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    Global bond yields move lower

    Bonds are back in focus as yields drive lower and lower and so provide welcome positive gains for owners. In the US the yield on the 10 year US Treasury bond fell as low as 2,91% as markets anticipated a possible further 0,5% drop in the US Federal Reserve rate, which stands at just 1%.

    The current yield on the 10 year bond is the lowest since records began in 1958.

    Likewise the yield on the 3 month treasury paper fell in mid November to just 0,01% and now around 0,04%. This is the lowest since the 1940’s. These yields are giving a very strong indication of the nervousness of investors, who are concerned with the return OF their capital and not the return ON their capital.

    Bond holders enjoyed capital gains as bond yields rallied. So much so that in November, the historical yield on the broader S&P500 moved higher than the 10 year bond yield. This for the first time since 1958.

    It’s also fascinating that Obama has appointed past Fed chairman, Paul Volcker, to his economic board. Volcker was instrumental in stemming the 1970’s inflation by raising short term rates in the early 1980’s, to as high as 20% (they are currently 1% and may drop to 0,5%).

    This painful period, set the base for the 2 decade bull market from 1982 to March 2000.

    What is a bond?

    A bond is a debt security – essentially an I.O.U. When you purchase a bond, you are lending money to a government or company, or whatever entity issues the bond.

    In return, the issuer promises to pay a specified rate of interest during the life of the bond and to repay the face value upon a fixed maturity date, or if a callable bond,

    Various factors that affect the valuation

    o Interest Rate
    Bonds pay interest that can be fixed, floating or payable at maturity. Most often it’s a fixed bi annual coupon and full principle at maturity date.

    o Maturity
    The maturity refers to the specific future date on which the investor’s principal will be repaid. This can range from 1 day to 30 years. In some cases however these can be for as long as 100 year or in fact with maturity date, known as a perpetuity. In the past the British government issued such bonds known as consols.

    A holder is entitled to receive annual interest payments forever. In this case the present value of the perpetual coupons is C/r – where C is the coupon and r the prevailing discount rate.

    Bonds can have various redemption features such as specific call provisions, which allow the issuers to settle the bond before maturity date.

    o Credit quality

    This varies from issuer to issuer depending on the assessment of ability to meet obligations. Governments are given the highest quality due to their ability to raise taxes or print money to meet debt obligations.

    Rating agencies, which have in the recent past lost a lot of credibility, grade the various bond from investment grade, to high, medium, low, investment grade etc.

    o Yield

    The yield is the actual return that you earn on the bond. Unlike most other investments, a bond tells you exactly what your return is if you hold to maturity. This is known as the yield to maturity and is the internal rate of return.

    So today the R157 bond, which matures in September 2015 had a yield of 8,3%. A buyer at 8,3% yield, who holds this to maturity will receive this internal rate of return before inflation.

    Buyers of US 10 year bonds will receive a total nominal annual return of 3% per annum.

    o The Link Between Interest Rates and Maturity

    Changes in interest rates don’t affect all bonds equally. Bonds with longer maturity dates are affected more by changes in interest rates.

    If you have any questions on the bond exposure in your portfolios, or if you would like to discuss asset allocation, please don’t hesitate to contact us.

    Have a great weekend

    Sincerely

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

    Permalink2008-11-28, 17:23:23, by ian Email , Leave a comment

    More on property syndications

    We started a discussion yesterday on property investments and specifically property syndications. A syndicate is nothing more than a really a collection of investors, i.e. a private partnership. These syndicates have merit where the cost of a single property runs into tens and hundreds of millions of rand and one invests alongside a property investor. But they fall down where one is merely investing into a product, dressed up as a property investment.

    It’s important to distinguish between investing on the one hand and buying into a product on the other. They are two very different transactions.

    Very simply, a syndicate is a group of persons (investors) who come together for a common purpose. In the case of a property syndicate, a large asset, for example R50m, is bought by a company (can also be another vehicle like a trust), funded by a group of investors.

    The concept is excellent, but there are many flaws in the varied execution of these transactions.

    Property syndications – let the buyer beware

    There is absolutely no doubt that property syndications have their place and indeed have been used successfully for many years.

    With property understood by many investors as an excellent long term asset class, in addition to the many “private” property syndicates, various forms of property promoters entered the fray, looking to derive profits. Companies like Seeff and Metboard operated in the late 1980’s and 1990’s.

