The US dollar

Out of curiosity are you still hanging on to your US dollars?

I see that there are media reports of North and South Korea trading pleasantries over a couple of artillery cannons this morning. Now THAT will do wonders for the global economy if we have both the Middle East and the Korean peninsula trying to obliterate eachother now won't it.

Anyway just a humble observation early in the morning and seeing as PIMCO were in the SA media earlier this week talking about how the US dollar was set to bounce back specifically against the pound and the euro, I thought it might be time to start looking at a few for the portfolio.

Geopolitics

I always find it difficult to take geopolitics all that serious - especially when it is looking ahead over the next decade, but I see that STRATFOR have made their forecasts to 2010 with some very interesting views.

I don't agree with all of them, but I think its good to throw out the ideas into the investor domain for debate.

Their predictions:

• Egypt and Turkey will become regional superpowers
• US-jihadist war will have subsided with Iran pacified by either military action, isolation or political agreement
• Worldwide labour shortages and huge demand for immigrant labour
• China will have suffered an economic meltdown leaving the US as the lone world superpower

I have mixed thoughts on these Egypt yes, Turkey no. Egypt I've always thought was an under-rated part of the mix on the continent and its proximity to Europe and the Middle East have to be considered. Turkey I still get the sense is too fractious internally to fill the gap.

I'm indifferent to Iran as a flashpoint. I was surprised to learn their economy is as big as it is - GDP of around $850m. That's big if one considers the problems it has. America doesnt have the enthusiasm it once had to pick fights and I wouldn't be surprised if Iran actually thrives on sheer pigheadedness.

Labour shortages I don't agree on. I actually think that while the world is going through a phase of upgrading its labour force and emphasising quality of work /loving its labour force. There might be a little less mechanisation than people think and while there might actually be wage deflation, but maybe more flexibility in the working day.

China - disagree completely and I also think that Japan will bounce back. Don't worry I'm not one of those people who believes that China is a bulletproof story - but let's be honest in 10 years China will just be starting to develop a property market, retail banking system and empowering its consumers - its not all going to fall on its head in the next 10 years.

Anyway food for thought always aims to stimulate some debate - your thoughts?

6.5% per annum?!

So I've been surfing around the financial news sites and it would appear that Old Mutual had a press conference today, because they seem to have cracked a couple of mentions

Anyway the gist of the tune being rolled out by these guys is that investors need to rein in their expectations and accept that investment returns are likely to be lower than what they've had over the last decade or so.

Numbers of between 6 and 7% have been rolled around which I'm assuming are real returns after inflation.

Let's say you're getting 3% dividend from that, that means you're not really making a helluva lot in capital gains... which I guess begs the question whether you really want to be invested in the equity market for this decade.

Anyway the thought that jumped out at me is that while there are a lot of points about being made about traditional asset classes and how they are likely to perform very little is being said about things like private equity, venture capital or even unlisted investments.

For those looking for something a bit more risque in terms of their investments and not prepared to sit back on an index tracking performance, their might be some value in looking at some of the following for their portfolios:

Brait:
JSE listed private equity play Brait has been busy in recent months and they've signed up a couple of smaller deals for their funds. While I probably wouldn't want to put money in one of their funds, I might be interested in putting some money into the holding company which targets a long-term return on equity of above 25%. Worst case you get some decent dividends if you are prepared to buy into the business through the cycle.

Reinet
The JSE listed "private equity" player is effectively a proxy for the British American Tobacco shareprice at the moment. But there is no question that they have a bit of money on the sidelines which they are looking to invest.

Paladin Capital
I've touched on Paladin in previous posts so not going to do much else to add here.

Venfin
Is now de-listed but if I remember correctly you can still buy their shares OTC. Also gives you a bit of access to high profile tech.
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Nobody can really see well into the future but I would suggest on historical evidence and data on the real economy, we're entering a period of consolidation. Those who are likely to score could be part of the "smart money" who are making investments in higher growth businesses now in the hope that they can exit them when the price is right.

Interesting punt
This is really high risk and not worth risking your mothers pension on, but those with the flair for something different should look at that rights issue out of Nigerian oil and gas firm Oando (JSE:OAO). I can understand the whole issue about doing business with Nigerians but I think they came to the JSE for the right reasons and this rights issue could free up some of the float - I reckon it could be worth a punt.

I am going to write a bit more on Oando in my next post but as I say - something different...

Obscure postings

Posting late at night sometimes I don't communicate that well. I started mumbling something about small cap shares and then found bed calling so let me try again.

I think there may be some merit in certain of the JSE listed small cap shares in 2010 and here are a list of stocks which I believe should be considered. Some are great businesses with a good track record and some are a little higher risk.

AdvTech
South Africa's leading private education provider, AdvTech is one of those stocks which could be classified as defensive. Parents will always want to equip their kids with the best opportunities. There is a massive shortage in quality education providers in the country and AdvTech gives you one way of participating in it.

Historical PE multiple of 12 means its not cheap but sometimes you pay a little extra for a bit of quality

CIC Holdings
This is a nice little company which has re-rated significantly since I tipped it at 80c last year. Presently trading at around 130c a share it still only sits on an historical PE of 5 times earnings. Its a company that not a lot of people know much about but it owns quite a lot of agencies in growth markets in Africa. It's partly owned by Paladin Capital (PSGs investment arm). A positive for it is first mover advantage but a negative in that it is an agency type business and does not have a lot of its own Intellectual Property. Still might have some legs though.

