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    Measuring Market Volatility

    Markets across the globe came under pressure, reasserting the principle that capital invested is subject to short term risk of loss. As capital prices have been moving up, so investors have generally gained in confidence and optimism, and therefore been more and more willing to assume risk for lower and lower potential returns. This is apparent in the Chicago Board Options Exchange’s SPX Volatility index (or VIX for short).

    So what is this VIX?

    The VIX is a measure of volatility in the markets, and hence the current perceived riskiness of markets, but more accurately the US markets. It is actually constructed using the implied volatility of a wide range of S&P 500 index options. It is therefore forward looking as to the perceived riskiness or volatility in prices – up or down.

    So what is implied volatility? In pricing an option, the mathematical formula uses volatility or expected volatility. If a share price is very volatile around a mean price, then there is a greater range of outcomes in say 3 months or 1 year. Because there is a greater range of outcomes, the price of an option on this share will increase. Higher uncertainty carries a higher price.

    Conversely, if there is a very narrow range of expected prices around a mean, sometime into the future, then the price of an option on such a share will be lower.

    As traders and writers of options in the US become more and more confident of future prices, so they price in lower and lower future volatility into their options. It’s this future or implied volatility that the VIX index tracks. The volatility has been falling ever since 2002 and indeed the index reached a low in December.

    The VIX is expressed as an annual percentage, so a VIX of 15 means that the market is expecting a 15% change in price over the next year. At peaks in investor uncertainty it has traded almost up to 50%, coming down to around 11, but now up to 18/19 level.

    Now as the riskiness is priced back in, so the implied volatility increases. This happens very quickly. On Tuesday the index jumped a record 64% as markets across the globe came under pressure. Investors and traders buy puts at any price, paying up for increased volatility and its this increase in implied volatility that the VIX measures.

    Local markets ended down on the day, but off their lows. Volumes remained high and the breadth was negative with 384 shares down against 129 shares up. Perhaps its just a breather in the continuing upward trend, but I believe increased risk premiums are good.

    Investors are naturally cautious. Its exactly at times like this, that its so important to have an investment plan that will take a longer term view, but more importantly, look at proper asset allocation and likely outcomes for retirement depending on your circumstances.

    I get calls saying Ian, should I sell now, or should I buy now. This is not really appropriate, except for traders and they should be making their own calls. As advisors we will come alongside serious investors, work on an investment plan, construct a portfolio, report back monthly, and guide an investor to and through retirement. We avoid all sorts of product gimmicks.

    Start the new financial year by appointing an investment advisor who can assist you in working on an investment plan.

    Kind regards

    Ian
    ian@exsequor.co.za

    Permalink2007-02-28, 17:20:26, by ian Email , Leave a comment

    Short Term Insurance companies

    Last week I spoke about certain shares that have benefited from the stock markets gains. Included in this list are the insurance businesses. In South Africa there are 2 big ones, Santam with a market cap of R11,8 billion and Mutual and Federal with a market cap of R8 billion.

    Mutual and federal reported its annual results at the beginning of February, while Santam reported results today.

    Short term insurance businesses have proven to be fantastic business models over longer periods of time. They are in the business of pricing risk, and if successful, benefit not only from the margins charged, but more importantly from the money earned on what is termed the float. The float is the cash flows from insurance premiums retained by the business a period of time, before paying out by way of insurance claims.

    The insurance company puts the float to work, and all investment income generated on this capital is for its own account. Over time, and given sound management of the capital, its starts to earn far more on its accumulated capital, than annually on underwriting.

    The underwriting cycle goes through peaks and troughs, but typically in South Africa, despite the high payouts, the insurance companies are generating positive margins. Santam’s margins from insurance activities declined from 11,4% to 8,8%.

    But because of higher float (gross premiums were up 12%), the company could generate a 16% higher return on what it calls its insurance funds.

    Then the company has accumulated over the years, R5,5 billion in share investments and R2,1 billion in debt investments. Because of the excellent gains in local assets, it generated a 24% increase in income from these assets. This was despite a reduction in its capital with a R762m special dividend.

    The result has been a share price that is now at R101, against a net asset value underpin of R56,34/share. It’s probably expensive now. The share price was cheaper when it traded at a premium of just 20% to net asset value.

    Santam now has a high solvency ratios, in excess of its requirements, and therefore to retain high returns on equity is looking at buying back 10% of its issues shares, by way of a voluntary repurchase offer. The offer is at R102 excluding the dividend declared of 262c/share.

    At the same time Sanlam intends to make an offer to acquire excess shares tendered by Santam shareholders – subject to their holding not going beyond 80% level.

    And at the same time a scheme of arrangement will be proposed to facilitate a BEE deal, which will see Santam shareholder obliged to sell 10% of their shares at R82 per share.

    Now R82 is a great price to pay for this company trading at R102. Not really a great price to sell at, when it’s trading at R102.

    Minority shareholders, as with minority shareholders in Mutual and Federal, are likely to be quite vocal.

    That’s all for now. The market took some pain today, giving up some of the “easy gains”.

    Please feel free to contact us to discuss your investment planning requirements. Mail me on ian@exsequor.co.za

    Kind regards

    Ian

    Permalink2007-02-27, 17:34:12, by ian Email , Leave a comment

    Old Mutual reports

    Accounting has made reporting complicated for many companies, but especially the large multinationals, operating across continents. Trying to understand the details provided takes some time and ability. The complexity has been compounded with the introduction of that concept called IFRS. Otherwise known as International Financial Reporting Standards.

    Looking at the results of Old Mutual for the year to end of December, its apparent that it will take the analysts some time to digest these numbers and get to the bottom of how well the group is doing.

    The company reported:

    Adjusted operating profit (IFRS basis) up 16% to GBP1,459 million.

    But adjusted operating earnings per share (IFRS basis) down 18% to 15,1p.