    In the last decade as the return from property escalated, largely on the back of declining interest rates, many new property syndicate promoters sprang up.

    Some of the points that we recommend you look out for when assessing an investment product and more specifically a property syndication include:

    o Consider if you are investing or being sold a packaged product: This is a major distinction that most investors fail to recognise. An investment product can do well; it just typically doesn’t because the price paid is too high, relative to the value received. See example below.

    o Most self styled property experts who promote specific properties, are in reality no more than salesman. A salesman buys a product for a certain price, adds a mark up and then sells as quickly and efficiently as possible. There is absolutely nothing wrong with that, it’s called a free market system. But when a salesman dresses up his product to the point where the buyer believes he is investing as opposed to being sold a product, then more often than not, the investor (read buyer) is disappointed in time.

    o The vested interests of the promoter: A salesman is less interested in the true value of a product than he is in how quickly and efficiently he can make a turn on the product. When it comes to many property syndications, the promoters identify a property, buy as cheaply as possible, add a mark up to what the market will bear and then onsell as efficiently as possible. Very seldom do they retain any form of ownership in the property. In some instances they retain a right to a percentage of the profit. In such as scenario, their main concern is securing, packaging and selling, not in the price of the property relative to its value.

    o Commissions: Where any investment product pays out large commissions as an incentive to distribute, this is raises a red flag. The higher the commissions, the redder the flag.

    o The long term history of completed transactions: A high number of syndications provides little indication of the success of the promoter as a property investor. Rather it provides a clearer indication of success as a salesman and the demand for the product.

    o Interest in the property at full cost: Does the promoter retain a decent (20% plus) interest in the property, acquired at full cost, and do I as an investor invest alongside the main investor in the property at the same price as he paid. Typically the answer is no. The promoter is just that, promoting a product to the point where he sells out as quickly as possible in order to derive a profit.

    An investigation into these factors will separate a true property investment from a mere “pump and dump” scheme.

    A property investor will retain a decent stake in the property, he is not interested in marking up and on selling to unsuspecting clients, he is interested in only looking for value, and in fact where value becomes scarce, he will desist from investing, because he’s putting his own capital at risk.

    Detractors will say, well it does not really matter. An investor is getting into a decent asset class, property, and as long as the structure is sound, so what if the promoters are making some money out of the deal?

    Our view is that it may turn out to be a good investment where driving factors come in line, like falling interest rates, but it’s unlikely to be a fantastic investment, because the costs have been loaded.

    Various structures can be used to acquire the property and represent the various owners. These include a private or unlisted public company; inter vivos trusts; issuing of debentures, partnerships or en commandite partnerships. The structure is very important and naturally the investor must have a full understanding thereof.

    Example of two different types of “investors”

    Buying from a promoter
    Let’s look at a hypothetical example. A property was acquired for R25m on an 11% yield, but marked up by 12% to R28m and sold to investors. In this case the yield drops to an effective 9,8% and can thus still be justified as an “excellent” investment.

    The rental stream escalates at 8% per annum and at the end of the 5 years, the property is sold at the going capitalisation rate of 11%.

    Buying alongside a property investor
    Assuming the same property as above, except that there is no mark up from the original purchased price. The promoter retains a large stake in the equity of the property and brings in co investors to assist in purchasing larger properties, which are more efficient to gear.

    In the first instance the likely capital growth (i.e. excluding the income yield) over the 5 years is a cumulative 21%. In the second instance because of the lower purchase price, this increases to 36%.

    This is enhanced where gearing is utilised in the second option. In the first instance little to no use is made of gearing as the promoters top priority is to sell the marked up asset, not to invest.

    As with all investments, it is important to look under the hood. Having a very clear understanding of the mechanics plays a big part in the ultimate risk and return.

    If you would like to set up a meeting to discuss your specific investment planning and ongoing management, please don’t hesitate to contact Vincent Heys at Vincent@seedinvestments.co.za

    Sincerely

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

    Permalink2008-11-27, 17:59:04, by ian Email , Leave a comment

    Property investments

    One investment option that can be very attractive is the purchase of a property. This can be in the form of a direct holding of a second residence, the purchase of a commercial property, an investment into a listed property unit trust or buying a stake in a company, which is the owner of a property. The latter is typically known as property syndication and I will cover this form.

