XML Feeds

What is RSS?

This is the Sharenet company blog where we will bring you the latest news and events on the go at Sharenet, together with tips on using our site and our products.

Top Rated

    Budget Speech 2011 - Review

    Pravin Gordhan gave his second annual Budget Speech yesterday afternoon. South Africans have become used to a predictable Budget Speech as delivered by the Minister of Finance, and this year was no different. Most of what was said had already been anticipated by the security markets, and other events on the day had more of an impact on our markets than the contents of the Budget.

    A great deal is always made of the changes to the personal income tax brackets, as this is the most obvious (and typically highest) tax that individuals have to pay. The major change in this department each year is the shifting of the levels for each marginal tax rate. Every now and then there are changes to the specific tax rates, but for the most part the brackets are shifted to take into account the effects of inflation.

    The chart below shows how the brackets have been adjusted for the coming tax year. It does look like quite a busy chart, but we will walk you through it.

    The horizontal axis has been calibrated to show increasing monthly income levels. For each income level the chart shows how much tax was paid this year and how much will be paid next year on a monthly basis, as well as the marginal and average tax rates. The chart also indicates (in the green) what the ‘saving’ is at each income level as a result of the bracket creep. Saving is put in inverted commas as with inflation running at just under 4% (and typically around 6% pa) savings for the higher income earners are in nominal terms only.

    At the R 35,000 a month income level and above employees will be paying more tax on a real basis (using an average inflation rate of 6%) while those earning less than this amount will in effect be paying less tax in the future should their income go up at the same rate as inflation.

    According to a document released yesterday by SARS and the National Treasury there are some 52,446 taxpayers who earned over R 1,000,000 (R 83,333 per month) in the 2009/10 tax year, with 2,046 of them earning over R 5,000,000! This pool of taxpayers clearly plays an important part in the country’s fiscus, and SARS can be commended on working hard to widen the tax net over recent years.

    Taxpayers over the age of 65 have always been given an additional rebate (i.e. they pay less tax then taxpayers under 65) and this year a further rebate was announced for taxpayers over the age of 75. The first R59,750 is tax free for taxpayers under 65, this raises to R 93,150 for those between 65 and 75, and R 104,261 per annum is tax free for taxpayers over 75.

    The exemption on income earned from interest has increased to R 22,800 for taxpayers under the age of 65. This equates to R 712,500 invested in a 32 day call account at 3.2% being the threshold for all the income to be tax free. As interest rates fall, so the amount that can be invested in interest earning assets increases and vice versa.

    Today we took a brief look at some of the aspects in the latest Budget. Next week we’ll take a look at a few more aspects. For links to some excellent summaries and in depth articles, please click through to our Facebook site. By clicking the ‘Like’ button at the top you will be kept up to date with relevant economic and financial news.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2011-02-24, 16:54:27, by Mike Email , Leave a comment

    Sharenet proud to announce smart phone applications for Blackberry and Android

    Sharenet is proud to announce that its Android and Blackberry applications are now available FREE through the Android (South Africans only) and Blackberry marketplaces respectively. To download directly, you can click on the appropriate link on our www.sharenet.mobi website through your phone.

    Steve Tester, head of IT at Sharenet commented on the applications by saying that “They were designed to cater for the professional who is on the move and who needs quick access to stock market information. Both applications support a wide range of screen sizes and is compatible with tablets and all phones running the Android version 2.0 and above, or blackberry version 5.”

    Customers can access JSE listed share price information including high and low data, best buy, sell and volume traded information all on a 15-minute delayed basis. Whether users want to follow international news headlines, keep abreast of local company news or follow the forex market, it is all available through the user-friendly and smart design of the Sharenet applications.

    Sharenet’s Blackberry application developer, international SNOM XML-Applications award winner Shaun Crous, feels that aesthetics is a key ingredient in designing a popular, frequently used application and regards the Sharenet release as “slick, trendy and very professional.” He also says that “while apps like these are available for foreign markets, I haven’t been able to find one that does what we’re doing for the South African market, until now!”

