I probably don't understand society but...

... we wake up on Monday after a massive earthquake has hit a major commodity producer like Chile and markets are going up?!

Me - I am largely indifferent but it says a lot about society doesn't it. My only open position at the moment is long the US dollar versus the Euro and some small long-term equity positions and that's about it.

This is a massive earthquake and there have been 90+ aftershocks to rock Chile all between 5.0 and 7 on the Richter scale. The swells off the coast of Hawaii are rising again and action in the Pacific on Friday was felt in Australia, New Zealand, Japan, Californaia (which you can short the shit out of till it sinks into the sea), Chile and Hawaii.

If you're interested in currencies, there is a good story on Bloomberg this morning predicting that pound sterling could drop by as much as 30% against the US dollar.

“Alarm bells were ringing in Greece for a long time and when it happened, it happened very quickly,” Haig Bathgate, head of strategy at Turcan Connell, said at the company’s offices in the Scottish capital. “The U.K. is in a similar predicament. It could be hit very hard.”

You can trade Forex products here if you want to get in on the action.

With any luck the Poms also sinking into the sea along with California and we're saved from their painful whinging and Wayne Bridge acting all sanctimonious about his woman being groped by a team-mate.

Anyway time to sit back and watch Hawaii get washed away...

Contracts for Difference

CFD(Contracts for difference) trading is about ‘margin trading’, or buying not ownership of stock but ‘trading rights’ on the stock by putting down a fraction of the price (i.e.,10%) holding it for short term, hours, days or weeks, and selling it at a profit when the market rises.

Easy? Yes and no. The cautionary is that like all speculation with stocks and shares, only money that you ‘can afford to lose’ should be used. Having said that, with the right systems, good nerves and attention, it is very feasible to make a lot of money. A CFD being a ‘derivative’ of a stock holding is a separate entity from Forex which can also be traded in the same manner but has some regulatory differences.

“For example, A client wants to purchase £10,000 worth of HSBC shares, the margin requirement would be only £1,000. If HSBC share value increases to £10,500 a £500 profit on the deal would equate to just 5% return if you traded the shares outright; compared to a return of 50% on a CFD.” Interested? You should be.

Get started now with a free ‘demo’ account from agmtrader.com .

Tactical asset allocation

Over the last few weeks I have been thinking quite a lot about this concept of "tactical asset allocation" and specifically how it impacts me as a South African trader / investor...

So here's my issue - over the last decade it has been pretty much money for jam if you have been long SA equities. The dividends have been good, there has been capital appreciation and believe it or not, the rand has been overall a quality currency to hold these assets in.

Shock, gasp, horror - and here everybody was thinking that South Africa was heading down the drain at a rate of knots...

So it has been easy - you buy SATRIX or RAFI or you pretty much throw darts at the newspaper and provided you don't hit the Alt-X you've made a pretty decent return.

But as cliched as it may sound, the world is a very different place now...

Are you going to get away with just tracking an index over the next few years? Can you just buy SATRIX, RAFI, MSCI World etc?

I amo not that sure that you will.

Two reasons:

• Global economy is recovering - we're not in a global economic bull market - certain segments will heat up faster than others
• South Africa has (at least from an equity perspective) appeared to catch up with the rest of the world

Locally our exchange is dominated by big international heavy-weights whose markets are made in London primarily. If international investors want them to move - then they will move.

Pfizer seems to be a stock that a lot of asset managers are talking up and it will suit my example well. I want to buy Pfizer - I have two options - buy it off my own bat through an asset manager geared for the international markets or buy into a fund which is supposedly "tactical" and will look for more opportunities like this.

I don't like the fund idea so I need to fin a stockbroker who can get me into international markets and then work in my tight forex regulations. But that takes a mindshift from me - I can't just limit myself to the SA market anymore.

I need to be aware of a brewery in Zambia or a Russian oil firm or a Mexican tequila plant and that takes some doing....

Will need to think about this a bit but would welcome any thoughts on

A) Will tactical stock picks outperform index tracking?
B) How important is the international market to local investors?

Let me know.

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.