    It then also reported adjusted operating profit (European Embedded value (EEV) basis) up 22% to GBP1,687 million.

    So between IFRS and EEV the group is reflecting a difference of GBP228m. i.e. R3.1 billion of operating profit.

    On a per share basis, the company reports adjusted operating earnings per share (EEV basis), down 14% to 17,8p.

    It also reports basic earnings per share (IFRS basis) of 17,0p.

    With life companies there is a lot of emphasis on the intrinsic asset value, styled as the embedded value, and Old Mutual reflects this on an EEV basis declining from 174,0p to 157,2p per share.

    Many years back before life companies disclosed their embedded values, analysts placed a lot of emphasis on the dividends declared and the sustainability of these. Today Old Mutual announced that their final dividend is up 13,7% to 4,14p per share, which is approximately 58c in local currency. It said “Despite earnings being impacted by unfavourable currency translation impact, our strong financial position has enabled us to declare a final dividend increase of 13.7%.”

    The rand has depreciated against sterling, and so investors in Old Mutual have befitted from these results.

    The reason for the decline in profits per share and the embedded value per share is the large Skandia acquisition. The company is now very large with assets under management growing by 31% to GBP 239 billion at the end of the year.

    The share price has been climbing and today put on 3,96% to 2623c, a new high.

    Kind regards

    Ian de Lange
    ian@exsequor.co.za

    Permalink2007-02-26, 19:23:52, by ian Email , Leave a comment

    Weekly Wrap

    The budget week is always a big week for South Africans and this week was no exception. It’s difficult to calculate the effect of announcements on the market, but I believe that in fact its somewhat muted. The markets did not gain ground on anything in the budget, but on excellent corporate results, either announced or on their way.

    The week with only 3 days before the month end, the JSE ended on a reasonably high note. Excluding the effect of dividends, the JSE All Share index is up around 5% for the month so far.

    Some incredible gains have been made this month, including

    A 50% gain for Wesizwe for the month to around 680c.

    Comair up 32%

    CMH (Combined Motor Holdings) up 26% to 2395c

    Basil Read up 24% to 1765c

    The banking sector has come through with excellent numbers. The Bank index has gained around 5,5% for the month.

    Absa came through with excellent annual results with headline EPS up 23,8%. The price is up 1% today to R141.

    Standard Bank issued a trading statement on Tuesday announcing December headline EPS up between 18% and 20%. The share traded at a new high of R106.

    The JSE issued an updated trading statement saying that its headline EPS for the year to December should be up between 29% and 33%. The price hovered around R20 after listing in June 2006. Then it started up and the enthusiasm has not waned with the price now heading for R60. In late trading it was trading at 5590.

    The down and out Glenrand MIB announced today that it has revised its forecasts because of certain “amendments of estimates” and EPS should now be up around 310% to 330% for the 6 months to December. Headline EPS however are likely to be down 60% to 80%.

    Steinhoff has been a great success. It issued a trading update saying that for the 6 months to end of December, it expects EPS and headline EPS to be up between 25% and 30%. The price gained 4,3% today.

    The JSE All share index edged up to 26792, a gain of 0,35% on the day. Gold put on a further 1,76%.

    Bullion is up at $683/oz as crude oil is now trading at $60,3/barrel.
    That’s it

    Have a great weekend

    Kind regards

    Ian
    ian@exsequor.co.za

    Permalink2007-02-23, 17:41:14, by ian Email , Leave a comment

    Budget Review 2

    As mentioned in my report yesterday, I will be looking at a few more aspects of yesterday's budget announcement. Overall the budget didn't create as much fanfare as in previous years. Government has essentially created a robust policy, so now all that is needed is changes to account for fiscal drag (inflation effects).

    Some of the fiscal drag components of the budget included increasing the CGT exemption from R 12 500 to R 15 000, interest income is now tax free for the first R18 000 (R16 500 last year) for individuals younger than 65 and R26 000 (R24 500 last year) for those who are 65 or older.

    The ad valorem excise duties on car airons, domestic dish washers, sunglasses, and certain cameras/camera parts have, among other items, been eliminated. This should, in theory, make these items cheaper as importers pay less tax on them. In reality we'll probably see these prices staying at the same level for a bit longer.

    One of the big announcements was that as of 1 March 2007 no tax will be imposed on the interest or rental income of retirement funds, this is a reduction from 9% last year and 18% the year before. This will benefit individuals who have investments in such funds.

    Shares held for longer than 3 years will now be considered as that of a capital investment, and as such gains on disposal will be taxed at CGT rates. Another amendment to business matters is that STC will be replaced by dividend tax, and the rate will be decreased from 12.5% to 10%. This dividend tax will be converted from company to shareholder level as soon as certain international tax treaties have been renegotiated. It is expected that the tax will continue to be paid by the institution making the distribution. The distribution will be made on behalf of the recipient, resulting in the investor receiving a 'tax free' amount.

    After being increased from R750 000 to R2 000 000, the amount individuals are allowed to take offshore wasn't raised this year, but the government has relaxed restrictions by, among others, allowing for a rand futures exchange to be set up. This will allow those investors who've reached their full allowance to take a position on the rand, and thus increase their offshore "exposure". The exchange will be set up in such a way that investors will be unable to influence the level of the rand as each contract is a zero sum game. These transactions will happen on the Yield-X trading platform.

    All these changes should, to a greater or lesser degree, impact on your financial planning.

    Exsequor Investments assists private investors in calculating and determining their investment objectives, and then formulates an asset allocation and portfolio, looking at risk measurements and probabilities. If you would like to discuss such an investment plan in confidence, please mail Ian on ian@exsequor.co.za or call 021 551 1580.

    Hopefully this has helped you to make some sense out of the budget.

    Have a good evening.

    Kind regards
    Mike Browne
    mike@exsequor.co.za

    Exsequor Investments is an Authorised Financial Services Provider.