    Because a commercial property makes an attractive long term investment, it is an ideal asset for investors to buy into. But only when a number of factors line up.

    Institutional investors continue to be large investors in property and Donald Gordon, who founded both life company Liberty and UK property company Liberty International found investing into property, especially large shopping malls, particularly attractive over the years.

    Property is an asset that has a long life span. Like a share in a business, an investor looks to receive both an income yield and capital growth. But with a property investment, because the bulk of the rental is paid out to the owner, leaving little in the form of re-invested earnings, two thirds to three quarters of the total return is in the form or an income yield, with the balance as capital growth.

    The higher and steadier rental stream derived from a property investment, lends the asset to be geared, i.e. using bank finance for a portion of the purchase price. Assuming a total return higher than the cost of debt, the owner’s equity will be improved. At the same time however gearing increases the level of risk, especially where there is inadequate matching of revenue and interest costs.

    With the longer term nature and quality of rental streams, which can be anything from 3 to 5 to even 20 years, matching against debt repayments is made easier. With the ability to secure fully repairing leases, upward only rental revisions, and fixing the cost of debt, many property buyers have managed to put themselves into excellent long term investments.

    In many respects, the purchase of a property is not dissimilar to a business decision. As always an investor wants to buy into the best quality and highest net present value of future revenues at the lowest price today. But like all investments, where the price paid is too expensive, owners will suffer declines in value.

    Some of the factors that must be assessed on the purchase of a property include:

    o Quality of tenant or tenants. Are they single or multi tenant properties.
    o Large multinationals as tenants or a range of smaller tenants.
    o Type of lease. These are often very detailed agreements, which may include turnover clauses, escalations
    o Initial yield on the property cost. Naturally the lower the price paid for the future revenue stream, the better the investment case.
    o A comparison of the yield relative to other properties and other investments.
    o Opportunity for enhancing the property. An example would be where there is unused bulk that can possibly be developed. This is not always feasible, but an area where an investor can really multiply up the return.
    o An assessment of the sustainability of lease rentals and possible upward or downward adjustment. E.g. where a lease has 6 months to run, but its market equivalent is R35/m less then adjustments needs to be made.
    o An assessment of current and future vacancy levels

    A property syndicate is nothing more than a group of investors as co owners of a property. There are many caveats into the various structures used and I will go into these.

    Sincerely

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

    Permalink2008-11-26, 17:24:12, by ian Email , Leave a comment

    Series on investment options

    When it comes to investment options for investors, they are numerous. This poses a huge problem for all investors and an ongoing dilemma, i.e. where is the best place to invest capital. We believe in diversification of a portfolio, but not to the point where the benefits derived from diversification are dissipated by too great a spread across poor performing assets.

    Trying to merely analyse the options across one asset class is daunting enough, let alone an analysis across various asset classes. Through a mini series, we would like take a fresh look across various options.

    Unfortunately many investment products are still wrapped and sold to investors, without an adequate process of due diligence on the past of an investor. In many instances, investors are sold on the basis of past performance and appealing packaging.

    Given the price declines across most global assets, it is important to take a step back and consider just what are the choices available to an investor with investment capital.

    We tend to concentrate on listed shares, but at the same time we are constantly on the lookout across the full spectrum of available options. Last Friday we met with someone on private equity, tomorrow I am seeing someone on a corporate debenture structure.

    As investment consultants to private clients, it’s our job to identify, consider, analyse and where necessary include various investments into a portfolio.

    In the next few weeks, we will cover some of the advantages and disadvantages of some of the available options as well as note pointers to watch for. Please feel free to contact me on any asset category that you would like to see included.

    Some of the options include

    o Money market funds
    o Government bonds
    o Corporate bonds
    o Debentures and convertible debentures
    o Preference shares
    o Structured products
    o A second residence / apartment
    o Share in a property syndicate
    o Property unit trust
    o Krugerrands, Newgold or gold shares
    o Shares or unit trusts.
    o Initial public offers
    o An investment into own business
    o Private equity fund
    o Hedge funds
    o Timber, farming

    Just one point today, which we will cover again and that is the issue of the counterparty to an investment. It seems to be an issue that is most often overlooked, but one of the very first questions that we delve into when assessing the viability of a particular investment.