    A distinguishing feature on the Android application is the individual watchlist/portfolio that users can build and monitor – a way to quickly view all shares of interest in one easily maintained table. Watch out Blackberry users, it’s coming your way too, very soon!

    Permalink2011-02-23, 15:15:00, by Natalie Email , 21 comments

    A range of companies have reported results

    Many companies have their year-end at the end of June or end of December. At this time of the year we have these companies reporting with their full year or interim results to the end of December.

    Analysts will update their earnings models as results are released.

    For investors it is also an opportunity to assess how much of the expected earnings are already priced into the market, or indeed how much the market is taken by surprise as earnings are released.

    Looking at some of the companies that have announced results over the last few days:

    Discovery Holdings reported interims to December with normalised headline earnings per share growing 25% to 169,5cents. The price has been flat for 2011 – currently at 3955c.

    Shoprite reported its 6 month results today with diluted headline EPS up 13,6% to 236,8cents. Shoprite has a market capitalisation of R52 billion. The share price came back 70cents to 9580 and is down 4% for the year.

    Investment holding company Brimstone reported annual results to December with diluted EPS up 8% to 146,9 cents. The net asset value per share fell to 643cents from 1030 cents mainly due to the unbundling of its interest in Life Healthcare. The share price has picked up 15,6% to its current 590 cents.

    AECI reported headline EPS up for the full year to December from 346c to 577c – an increase of 67%. AECI is a R10 billion company – the share has been steadily moving up but is flat for the year.

    Media company, Kagiso Media reported their interims to December with headline EPS up 30,5% to 98,8 cents. The share price is flat for the year at 1695cents.

    Truworths reported interims with fully diluted headline EPS up 19%. The share price however is down 11% for the year to date to 6370c.

    Wilson Bayly Holmes reported interims yesterday. These reflected diluted headline EPS down 19,2c to 676,3 cents. With the competition commission’s proposed investigation into anti-competitive behaviour in the construction industry and the results, the price is down 15% for the year.

    Mondi announced full year results with headline EPS up 312% in euros to 47cents. The share price has been moving up firmly and for the year to date is up 5,5%.

    OneLogix reported its interims with headline EPS from continuing operations up 72%. This is a relatively small company with a market cap R275 million. The price has been steadily climbing and is up 9% for the year.

    Eqstra Holdings reported interim results with headline earnings per share turning from a loss of 21,1cents to a profit of 30,4 cents. The price is up just 1% for the year.

    Presentation

    Cape Town

    Seed is having a one hour presentation - 25 minutes on the market overview and 25 minutes on how to position your retirement portfolio. The presentation has been structured to allow enough time for questions and interaction.

    Please contact Myrna if you would like to attend

    Date: 1 March 2011
    Time: 17:30 for 18:00
    RSVP: 23 February 2011 myrna@seedinvestments.co.za
    Venue: Belmont Square Conference Centre, Rondebosch, Cape Town

    Regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2011-02-22, 16:54:30, by ian Email , Leave a comment

    An Update on Inflation

    Do you have an opinion on what the inflation rate will be at the end of the year? Click through to our Facebook page and comment under our question.

    The inflation numbers to the end of January came out yesterday in line with market consensus at 3.7%. This number is still on the low end of the 3% - 6% that the Monetary Policy Committee (MPC) targets, which could result in investors, and citizens alike, thinking that we don’t need to be worried about inflation for the foreseeable future. While I don’t think that we are at risk of runaway inflation, there are some important issues that everyone should be aware of going forward.

    Firstly, we are STILL seeing many sectors of the economy demanding (and striking) for wage hikes in excess of 6%. Over 65 000 truck drivers are the latest to go on strike, with their demands for a 10% wage hike per annum for the next 2 years – and now willing to take 9%. Without going into the discussion of whether they are earning a fair wage for what they do – this is always a contentious debate – a 10% wage increase should rationally only be given by their employers if the drivers had improved their productivity by at least 4% over the year.