    Permalink2007-02-22, 17:17:35, by ian Email , Leave a comment

    Budget Review

    With Trevor Manuel making his 11th budget speech earlier this afternoon, it is fitting to have a look at some of amendments that have been made to the budget for the 2007/8 year that affect you.

    As has been the case over the last few years collections have exceeded budget. South Africa has a healthy economy and this, combined with a widening of the tax net, has allowed the Department of Finance the opportunity to ease the tax burden on most South Africans. So healthy have collections been this year that a budgeted deficit for 2006/07 this time last year has been revised to a 0.3% (of GDP) surplus, i.e. government has received more than they have spent over the past year.

    Income tax relief of R8.4 billion has been allowed by increasing the levels of the tax brackets. While not being as generous as previous years (owing to accelerated consumer expenditure) the brackets have allowed lower income earners to have a real reduction in income tax, while the top end earners will have a higher real liability (but still have a decrease in nominal levels).

    Nominal reductions are as follows (for persons under 65):
    R60 000pa 15%
    R120 000pa 9%
    R250 000pa 7.2%
    R500 000pa 4.3%
    R1 000 000pa 1.8%

    Those reductions in income tax could well be used to fund your 'sins' for the year. Sin taxes are up once again. A 340ml can of malt beer is up 5c, 750ml bottle of wine up 13c and 750ml bottle of spirits up R1.88. For those of you lucky enough to drink traditional African beer, there is no tax increase yet again, translating into a real decrease of 4.9% in price.

    Cigarette smokers will have to pay 60c extra for each pack of 20 cigarettes.

    With the general fuel levy increasing by 5c a litre and the Road Accident Fund levy by the same amount, vehicle owners will be paying 10c a litre more for petrol and diesel from 4 April this year.

    Dying won't be as expensive as before with the basic exemption for estate duty increasing from R2.5 million to R3.5 million from 1 March 2007, after increasing from R1.5 million on 1 March 2006. At the same time the annual exemption for donations tax is adjusted from R50 000 to R100 000 per annum.

    All these changes should, to a greater or lesser degree, impact on your financial planning. Exsequor Investments assists private investors in calculating and determining their investment objectives, and then formulates an asset allocation and portfolio, looking at risk measurements and probabilities. If you would like to discuss such an investment plan in confidence, please mail Ian on ian@exsequor.co.za or call 021 551 1580.

    We will discuss some of the other announcements in tomorrow's report. This is enough to digest for one day. I trust that there is something in the budget that will make you happy. Have a great evening.

    Kind regards
    Mike Browne
    mike@exsequor.co.za

    Exsequor Investments is an Authorised Financial Services Provider.

    Permalink2007-02-21, 17:45:31, by ian Email , Leave a comment

    The effect of Operational Gearing

    As the market has gained ground, so some investors have found increasing value in what I term bull market companies. These are financial services companies that derive a large portion of their income on funds that they manage, or on stock market activity. As the value of assets moves up, so these businesses have what is termed operational gearing.

    What is operational gearing and how does it impact these types of businesses? Well it’s the effect of fixed costs to variable costs. At the extreme if a company has no operational gearing, then its operating profit will rise in the same proportion as sales rate increased.

    However businesses that have a high fixed cost component, often have higher operational gearing, so that as sales increases, and as soon as fixed costs are covered, so more of the sales revenue drops straight to the bottom line, with a geared effect.

    Example:

    Company A has sales of R1m, variable costs of 70% and fixed costs of R0,2m. It makes R100 000 profit.

    Company B has sales of R1m, varibale costs of 80% and fixed costs of only R0,1m. It will also make a profit of R100 000.


    The businesses have the same profit. However in year 2, sales increase by 50%, the company with higher operational gearing (company A) makes more profit:

    Company A's operating profit will come in at R250 000, while Company B's operating profit at R200 000. This because company A has a higher fixed cost component.

    In some of the financial services businesses, we have seen the impact of operational gearing over the last few years, as a greater and greater percentage of top line sales growth falls to the bottom line.

    One of the examples is Peregrine. In March 2003, the markets fell to some fresh lows, but picked up strongly over the next 4 years. This business earned 27,4c headline earnings per share.

    At March 2004, it had gained slightly to 33,2c an increase of 21%. By March 2005 this was up 63% to 54,1c and March 2006 this had escalated to 106% increase.

    The interims to September had slowed down to a 55% improvement in earnings, and so the benefits of operational gearing may now start to slow down. Still it’s been impressive, with equally impressive gains in the share price.

    Clearly they are not the only company or type of industry benefiting from operational gearing. Its one of the reasons why some companies are reporting big gains in bottom line earnings, which in turn is helping to sustain prices at these valuations.

    The JSE Mid cap price to earnings ratio is at 16,3 times

    The JSE All Share index is at 17,3 times

    A lot of the good numbers are in the valuations. While these PE ratios are high, as companies report, so the PE multiple will steadily drop – all things being equal.

    Exsequor Investments assists private investors in calculating and determining their investment objectives, and then formulates an asset allocation and portfolio, looking at risk measurements and probabilities. If you would like to discuss such an investment plan in confidence, please mail me on ian@exsequor.co.za or call 021 5511 580.

    Kind regards

    Ian

    Permalink2007-02-20, 17:51:18, by ian Email , Leave a comment

    Two common investment mistakes

    Kenneth Fisher is a US based money manager and has been a very longstanding columnist for Forbes magazine. He always has a unique angle, but by and large he has been a bull through the markets and has therefore benefited over time. He has published a book and also released a short guide called Eight Biggest Mistakes. I will discuss a couple of these today.

    He notes mistake number 1 as Underestimating the time horizon for your assets.

    His view, which has a lot of merit, is that most investors are far too conservative in estimating the length of their lives, which is a big problem when it comes to planning financial future. Clearly the cost of healthcare escalating sharply over time combined with people living longer lives, has a big impact on the type of financial plan that needs to be put into place.