    Let’s look at one simple example. When buying a share in a company that is listed on a stockmarket, an investor should understand that his money is buying from an existing shareholder. i.e. when you are buying, there is another shareholder that deems it appropriate to sell. In this instance shares are traded from one owner to another with no impact whatsoever on the capital structure of the underlying company.

    Where however a share is acquired in an IPO – initial public offering – this is not the case. Here one of 2 things or a combination occurs. The company itself is calling for equity and issues shares, or the existing private owners of the company are looking to sell down their stake in this business as they list. The former option is more appropriate for a new investor.

    We like to find out the appropriate counterparty to all investments, because where our clients are investing, we need to determine who is selling and the reasons why. Alarm bells start to ring where informed investors are selling out.

    Please feel free to contact Vincent Heys to set up a meeting to discuss your investment planning requirements. You can mail him on Vincent@seedinvestments.co.za

    Sincerely

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

    Permalink2008-11-25, 17:27:52, by ian Email , Leave a comment

    Citigroup and relative yields

    Citigroup Inc is the latest large US bank to come under immense pressure, leading to the US government announcing a $306 billion guarantee of its mortgages and assets. Citigroup is one of the 30 components of the DO Jones Industrial index. Its price decline to $3,77 last week from a peak of over $50

    Today the price is up 50% to $5,62/share

    In its current guise the bank was formed through a merger of Citicorp and Travelers Group in 1998. Its history goes back to the various components of the current merged entity.

    As with many other failed institutions this year, such as Lehman Brothers, Citigroup’s has a history going back to the early 1800’s. City Bank of New York was chartered in 1812 with $2 million according to Wikipedia.

    Travelers Group was the result of a merger of a number of entities under the previous chairman of Citigroup, Sandy Weill. Its businesses included Control Data Systems, Primerica, life insurer AL Williams and stockbroker Smith Barney.

    In 1997 Travelers acquired the notorious investment bank and bond trader, Salomon Brothers. It started in 1910 and known for their bond trading, innovation in mortgage backed securities etc. In 1991 Salomon was fined $290 million, then the largest ever fine on an investment bank due to it submitting false bids to the US Treasury in an attempt to purchase more bonds than permitted.

    Smith Barney in its original form was founded in 1873. As a retail stock brokerage firm, it formed part of Primerica Financial Services in the late 1980’s, which then became Travelers Group.

    In addition to the guarantee of troubles assets, the Treasury will also inject a further $20 billion in cash, adding to last months $25 billion. In return the government will get $27billion of preferred shares paying an 8% coupon.

    Yields on bonds versus dividends on shares

    The decline in global equity prices is evident when comparing the yield on the 10 year government bonds to the historical yield on shares.

    Before 1958, the yield on Treasuries was typically higher than the dividend yield on shares. Investors demanded a premium to be invested into riskier shares, but as investors realised that the dividends, unlike bond coupons, grew each year, they started to price this in.

    In 1958 the bond dividend yield fell below that from bonds (i.e. shares were revalued up) and this remained the same, until now, when investors became so concerned with shares that they have been sold down to the point where the yield on bonds at over 3,5% is now once again higher than the yield on the 10 year Treasury at 3,25%.

    Its an indication that investors are extremely panicked, concerned about growth from corporate over the next few years and hence far more willing to accept zero growth from bonds at a yield of 3,25% than the uncertainty from shares at 3,5%, but likely to be flat or slightly down.

    This is a relative graph. In the medium term, the yield on shares can drift higher – perhaps to around the 5% in the US, before an absolute low is reached.

    If you would like to set up a one on one meeting with Vincent Heys in Cape Town to discuss your investment plan and or specific investments, please mail him on Vincent@seedinvestments.co.za

    Sincerely

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

    Permalink2008-11-24, 17:37:51, by ian Email , Leave a comment

    Long run real returns

    One fund manager that has proved to have an excellent ability at forecasting longer run returns from various asset classes, is US based GMO. At the end of 1998, they were highly sceptical of the long run returns from the US equity market, given the high prices and unattractive valuations. At the time this was contrary to the “new paradigm” and understandably they were losing clients as the US markets were running strongly.