    Rationally, for an employee with no change in job description, his/her wage increase should be inflation plus or minus the change in his/her productivity. Any increase in excess of this amount leads to inflationary pressures, while any increase less than this amount would result in the employee losing purchasing power.

    Ultimately wage increases structurally above the current (and targeted) inflation level will be inflationary as the business owners will, at some stage, need to pass the increased costs onto the end consumer.

    Secondly, the inflation rate of food and non-alcoholic beverages looks like it’s on an upward trajectory. At the moment it isn’t having an impact on the total inflation number as it is only 3.1% for the 12 months to January 2011, but in January alone it was 2.2%! With this component of the basket compromising nearly 1/6 of the total basket, we can expect to see it having a bigger impact on the inflation number going forward.

    Thirdly, and related to the above point, is the cost of fuel. Petrol was up 3.4% in January, and we know that it is going to be up again in February, and most likely in March. The tailwinds to the inflation number towards the end of 2010 of a lower oil price, and stronger rand have disappeared. We think that there is a higher probability that the rand will be weaker than current levels and oil will be more expensive in US$ at the end of the year than the other way around.

    While petrol only contributes 4% to the inflation basket, the second round affects are a lot bigger – i.e. cost of food goes up because it costs the farmer more to farm his land and deliver his produce, etc.

    Investors should be aware of these risks. With South Africa being a small open economy, we are very susceptible to inflation shocks, and should therefore factor this into our decision making process.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2011-02-17, 18:45:29, by Mike Email , Leave a comment

    US debt near the current limit

    Obama is looking to reduce the government fiscal deficits. The deficit for the current fiscal year is set to be at a record $1,6 trillion up from $1,4 trillion. The Obama administration is hoping to reduce this to below billion dollar deficits in future years, but this is never easy.

    The chart below reflects the annual fiscal deficits (a few years at the turn of the century posted small fiscal surpluses) plus the current forecast to 2020.


    Source: US Treasury

    As cumulative debt increases so does the debt bill. According to the 2011 budget, the interest expense is set to reach $554 billion in 2015.

    Importantly fiscal deficits must be met from the US Treasury issuing more and more debt. The government is allowed to increase its debt level to the maximum agreed ceiling. The US government must negotiate with Congress to set the maximum debt ceiling from time to time.

    Over the years this ceiling has been ratcheted upwards. The debt ceiling is currently at $14,294 trillion – set on the 12 February 2010. Actual debt is now close to $14,1 trillion and so the current limit is due to be reached in the next few months. The debt level was at $10,6 billion when Obama took office.

    See chart below of the growth in the US total public debt and the stepped up ceiling. In 10 years it has more than doubled from $6 billion.

    Source: US Treasury

    The US government understands that it has some challenges with respect to its debt including:

    • Reliance on foreign ownership of its Treasure Debt – largely the Chinese government
    • A large portion of the outstanding debt matures in the years 2012 to 2015, which needs to be refinanced.

    These are some of the fundamental issues that investors need to be aware of when they invest into government bonds. Seed's view is that global government bonds are generally on the expensive side and subject to capital loss as interest rates move up.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2011-02-14, 16:37:06, by ian Email , Leave a comment

    Mirror, mirror on the wall - who is the fairest of them all?

    Well as far as the JSE is concerned this depends, but a big chunk of our subscribers hunt down reasonably valued income shares with fevour and such companies that have consistantly grown dividends for at least 5-10 years and are currently going at a discount to their recent highs are always a favourite. Our reporting system shows this screen is run the first thing every morning by 80% of our subscriber base, and just after a correction, or when we have issued some general market buy signals, the screen reaches fever pitch. This is what our subscribers would have seen yesterday...