Zeder
Jim Rogers is still mumbling on about farming being all the rage in the coming years and I can buy that story. Zeder, the PSG agri-ops business has been very aggressive in the last 12 months sorting out and growing its portfolio.

Paladin Capital
This is your alternative in the education space (but with far less concentration). Paladin - the PSG investment arm - is in the process of rolling out and expanding its network of Curro schools. These guys have been tipped as being super aggressive so and probably not the nicest management around but they'll get the job done.

Pallinghurst
This is the only resource play which jumps out at me but I am useless at judging the sector so don't go on my word. I was speaking to one of the resource guys yesterday and his thinking is that it will either be a 10-bagger or it will go nowhere fast.

Beige Holdings
I am probably going to take much flak for this one but this is a company I really like. Its got much too much paper in issue but its not the worst business around by the stretch of anyones imagination. It has quite a lot of negative legacy issues which its battling to shake off. However it has a major competitive advantage in terms of that new factory which it has put together in Chloorkop plus that factory in Durban (Quality Products I think its called). They can interchange product lines extremely quickly meaning they can shift up or down depending on demand. Paper is a huge issue though. Directors have also not been shy to buy their own stock.

Glenrand MIB
Buying a share in an insurance broking operation in the current economic climate seems to be madness. But that hasn't stopped the big-wigs at GlenMib putting their money down on a regular basis. Something is potting here and a historical PE of 9 considering the problems they had last year may be a sign that better earnings are coming through.

If anything else jumps out at me, I'll post it below this thread but it might be something to look at.

No recovery soon?

Again a few random musings which shows a very cloudy outlook for the real economy over the next few months.

Geopolitics
Politics is always tough to read and more often than not geopolitical "intelligence" is a big "what-if" game.

However there appear to be a few storm clouds brewing:

• The US over the last few weeks has found itself in a constant state of alert for terrorist threats both at home, in far-flung places like Yemen and of course in the Middle East. Whether there is a serious threat or not to the US the emotional drain on the American psyche has to be there
• Just tonight a Texas nuclear assembly plant was shutdown for securit reasons.
  
• A top Iranian nuclear academic was recently assasinated. Neither Israel nor the US are claiming responsibility but Iran is making some unhappy noises and this looks like it is rapidly coming to head considering the US deadlines which don't appear to have been enforced.
• More fuel is being thrown on this fire (excuse the bad pun) after Swiss commodity firm Glencore reportedly stopped selling gasoline to Iran. Something has to crack here and it looks like the US is on a colission course with Iran.
• Debt issues continue to plague Iceland, Ireland, Argentina and Greece as well as a number of other emerging markets which look shaky.
• US Centre for Disease Control reckons as many as 81 million people have been infected with H1N1 swine flu, 16000 deaths and 360000 hospitalisations.
• Lots of posturing between China and Google which I'm surprised hasn't really been picked up by South African media.

Economics

• Initial stimulus packages appear to have had only a short-term impact on the economy
• Job cuts both locally and abroad continue to mount. The pace may be slowing but each month there are a few more people joining the unemployed lines

I am reading some research from the NFIB Small Business Economic Trends for January 2010 and it would appear that there appears to be no real improvement in the confidence of US small business - a worrying sign was that 33% of SME's reported price reductions for products and services.

Locally I have had reports from one of the big media houses and two of the big financial services firms that there is another round of job cuts coming.

Small business confidence ticking up?
Having said that there are a lot of negatives in the economy, there seems to be some anecdotal evidence that some of the smaller businesses who were operating on a low cost base are bouncing back quite nicely.

Those who survived the carnage of last year appear to be consolidating.

So where does that leave us?
Disposable income is tight and markets don't look like they are going anywhere fast. Maybe there are some opportunities for some under-rated small-caps to shine through?

Things that look like they bear some consideration:

• CIC Holdings - quality branded goods licenses
• Advtech - Education
• Paladin - Education and financial services
  

Tough market

Bloody hell it is a tough market at the moment. I'm personally getting slaughtered with whatever strategy I employ, except good old fashioned "buy and hold".... maybe there is a lesson in that?

Anyways there is not a lot that looks particularly exciting to me at the moment - markets have continued to rally into the new year but there is still pain being felt in the US consumer with insolvencies / bankruptcies still high.

One stock which appears to have gotten a lot of coverage today in the press - (pump and dump?!?) is local coal producer Exxaro. In the South African context it is obviously a sensible play as they are going to be the major supplier of coal to Eskom when it starts to ramp up its production levels and expansion program.

Seems like a far cheaper play (on historical earnings) than something like Anglo American and far more targeted in terms of specific resource.

One thing which did jump out at me today - and I saw it was covered on the Miningmx website - is a report out of Stratfor. The research firm has its detractors and I have called them war-mongerers before - but they certainly do raise a couple of interesting points.

1. Russia continuing to spread its influence into neighbouring states
2. China going to continue reckless lending practices to sustain its growth
3. A "cold war" of sorts between Angola and South Africa
4. A crisis in Iran is now inevitable and all the big players are jockeying for positions

I don't want to be the "Chicken little" out there but 1 and 4 worry me quite a lot. I am just not sure what the fallout is and how to tackle it.

On my personal account I've been moving quite quickly into cash. I have kept my preference share portfolio but that's about it.