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.