    The "HI" column shows discount to more recent highs. You can see some juicy numbers here like GRF down 21.5% and LEW down 13%. The "PVM" shows the PowerStocks Valuation metric which is a combination of the shares' P/E, Price/Book and Price/Sales numbers to derive a feeling for if the share is undervalued or overvalued. None of the shares above are overvalued and in fact GRF and TPC are undervalued. The historic dividend yields are not too shabby, with the average for the above group at 4.61% ("Yield" column.) Remember, these shares have not only demonstrated at least 5 years of consistanet dividend payments, but consistant dividend growth. So the 4.61% has a high degree of confidence. In fact the above group have consistantly grown dividends an average of 24.3% compound per annum!

    In addition our research shows that those baskets of shares that have consistantly increased dividends for at least the last 5 years (10 reporting periods) comprehensively out-perform the general market from BOTH a capital gains and income perspective. (If you would like a sample of such research, then email us.)

    The green encircled ticks in the "V" column are alerts that certain counters are displaying strong trough-reversal characteristics - an invitation to try your luck. The others may still have some downward momentum.

    If this style of investing and trading appeals to you, come and see our 6-hour training and live tutorial in the Sharenet nationwide seminars or alternatively read more on our page on Sharenet.

    Dwaine van Vuuren
    PowerStocks Equities Research
    www.powerstocks.co.za

    Permalink2011-02-11, 16:21:06, by dwaine Email , Leave a comment

    The outlook for longer term interest rates

    Long term interest rates are typically a good predicator of market sentiment. These rates are closely followed and so it was interesting to see BCA Research make the comment yesterday that, “The recent breakout of the U.S. 10-year Treasury yield above 3½% is an important technical signal, highlighting that the macro backdrop is increasingly turning against the bond market.”

    Chart US 10 year Treasury yields


    Source: Yahoo

    Short term interest rates are driven by central banks to either stimulate or curtail growth and inflation, while longer term rates are a clearer reflection of where the market sees inflation over time.

    At major turning points the combined market has been wrong. 30 years ago US bonds were yielding 15% as lenders banked on high inflation. As US inflation trended down, so lenders adjusted long rates down in sympathy.

    Now we are arguably at another inflection point. Should inflation prove to be difficult to contain, long term interest rates will have to continue to steadily adjust upwards. It will never be in a linear fashion, and so while there will be opportunities on a tactical basis, there is a good probability that this will not be the case strategically.

    Graph: real effective funds rate


    Against a likely backdrop of higher future inflation, the valuation of global bonds is not attractive, given that they love a low inflation or a steadily declining inflation environment.

    The chart presented by BCA Research clearly indicates how the US quickly moved to negative real interest rates in 2008 in a direct attempt to pump liquidity into markets. There was a degree of normalisation in 2009, but as inflation started picking up in 2010, while at the same time that the US maintained near zero interest rates, the real rates turned negative again.

    Despite the inflationary concerns across the developed market’s three main central banks, i.e. the US Federal Reserve, UK’s Bank of England and Europe’s, European Central Bank, are likely to hold rates at low levels until early 2012. There is an outside chance that the Bank of England jumps the gun in 2011, given its high inflation numbers.

    Source: Wells Fargo Securities

    If you are an investor that shares these views of higher inflationary pressure into the future, it is important to assess the composition of your asset allocation.

    If you would like to set up a time to meet in order to discuss your portfolio and its positioning, please don't hesitate to contact us.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2011-02-10, 16:47:20, by ian Email , Leave a comment

    Outlook for global bonds

    Long term interest rates are typically a good predicator of market sentiment. These rates are closely followed and so it was interesting to see BCA Research make the comment yesterday that, “The recent breakout of the U.S. 10-year Treasury yield above 3½% is an important technical signal, highlighting that the macro backdrop is increasingly turning against the bond market.”