    Following on from this is mistake number 2 - misalignment of investment objectives and portfolio strategy. Let’s look at what is the objective.

    For most investors, their investment objective is to work towards generating a sufficient retirement capital base, which into retirement years can provide a sufficient and growing increase stream.

    That’s perfect, but the question then is this. Does the portfolio strategy match this objective? Many times no, it does not. The main reason is that the portfolio strategy is too focused on short term risks, while ignoring the BIG long term risk. Short term risk is prices moving down, while long term risk is often underestimated. Long term risk is generating sub par returns from a portfolio that may be too conservative.

    Do Investors have an investment objective in the first place?

    Most investors don’t have a proper investment objective. They follow tips, recommendations, sometimes take the advice of salesman, open investment accounts, buy speculative assets, get disillusioned quickly, save for a while etc, but often with no overriding plan of action.

    With both property and equities performing so well, investors may be lulled into thinking that they don’t need a long term plan. But they will, as soon as prices start to get a bit rocky.

    The JSE traded at a new high on Monday. Volumes were high, but lower than normal due to US markets closed. It’s been a very good run, and so while investors are feeling comfortable, they should use this opportunity to get down to some serious planning.

    These 2 main common mistakes are not unique to US investors. They are commonplace, but unfortunately the long term impact is big, because of the effect of compounding. If you would like to start a process of getting an investment plan into place, and then looking at portfolio management to match the objectives, please contact us by e-mail. ian@exsequor.co.za

    Kind regards

    Ian de Lange
    082 921 0220

    Permalink2007-02-19, 18:01:22, by ian Email , Leave a comment

    Looking for Value in this Market

    It’s always interesting chatting to asset managers and getting various views, not only on the market, but more importantly their approach and philosophy to investing. Today I spent some time with Cannon Asset Managers. They have a strong value bias and produce a very interesting annual study, aptly titled Diamonds and Dogs.

    It’s an ongoing study that the chief investment officer, Dr Adrian Saville, has been doing since 1996, with some outstanding results.

    Very simply at the beginning of each year, he selects the 3 cheapest shares from each main sector that has at least 6 shares. The criteria are low price to earnings ratios. The price of these shares is noted and they are all put into a notional portfolio. This portfolio is known as the Dog Portfolio. These are shares that display characteristics of value.

    Likewise the 3 most expensive in terms of price to historical earnings are selected from the main sectors and these are put into a notional portfolio, known as the Diamond Portfolio. Typically these shares are more flavour of the month, glamour shares, and the portfolio classified as a type of growth portfolio.

    These portfolios are rebalanced annually, such that both portfolios are valued at the end of the year, and on the 1 January, a new Dog and Diamond portfolio established on the same criteria. The annual performance is calculated.

    Over the 11 years, the portfolios have held an average of 47 shares, a total of 522 dog shares and 522 diamond shares. Then comes the interesting part, comparing the returns to the index and to each other.

    Over the period 1996 to end of 2006, a passive investor in the Financial and Industrial index would have achieved an annual 14,71% per annum, including dividends. However an active investor holding the shares in the diamond portfolio, and switching out each year to a new diamond portfolio, would have underperformed, achieving an average of just 11,66% per annum.

    The winners are the Dogs. This portfolio of low price to earnings shares would have achieved an annual average of 25,75%, more than double the average of the diamond portfolio.

    Compounding the results over the relatively short 11 years makes the final numbers even more impressive. There were some negative years for both portfolios, but the impact was less on the Dog portfolio, which is testament to the deep value bias of the portfolio.

    The manager concedes that there are some constraints including liquidity issues. In other words large portfolios would not be able to buy some of the smaller cap shares proposed in the Dog portfolio. Nevertheless the study is comprehensive and will be updated annually.

    With the overall market trading at expensive levels, investors need to try and identify value and value managers. This will produce superior results over time, with lower risk. It may not be the most glamorous approach, but it’s been proven over an over to be the superior approach. Exsequor Investments provides investment management to private clients. If you would like to view a copy of our value proposition, which also details our investment philosophy, please mail me on ian@exsequor.co.za

    Have a great weekend

    Regards

    Ian
    ian@exsequor.co.za

    Exsequor Investments is an authorised financial services provider.

    Permalink2007-02-16, 17:26:07, by ian Email , Leave a comment

    Interest rates remain unchanged

    While those people following the MPC (Monetary Policy Committee) statement live had to wait until the end of the announcement to receive confirmation of the interest rate decision, the average person is essentially interested in only one bit of news.

    The result of two days of meetings, concluding at 3pm today, was that the repo rate will remain unchanged at 9%, meaning that prime will stay at 12.5%.

    For those people who are interested in a look at the announcement I have summarized it here. The full transcript is available at www.reservebank.co.za.

    Mr Mboweni started off by mentioning that the inflation outlook had slightly moderated since the December meeting as a result of moderating food price inflation (down from 9.4% in October 2006 to 7.7% by year end) and lower international oil prices (petrol inflation for the year to December was 5.8%).

    CPI-X inflation for the 2006 averaged 4.6%, up from 2005's 3.9%, but still comfortably within the 3-6% inflation target band. Year-on-year inflation was slightly higher than the annual figure for the final quarter of 2006, at 5%, but the MPC no longer expects it to breach the upper limit of the target, forecasting a peak of 5.6% in the second quarter this year and to average 4.7% by the end of 2008.

    While wage inflation was above the target (6.5% in 2006, 6.3% in 2005) an allowance for improved labour productivity brings these numbers in line with the target. The domestic economy also shows signs that growth momentum has been maintained with manufacturing output and mining production both up nicely for the quarter.

    Over the period since the last meeting the rand has been relatively stable against major currencies. It started at R7.10 to the dollar and is currently trading at R7.20, much volatility against the green back has been due to movements of the dollar versus other currencies.

