 years, this is going to become a serious player in the South African industrial segment off its own bat.

Sekunjalo
Intriguing things happening at Sekunjalo this week.

The company announced that they had gone into negotiations and the share price leapt up from 61c - 68c.

A nice bit of volume as well and no announcement that there were some director dealings so maybe it is not Surve buying shares.

According to website www.sharetips.co.za, there is a good chance that SKJ is going to be delisted in a management buyout by Surve.

I'm less convinced and think its an acquisition but nothing seems immediately obvious.

But I admit that I will be very irritated if this is a management buyout and delisting.

Brimstone
Investors seem to be recognising that there might be some disconnect between Brimstone's share price and the underlying operations.

The company is on a VERY undemanding price to earnings ratio.

The shareprice has jumped nearly a Rand (20% this week), admittedly on relatively thin volume. Even after this jump the share is still trading on a PE ratio of under 3 times earnings... must be money for jam.

Vunani
The company went under cautionary on Thursday afternoon. 24 hours later, Peregrine (of which Vunani holds 15%) also went under cautionary as it was announced that CEO Sean Melnick and management partners are planning to delist the business in a management buyout.

As a shareholder in Peregrine, I can't say I'm happy.

But Vunani has been doing some nice things since listing and the share price doesn't really reflect it.

The share is illiquid at the moment and there are some minor operational issues which need to be smoothed out.

But barring a huge disaster, I don't think this is a bad story. If they can retain their Peregrine exposure then they should do nicely over the next few years and re-rate appropriately.

About the Liquid Trader blog

I'm a South African day trader and investor.

I love the South African stock market and I love interacting with like minded South African professionals.

This blog was formally hosted on iBlog (www.liquidtrader.iblog.co.za), but we have had some connectivity problems as of late so I have begun to start shifting some of the content over to here.

I look forward to being able to bounce ideas off other South African and international investors and build a nice solid trading community to share ideas with.