    Chart US 10 year Treasury yields


    Source: Yahoo

    Short term interest rates are driven by central banks to either stimulate or curtail growth and inflation, while longer term rates are a clearer reflection of where the market sees inflation over time.

    At major turning points the combined market has been wrong. 30 years ago US bonds were yielding 15% as lenders banked on high inflation. As US inflation trended down, so lenders adjusted long rates down in sympathy.

    Now we are arguably at another inflection point. Should inflation prove to be difficult to contain, long term interest rates will have to continue to steadily adjust upwards. It will never be in a linear fashion, and so while there will be opportunities on a tactical basis, there is a good probability that this will not be the case strategically.

    Graph: real effective funds rate


    Against a likely backdrop of higher future inflation, the valuation of global bonds is not attractive, given that they love a low inflation or a steadily declining inflation environment.

    The chart presented by BCA Research clearly indicates how the US quickly moved to negative real interest rates in 2008 in a direct attempt to pump liquidity into markets. There was a degree of normalisation in 2009, but as inflation started picking up in 2010, while at the same time that the US maintained near zero interest rates, the real rates turned negative again.

    Despite the inflationary concerns across the developed market’s three main central banks, i.e. the US Federal Reserve, UK’s Bank of England and Europe’s, European Central Bank, are likely to hold rates at low levels until early 2012. There is an outside chance that the Bank of England jumps the gun in 2011, given its high inflation numbers.


    Source: Wells Fargo Securities

    If you are an investor that shares this view of higher inflationary pressure into the future, it is important to assess the composition of your asset allocation.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2011-02-09, 17:30:27, by ian Email , Leave a comment

    Another look at commodities

    Commodity price rise – both a market positive and a market risk.

    For a country such as SA, which is commodity rich, the ongoing rise in the price of many commodities is generally seen as positive.

    At the same time on a global basis, many investment strategists are citing this ongoing inflationary rise in prices as the single biggest risk for markets. Rising inflation demands higher interest rates.

    While there is some concern that many emerging markets are not being enough in raising interest rates, so far India, Indonesia, Thailand and South Korea have raised their interest rates this year.

    China

    Also China today announced an uptick in its core interest rates for the third time in four months. The People’s Bank of China announced that it would raise the one year deposit rate by 0,25% to 3% and the lending rate by 0,25% to 6,06%.

    This had a dampening effect on global markets, but at these early stages it is not enough to turn the more bullish sentiment.

    Global money supply

    Is there is direct link between global money supply and rising commodity prices? We do know that the liquidity created around the world post the 2008 financial crisis was on an unprecedented scale. Now 2½ years later we are seeing the aftermath of this liquidity in rising prices.

    The chart below reflects the exponential rise in country reserves, including the current $2,4 trillion on the balance sheet of the US Federal Reserve.

    Chart - global reserves


    Source: Ecowin

    Various commodities

    BCA Research put out a note saying that at $100/barrel, the higher price of oil is not yet having a negative impact on the demand for oil and they are still bullish on energy shares. Locally there is really only one direct recipient of higher oil prices – Sasol – the coal and gas to liquid company.

    Sasol has a market cap of R240 billion. The company announced at the beginning of February that its expected half year results to December are estimated to increase by 17% to 27%. For the full year to June Inet have broker consensus earnings up 13,6% in 2011, 20% in 2012 and 16% in 2013.

    BCA Chart : Oil spend as a percentage of Nominal GDP


    The demand for oil is still strong, given factors such as :
    • The demand from China which is growing as it transitions into a “car economy”;
    • Vehicle miles in the US are growing;
    • Sales of SUV and light trucks have reaccelerated

    At the same time as the chart above indicates the global energy consumption as a percentage of GDP remains below the 2008 high.

    According to their findings, energy prices are sustainable at today’s prices and are set to move higher.

    Chart wheat price

    Chart sugar price

    Chart copper price

    Commodity companies on the JSE

    With the large weighting of Anglo American, Billiton and Sasol in the overall market, the weighting to the Resource sector for the JSE All Share index has always been high.