    Mention was made that current account deficit may have widened significantly in the fourth quarter, but Mr Mboweni emphasized that the MPC doesn't have a target for the current account. Strong flows into the country have made up for the gaping deficit. Non-resident purchases of South African bonds and equities totalled R108 billion in 2006 as a whole, compared to R41 billion for 2005, with a net R5.1 billion this year so far!

    Note was made that the strong pace of household consumption growth was still a concern to inflation, but that the lag between implementing the 200bps increases last year made it difficult to ascertain whether the effect was still to be felt (with expenditure growth slowing).

    Reference was also made of the strong growth in asset prices, notably share and house prices, and that credit growth continues strongly.

    After trading at record highs in the morning the market sold off some of its positions, moving down, and remaining fairly quiet until the announcement was made at 3pm. There was an immediate spike, both in direction and volume traded, with the ALSI moving up 0.5% (126 points) within half an hour of the SARB's decision being made. Validating the assertion that asset prices are inversely related to interest rates.

    I trust you will sleep well, knowing that your home loan repayments won't be going up (at least until the next meeting).

    If you want to sleep even better, Exsequor Investments assists clients with their investment planning requirements, providing a holistic and ongoing investment management service. If you would like to find out more, or how we can assist, please don't hesitate to contact Ian at ian@exsequor.co.za

    Kind regards,

    Mike Browne
    mike@exsequor.co.za

    Exsequor Investments is an authorised financial services provider.

    Permalink2007-02-15, 18:25:02, by ian Email , Leave a comment

    What Wall of Worry?

    The JSE moved up very strongly to new highs as global markets, provided impetus. There is a saying that bull markets climb a wall of worry, but currently there seems to be no worries out there. Prices are going up and investors are clamouring. Yes over the last few years, there have been some large pullbacks, worries set in and the bull continued.

    One US commentator on the notion that bull markets climb this so called wall had this to say. “Bull markets DO NOT climb a wall of worry...bull markets climb a wave of ever-increasing comfort and speculation. “

    Yes maybe this is more accurate for the South African market. Prices move up and so more and more investors get comfortable and invest. As in the US, for so long now, it’s been a case of buy in the dips and wait for the inevitable rebound.

    I have mentioned the global liquidity as being a major driver of prices and how this also has had a self reinforcing effect. We continue to see evidence of this boom, as its played out in company profitability.

    Today Truworths announced headline EPS up 37% for the interim.

    Distell Group announced headline EPS up 59,3%.

    Sabvest trading statement saying that headline EPS should be up 138%

    Advtech trading statement saying that headline EPS should be up 38% - 48%

    Liberty International adjusted EPS up 14%

    The JSE powered up to a new record high in nominal terms at 26311, a gain on the day of 1,1%.

    Over R10 billion was traded on the JSE with 288 shares up against 138 shares down in price.

    All global markets moved up on the day.

    Its great for existing investors. The difficulty is for investors coming into the market or needing to provide income streams from a retirement fund capital base. This is where some form of capital protection is required.

    We assist clients with their investment planning requirements, providing a holistic and ongoing investment management service. If you would like to find out more, or how we can assist, please don’t hesitate to contact me. E-mail on ian@exsequor.co.za

    Sincerely

    Ian de Lange

    Exsequor Investments is an authorised financial services provider.

    Permalink2007-02-14, 17:23:32, by ian Email , Leave a comment

    A possible interest rate move this week

    Tito Mboweni and his team will start their meeting on Wednesday and through Thursday, scouring over reams and reams of numbers and data. Their job will be to try and accurately analyse that data and come to a conclusion: Will rates go up, stay the same, or come down? And if there is a change, what should the magnitude be?

    This seems like a simple decision, but the work going into deciding what to do is immense.

    One can safely assume that rates won’t be coming down after this meeting, with consumer spending still at record highs, and still increasing (although at lower rates). One can also be pretty sure that the magnitude (if rates are increased) will be 50 basis points (bps, 0.5%). The Governor is tasked with altering monetary policy in such a way that it doesn’t alarm the various stakeholders and this is generally done by being gentle with interest rates.

    With South Africa’s rates structurally higher than most developed countries, we don’t have the luxury of making 25bps movements, as this will be too small to have the desired effect. Conversely a 100bps shift will send the wrong signals to the market. This would be conceived as a fairly aggressive move, and should only be used when it is patently clear that an aggressive shift in rates is needed.

    Now that you know what won’t happen when Tito makes his announcement, let’s look at the two likely outcomes and what they imply.

    A 50bps hike will indicate that consumption is still increasing at levels that are too high, and the country is under significant inflationary pressure (remember the Reserve Bank’s mandated to keep inflation between 3% and 6%, and we are currently at the upper end of that band). The hike will attempt to cool expenditure, and as such asset prices may come under pressure, although the increase in yield should be advantageous for the exchange rate.

    No change in rates will show that the SARB believes that consumption is slowing enough with current levels of interest rates, and that we should remain within our inflation target range. Any economic policy has a lag from implementation to when the effects are felt, and they may want to take a break, and see if the four increases (200bps) implemented throughout last year are having an effect. Note that no change in the rate doesn’t necessarily indicate a change in policy, or that we have reached the top of the interest rate cycle. It merely indicates that there is no clear sign that rates should be increased.

    Many external factors influence where rates should be, and an easing oil price is one that would tend to favour a rate pause. These kinds of factors are out of the Governor’s hands, so he needs to forecast where he thinks they will go, taking into account factors such as the potential likelihood of a war in Iran, or strikes in Nigeria, or a coup in South America. These kinds of considerations are taken into account for every variable, and so we must remember when he announces what is happening to interest rates, that it isn’t a ‘thumb suck’ and that a great deal of work has gone into it.

    We should also remember that the SARB has South Africa’s best interests at heart when making these decisions.

    Economists are currently divided as to whether rates will remain the same, or increase. Let’s see what happens Thursday afternoon.

    Exsequor Investments assists clients with their investment planning requirements, providing a holistic and ongoing investment management service. If you would like to find out more, or how we can assist, please don’t hesitate to contact Ian at ian@exsequor.co.za

    Have a good evening.

    Mike
    mike@exsequor.co.za

    Exsequor Investments is an authorised financial services provider.

    Permalink2007-02-13, 18:12:36, by ian Email , Leave a comment

    A Different Perspective

    While the South African investment returns have been very good, some believe that the story has yet to be told to global investors. John Mauldin is a US based writer and commentator on global markets as well as promoting hedge funds. I have read his writings over the past few years and his 2 published books. He has typically taken a more conservative view of the global markets over the last few years, but this week waxed lyrical about South Africa.

    Some of the issue he raises as important, I have also expanded on. These include

    • Investors are currently facing a world of low yields and high valuations.
    Developed world markets are generally in the top 20% of the long term highs in terms of valuation. Prospective returns from a high valuation scenario are normally lower than normal to compensate.

    • The world is awash with cash and looking for a home.
    This goes hand in hand with point 1 above. Excess liquidity creates high valuations.

    • Investors may now be measuring risk accurately.
    In order to achieve higher yields, investors have been risk seeking. Taking on risk is acceptable where one is more than compensated, but not when prospective returns are low.

    In this weeks article, after having spent 10 days in South Africa as a guest of Plexus, John Mauldin waxed lyrical about the country, its people and prospects.

    Some highlights

    • Construction everywhere
    • Johannesburg is a world class city on a par with New York or London or any major city in terms of facilities, shops, infrastructure … and traffic.
    • Durban is tropical jewel on the Indian Ocean.
    • He loves Sydney, Vancouver and San Francisco, but for his money, Cape Town is the most beautiful city he has been to.
    • Restaurants are top class and cheap in world standards.

    His view is that with the inevitable demise of subsidies to farmers in Europe and across the US, and with growth in demand for food from China, Africa will have to step up to the plate in being the breadbasket for much of Asia.

    Clearly upbeat about long term prospects, despite also highlighting the issues of crime and corruption.

    As if on cue, despite weaker global markets, the local JSE moved up 153 points or 0,6%, with gains from resources helping the overall market.

    We assist clients with their investment planning requirements, providing a holistic and ongoing investment management service. If you would like to find out more, or how we can assist, please don’t hesitate to contact me. E-mail on ian@exsequor.co.za

    Sincerely

    Ian de Lange

    Exsequor Investments is an authorised financial services provider.

    Permalink2007-02-12, 17:30:53, by ian Email , Leave a comment

    Weekly Wrap

    Friday ended strongly, but off the highs. The week saw a new high close for the JSE All Share index at 25934 on Tuesday. The state of the nation address from Mbeki failed to provide any enthusiasm for the local shares. Rather gold shares gained ground as oil prices closed in on $59/barrel.

    Some of the news item this week

    Billiton announcing the retirement of CEO, Chip Goodyear at the end of calendar 2007. He took over from ousted Brian Gilbertson 5 years ago, and has done a sterling job in what has clearly been a phenomenal period for resource companies across the globe.

    The company has generated huge cash flows to match its earnings and announced a bumper share buyback of $10 billion. This is a structured off the market share buyback.

    The price closed last week at R139, put on 4,8% for the week.

    The week saw the takeover announcement of Edcon by Bain Capital for R46/share. Clearly investors were not expecting such a premium and the price jumped to close at 4418c on the day. Listening to the chairman last night, they are enamoured with the price obtained. Its still has to follow shareholder approvals.

    The gain on the week was 11,6%.

    Property group Madison gained 8,5% on the week to close at 895c. The company has been aggressive in looking to manage properties and is also apparently in talks with Allan Gray the 76% owners of Grayprop management company, which manages the Grayprop fund with a market cap of R6,5 billion.

    Madison only listed in June at 500c, and has almost doubled in price. It has a market cap of R1,7 billion.

    There has been a fair amount of consolidation in the listed property sector over the last year.

    A lot of news this week also in the press about failed “financial services firm” Fidentia. My view on this is that despite a regulatory body, or even because of such a body, investors must remain vigilant at all times with their investments. Know where they are placed, who is the custodian of the funds, what independent parties are looking at the risk, the pricing etc. Nothing is foolproof, but don’t ever rely on a regulatory body to police and pre-empt the scams.

    That’s all for now.

    Have a great weekend.

    Kind regards

    Ian de Lange
    ian@exsequor.co.za

    Permalink2007-02-09, 17:29:45, by ian Email , Leave a comment

    Bain at the Gate

    Last year I read the classic book on private equity leveraged buyouts, “Barbarians at the Gate”. This is a detailed account of how the firm KKR (Kohlberg Kravis Roberts) took control of one of the US’s largest companies at the time, RJR Nabisco in 1989. Today its US based Bain Capital LLC at the gate of Edcon.

    RJR Nabisco was a company that generated a prodigious amount of cash and was therefore a very attractive investment. As the bidding and takeover process evolved, so more and more parties entered the bidding fray. One of the largest private equity investors was and still is KKR. The frenzied bidding process resulted in the private equity investors paying far more than they initially calculated, pushing the final price for RJR Nabisco to around $30billion in 1989. This record price for a private equity deal stood for many years, but KKR arguably paid too much and it resulted in a poor investment.

    Will the same be for Bain Capital now paying some R26 billion, at a price of R46.

    The statement today said that the board conducted a comprehensive auction process and is now recommending the Bain cash offer to shareholders. They also say that the cash offer is backed by a fully committed financing package provided by a consortium of banks.