    At certain times, the resource index has moved sharply away from the overall index, as we saw in 2007 /2008. Over time investors in the more volatile resource sector have been rewarded, but it is not that clear whether this additional return has been commensurate with the additional volatility sustained.

    Because the large companies, Anglo American and Billiton are essentially global companies, the two main drivers for local investors are the profitability of their basket of commodities plus the impact of the currency relative to the US dollar, which is the currency commodities are priced in.

    Resource index relative to JSE All Share index from January 2000

    An ongoing rise in commodities together with some rand weakness could translate into a double whammy for locally listed resource shares.

    Regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2011-02-08, 16:47:39, by ian Email , Leave a comment

    We have ignition

    We maintain many quantitative timing models for our subscribers,to allow them to trade swings in the market. We also have "Buy on the dip" models we maintain for our longer-term investor subscribers and smaller funds, to allow them to manage the risk of JSE entry. These are far less frenetic than the trading systems and sometimes give bull-market signals only once every 150 days. A few days back, one of the models awoke from a 6 month slumber to give an entry signal as shown in the signal chart below:

    This is a system we invented specifically for regular funds deployment as it has various risk ratios from 90% confidence signals to 70% confidence signals and generates about 1 signal per month on average. The signals it generates depends on the "swings" of the yellow index from low thresholds through to higher thresholds as shown in the above chart.We call this the "slingshot effect". The 90% confidence signals are shown as orange vertical bars and as you can see they are much less frequent than the lower confidence signals.

    The yellow index is our own JSE breadth metric that measures on a daily basis, the percentage of JSE shares and ETF's making new short-term highs or breakouts. Corrections are characterized by this index slumping to low-watermark levels (with the lower dotted line demarcating extreme selling pressure). But if within 10 days the index "slingshots" up to certain higher values (the upper dotted line represents rush-buying), you have superb trough-reversal markers to help you manage the risk of funds deployment. There have only been sixteen (16) "90% confidence" signals in the last 7 years, as depicted below:

    It is not perfect (it got caught in the Jul 2008 bull-trap, as did most quant systems) but it is damn close. It may not detect all "great-troughs" (that is why we run multiple systems to catch them all) but the actuarial table below for various holding periods shows stunning performance for a 20-day holding period. Acting on these signals by just investing in an instrument that tracks the TOP40 (such as SATRIX40 or ALSI Futures)and holding for 20 days delivers 93% success (7% of trades were losses) and an eye-watering gain-to-loss ratio in excess of 100-to-1 (100 points gained for every point lost).The expected gain for such an operation would be 5.1%

    As always, systems are just that - systems - and they can be imperfect and whilst a 7 year track record of 16 signals may yield a historical 93% success rate, that is no guarantee signal number 17 wont be a dud! For this reason normal position sizing and risk management rules would apply to these trades/entries regardless of the historical performance.

    If you are interested in more systems like the above for timing the markets, from investment systems to more rapid trading ones that also give exit signals on the above entries, then book and come and see us at the Sharenet National Seminars. You can also read more about us and our systems at the Sharenet PowerStocks Landing page

    Be safe out there...
    Dwaine van Vuuren
    Founder & CTO, PowerStocks Equities Research
    www.powerstocks.co.za

    Permalink2011-02-04, 13:51:07, by dwaine Email , Leave a comment

    Investing When Markets are Volatile

    There is no doubt that one of the greatest destroyers of long term value to uneducated investors is volatility in the market. Educated investors, however, realise that volatility should be treated as a friend. It is Warren Buffett’s adage that you should be greedy when other investors are fearful and fearful when other investors are greedy. In times when other investors are greedy they look over potential problems, and when they’re fearful ALL that they can see are those potential problems.

    You may be asking how you, as an investor, can use volatility as your friend?