    Just 6 months ago the price of Edcon had dipped to around R26. Nine years ago the price had dipped to a low of around R2, even as low as 165c

    While the price has appreciated strongly in recent years, its interesting to see how certain shareholders are willing to pay far more than the pension funds and asset managers.

    I think the big reason is in the way that the deal is structured, i.e. its borrowed capital used. It’s also largely a function of what I spoke about yesterday, plenty of liquidity around the globe looking for opportunities in which to invest.

    Private equity companies firstly take in substantial flows from private investors and pension funds looking to earn better than market returns. With this base capital, they are able to look for cash generating companies, and then using substantial gearing, buy the company.

    Gearing carries risk, but invariably the risk is ringfenced to the assets, so there is no recourse to the providers of equity. If the deal works out, then because of the high gearing, the equity providers earn substantial returns. If it does not work out, well the returns won’t be that good. In both cases however, the private equity promoters will score.

    As noted by KKR, they started out doing smaller deals, but soon found that it took a similar amount of work to do much larger deals, but with a far better payoff profile. With lots of global liquidity, able to gear up through cheap debt, expect more of these bigger type deals.

    We assist clients with their investment planning requirements, providing a holistic and ongoing investment management service. If you would like to find out more, or how we can assist, please don’t hesitate to contact me. E-mail on ian@exsequor.co.za

    Sincerely

    Ian de Lange

    Exsequor Investments is an authorised financial services provider.

    Permalink2007-02-08, 17:34:03, by ian Email , Leave a comment

    What comes first?

    Bill Gross is the senior director of Pacific Investment Management (Pimco) in the US, which is one of the largest bonds managers in the world. He writes a very good monthly newsletter, which this month discusses the effect that financial innovation and globalisation is having on asset prices.

    For all investors, whether they are invested into property or company shares, the views are important, summed up as:

    “Bond, stock, and real estate trends then, have recently been increasingly at the mercy of relatively price insensitive and levered financial flows as opposed to historical models of value or the growth of the real economy itself.”

    He argues that asset prices are no longer a function of the real economy, but that possibly the real economy is being driven by asset prices, which are being pushed up by unprecedented financial flows.

    South Africans have experienced a similar scenario where the gains in asset prices (property and share prices) have had a positive effect on wealth, which in turn has provided capital to be made available back into the real economy.

    The phenomenon has also extended to the prices of base metals, which has added further impetus to South African company profitability, the fiscus, employees and therefore in turn trickling back down to the real economy, which in turn helps sustain the higher valuations.

    It’s almost a case now of the tail wagging the dog, but because of the virtuous circle created, has the ability to continue, coming to an end only when the liquidity bubble is burst. This huge amount of global liquidity has been dubbed the “super liquidity” cycle and while is lasts all owners of assets smile.

    It’s impossible to predict changes in direction with any degree of accuracy. Likewise it’s impossible to predict when global liquidity will start to deflate, which will inevitably have a negative impact on asset prices the world over. Investors must however remain vigilant; having an understanding that for the past number of years now, the wind has been blowing firmly from the behind.

    We assist clients with their investment planning requirements, providing a holistic and ongoing investment management service. If you would like to find out more, or how we can assist, please don’t hesitate to contact me. E-mail on ian@exsequor.co.za

    Sincerely

    Ian de Lange

    Exsequor Investments is an authorised financial services provider.

    Permalink2007-02-07, 17:28:35, by ian Email , Leave a comment

    Banks lead the JSE up

    The JSE closed up 1.28% at 25934 with value traded at R7.80 billion. Advances led declines 252 to 143 on a day which saw the Banks index up 2,5%. Mining closed up 1.46% at 30346, while Industrials were up 0.72% at 22535 and financials ended the day up 2.03% at 24063.

    The best performing sectors of the day were Banks Index up 2.5% at 38668, Financial 15 up 2.2% at 9300 and General Financial Index up 2.1% at 2747, while the worst were Development Capital down 8.6% at 1093, Electronic & Electrical Equipment Index down 1.2% at 29516 and Health Care Equipment & Services Index down 1.2% at 36102.

    There were 35 new 12 month highs today, includingthe Alt X listed IPS which closed up 19.9% at 1055, Cadiz up 7.5% at 575 and Enserv up 5.6% at 950.

    Of the major stocks Anglo was up 1.79% at 34521, Billiton was up 0.9% at 14050, Gfields gained 1.87% at 12241, Sasol ended up 1.2% at 25199, and MTN up 1.45% at 8699.

    Best performers of the day were Ips up 19.89% at 1055 , Z-c-i up 16.13% at 1800 , some of the losing shares included Dynamic down 10% at 135 and Purple down 5.8% at 130

    The Dow was unchanged at 12665.67 and the S&P 500 up 0.1% at 1448.29 a few moments ago.

    Gold was up 0.6% at $ 653.15/oz

    The rand was last trading at R 7.20 to the dollar, R 14.16 to the pound and R 9.32 to the Euro.

    Permalink2007-02-06, 17:34:15, by ian Email , Leave a comment

    Closing of Funds

    In recent months, some of more smaller (sometimes called boutique) fund managers have made statements that they are either closed or indeed closing for new business flows. Often these managers define a fixed value of funds under management as the cut off level, say R10 billion or R25 billion etc.

    In South Africa and especially for traditional fund managers this is quite a novel move, where greater funds under management means more income. In the US however, it has been the hedge funds that have initiated this practice of limiting size. Hedge funds, often by their very nature try and limit the number of investors. Often these funds define their level of funds upfront, take in the funds from pre selected clients, and are then capped to new business flows. Their heavy reliance on performance fees as opposed to fixed annual fees also encourages this approach.

    Naturally there are a number of advantages to this practice and your investment advisor should be on the lookout for this type of managers. This decision to close gives an indication that the manager places a higher value on existing clients than future clients.