    There is an index on the JSE called the SAVI (South African Volatility Index) which essentially measures the implied volatility in the market at any given point in time. (As an aside the index is calculated by working out the cost of options on the market. The cheaper the option is, the less volatile the market is assumed to be, and vice versa). When investors are fearful we see the index going up, and when they are complacent it generally goes down.

    Over short periods (two months used in the chart below) we can see that the performance of the ALSI (red in the chart below) is inversely related to the level of the SAVI (blue) which is fairly intuitive. This isn’t much use as an investor though, as the market has already fallen as the volatility has risen. It does make a nice chart, but that’s about it!

    Far more insightful is to track the market return over a longer period (in this case I’ve used 2 years) AFTER the SAVI has hit a high level (I used 35) and what it has been after it has hit a low level (I used 20). The chart below shows what the investment outcome would have been.


    A few things to notice:
    • 2 year returns after high volatility have been good
    • 2 year returns after low performance have been poor
    • The SAVI was only started in February 2007, and therefore doesn’t have a long track record
    • The SAVI is only above 35 or below 20 for a small percentage of the time

    The third point is important and raises an important caveat to this analysis. In an extended bull market investors could very well see good performance from low volatility levels. Equally, in an extended bear market a starting point of high volatility might not necessarily generate great returns. Nonetheless this could be an interesting tool to investigate to compliment valuation work.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2011-02-03, 18:21:34, by Mike Email , Leave a comment

    Commoditie prices

    These have been on the rise for some time now, due to both fundamental (supply and demand) and monetary (global money supply) reasons. Numerous macro and micro fundamental reasons come into play, including geopolitical issues such as political unrest in Egypt, weather issues experienced across the globe, which disrupt supply and strong demand from a growing China.

    What are commodities?

    These are essentially substances that come out of the ground and generally maintain a universal price. Typical is gold, copper and sugar.
    A characteristic of a commodity is that its price is determined as a function of the market as a whole and with most commodities this includes both a spot price and a futures price.

    While there are innumerable fundamental factors impacting prices, research has revealed that there is a significant negative relationship between commodity prices and interest rates across all commodity prices. I.e. lower real interest rates correlate with higher commodity prices.

    There are various classifications of commodities, but for purposes of producing an index, the Commodity Research Bureau - CRB - segment commodities into 6 sub categories, each of which contains underlying constituents as follows.

    • Energy, which includes crude oil, natural gas
    • Grains, which includes corn, soybeans, wheat etc.
    • Industrials copper and cotton etc.
    • Livestock, comprising cattle and hogs etc.
    • Precious metals, includes gold, platinum, silver
    • Softs include cocoa, coffee, orange juice and sugar etc.

    Jeremy Grantham from fund manager, GMO, made some comments on their thoughts on commodity prices.

    “I fear that rising resource prices could cause serious inflation in some emerging countries this year. In theory, this could stop the progress of the bubble that is forming in U.S. equities. In practice, it is unlikely to stop our market until our rates have at least started to rise. Given the whiffs of deflation still lingering from lost asset values, the continued weak housing market, weak employment, and very contained labour costs, an inflationary scare in the U.S. seems a ways off.”

    He goes on to say that “The complicating point is that in the recent few years, commodities seem to be making a paradigm shift. If this is so, it will be the most important paradigm shift to date. The bad news is that paradigm shifts cannot, by definition, be described well using history. It is all about judgment.”

    The CRB index

    Selected commodity prices, relative to the S&P500
    Palladium, silver, Brent crude, gold, copper and platinum

    The charts above clearly demonstrate the firm prices over the last 12 and 24 months.

    So despite the very firm gains, we are likely to see more of the same in the year ahead. Naturally this is positive for a country such as South Africa which exports metals and some agricultural products, but at the same time the rise in oil and food prices is starting to come into the inflation numbers.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2011-02-01, 17:18:35, by ian Email , Leave a comment