    As a client, knowing that the fund manager is spending more time looking for investment opportunities, valuing companies, and spending time with management etc, should enhance confidence. Obviously the results should improve in tandem.

    In recent months its been the value managers that have indicated capping of their funds. One of the reasons cited is that it’s getting more and more difficult for them to allocate new funds to investment opportunities. This is a value decision and with the prices at new highs, these managers are finding less and less value out there.

    Their timing may be wrong. They could be too early and lose out on taking on more clients and indeed making money for these clients, but there is no doubt that they are putting money where their mouths are. By placing greater emphasis on existing clients, they can’t be faulted.

    Don’t hesitate to e-mail me if you wish to discuss how we can assist with your investment planning.

    Kind regards

    Ian de Lange
    ian@exsequor.co.za

    Exsequor Investments is a registered financial services provider.

    Permalink2007-02-05, 17:41:42, by ian Email , Leave a comment

    The Importance of Education

    When the market has been booming for several years, one tends to find that more and more of the ‘general population’ start to invest in the market, be it directly, or through structures like unit trusts. They all know someone who “made a killing” and want to jump on the bandwagon.

    Generally by the time that these less informed/educated investors want to get into the market the above mentioned wagon has long left the station and the market may be in a correction stage, or nearing the end of its upward cycle. They invest all of their hard earned money (usually not very much in absolute terms, but comprising a relatively large percentage of their net worth) onto the market on the back of advertising and the general buzz created through annual returns of over 40% over extended periods. There is the expectation that these returns will continue into the future. The uneducated (and some of the educated) fall prey to terms such as “this is the new economy” or “there’s been a structural shift in the country’s demographics/inflation rate” and blindly pour their money into the latest ‘hot’ sector/fund.

    If there is a significant correction, or even a market crash, the investors are left with a fraction of their original investment (which is often disinvested at the bottom of the market) and no idea as to what happened, or why it happened. They then swear off investing in the market, and miss out on future opportunities.

    Questions like “How can one avoid this situation?” can be answered through getting educated. One doesn’t need a qualification (although this does help), but just the dedication to sitting and reading newspapers and online articles/emails from reputable business/financial sources. In this day of unregulated information overload it can be difficult sifting through reams and reams of commentary and opinion that is often published in industry specific jargon, and causes people to take the view that “I don’t have enough time for this!” or “I can’t understand this!”

    One mustn’t be afraid to start small with your education (understanding how paying off your credit card monthly will help your cash flow) or asking ‘stupid’ questions, it is your life after all! If you don’t have the time, find someone you trust to help you manage your financial affairs. If you take an active role in monitoring your portfolio, with the help of a professional, you will improve your education, simultaneously decreasing the chance of being blind sighted in the future.

    Not everyone knew that the IT bubble would burst, and many people were hurt by it, but those investors who (despite being hurt) made a conscious effort to educate themselves on WHY they got caught out, and WHAT they should look for in the future will be the ones who won’t get caught out the next time around, while those investors who don’t bother educating themselves are the ones who are like to pull their money out of the market, only to be lulled back in the next time they hear “this is the new economy”.
    Trying to take investing seriously without some education is like trying to be healthy without having knowledge of how to lead a healthy lifestyle. If your finances are important to you, you owe it to yourself to get educated.

    I trust you will have a good weekend. Enjoy the rugby/cricket/soccer!

    Kind regards,

    Mike Browne
    mike@exsequor.co.za

    Permalink2007-02-02, 17:12:19, by ian Email , Leave a comment

    JSE Bull Market Thus Far

    One is often asked “How long will the market carry one going up?” This is currently a very tough question to answer without having access to a crystal ball. Markets are driven by many factors, but two of the more influential ones are fundamentals and sentiment. The JSE is currently experiencing one of its strongest bull markets in history, so it is interesting to look at what has driven this bull market and where we are now.

    Turning points in any market are nigh impossible to time consistently, with the JSE no exception. All the news is doom and gloom at the bottom of the cycle, with the converse true at the top of the market.

    When the market found some clear direction (towards the end of 2003) fundamentals started to drive it. Falling interest rates resulted in lower interest repayments which allowed companies to improve profitability, with individuals having excess cash for consumption, which further helped to boost profitability for the companies. The improvement in earnings, coupled with a re-rating in the market (higher PE ratios – through positive sentiment) had a positive double whammy on share prices.

    The global community also helped in no small part through the increased demand for commodities, which we have in abundance. The profusion of liquidity created by historically low interest rates also lead to global investors seeking higher yielding assets, and they therefore poured their money into emerging markets, and particularly South Africa. These money flows, coupled with the rand coming from extremely undervalued levels helped to strengthen the rand over this period, further adding to the positive sentiment.

    This generally positive story has carried on for almost four years now. Government has helped through increased capital expenditure, and sound fiscal and monetary policy. This has been crucial in ensuring that there is continued positive sentiment in the country. Private sector’s contribution cannot be ignored.

    We are now in a position that the market is fully valued (PE’s above historic levels) but not overly stretched. Also priced into the market is the “good news expectations” that has been a significant catalyst for the market. Investors expect to carry on getting good news with regards to production, growth, expenditure, etc. When sentiment turns, or worse than expected operational results are announced, there could be a significant negative impact on shares prices. One needs to be aware of the risks involved as well as the possible rewards, and weigh up whether it is worth getting into the market.

    There are always at least two sides to the story and often more. You will get the ‘Eternal Bulls’, ‘Eternal Bears’, as well as those who tend to sit on the fence. Having an open mind to all ‘stories’ should help you to decide who to believe, and hopefully give you some foresight, or at the very least prevent you being blind sighted by market movements. One must also remember that finance is a social science, which results in things not always ending up the way that you thought they would.

    Have a good evening.

    Kind regards,

    Mike Browne
    mike@exsequor.co.za

    Permalink2007-02-01, 18:04:03, by ian Email , Leave a comment