    Mid 1998 was just before the emerging market crash. South Africa suffered as a consequence. Most emerging market currencies tumbled, prices of assets tumbled, while investors found solace in US technology shares, which continued piling up gains week after week.

    At the time GMO forecasted likely real returns from ten separate asset classes, including emerging market equities, bonds, international small caps, US government bonds and the S&P500 etc. See graph below.

    The Economist recently published an article on the firms forecasts compared to the actual results.

    Not only was GMO close in terms of the absolute real returns from the various asset classes, but the ranking of the classes proved very prescient.

    GMO, like any true value manager, predicates their assessment of likely future returns on the fact that

    o Company earnings, profitability and valuations revert to a long run mean.
    o Long run real returns are a function of current dividend yield plus future dividend growth plus or minus changes in valuations.

    In mid 1998, GMO’s best asset class was emerging markets. Their worst likely performer was the US market as depicted by the return from the S&P500, where they anticipated a negative 1,5% real return per annum for 10 years.

    If an investor is presented with a current depressed valuation, depressed earnings, high dividend yields, then there is a high probability of relatively high real returns from that asset.

    Unfortunately it’s easy to look back on the past 10 year results, but they looked like idiots predicting a negative return from the US markets in mid 1998 when the market continued up to a peak in March 2000 of some 32% higher.

    source : GMO, Economist

    At the end of October, as prices have fallen, GMO is predicting amongst others the following long run real returns from selected asset classes, including a portion that can be added by active management.

    o Emerging market equities 13,2%
    o US high quality equities 12,2%
    o International government bonds 1,3%
    o US government bonds 2,2%

    While global money has rushed into the “safe haven” of US bonds and cash, this is likely to prove to be a bubble, with investors experiencing very low rates of return over time.

    The long run real return from US equities is in the order of 6,5%. From these depressed levels, the 7 year outlook is positive. But again this does not mean that there the next few months will experience even more downside.

    If you would like to set up a one on one meeting to discuss your investment portfolio and investment planning, please don't hesitate to contact Vincent on the number below or vincent@seedinvestments.co.za

    Have a wonderful weekend and best of luck for the Boks

    Sincerely

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

    Permalink2008-11-21, 14:51:41, by ian Email , Leave a comment

    More on Value

    Ian wrote yesterday that we are seeing signs of longer term value and that while many shares represent good value it doesn’t mean that they’ll deliver immediate returns or even returns in the next couple of years. Today I’ll have another look at value investing.

    The process of value investing is one that we like and understand, as it looks to get the odds in your favour by continually investing into shares that are trading at depressed prices. It is by no means a fail safe method of investing, but conscientiously sticking to this style has proven to produce excess returns over the long term.

    The major pitfall of value investing is that you are purchasing companies at depressed prices and there are usually good reasons for them trading cheaply. Distressed companies and those with poor prospects are the usual suspects that make up any value manager’s initial screening list. From here the manager needs to ascertain if there’s any justification for the company trading at a discount to its peers, and then if there is a reason for it trading at a discount, whether the discount attributed to the share price is warranted. Once the manager has determined that a share qualifies as one to be included in his portfolio he can look to allocate a portion of his investors’ funds to that idea.

    Many people assume that this is the hardest part of the investment process, but this is generally not the case. By virtue of the investment style that the value manager practices he’ll be buying unpopular shares that very often underperform in the near term. Investors who buy a ‘winner’ with other investors at the top, only to see it crumble can always live in the comfort that they weren’t alone. A value manager has no such comfort. Should a value manager’s portfolio underperform, there is no peer comfort, he is often left out to dry for selecting shares that ‘obviously weren’t going to perform’. As you will no doubt have realised, staying the course is often the value manager’s most difficult task, and by extension patience is a crucial virtue of the successful value manager.

    At the moment we see many large companies that are trading on extremely cheap historical multiples. These companies may struggle to maintain, or grow, earnings and dividends for the next few years, and they may even retreat somewhat (causing the multiples to decrease), but when looking at any valuation model the growth (be it earnings or dividends) over the next couple of years plays only a small part in the overall valuation. The long term normalised growth is the variable that typically has the largest impact on the company’s valuation.

    Investors investing in the stock market must ensure that their time horizon is sufficiently long (at least 5 years) to allow for the vagrancies of the market. Share markets are merely an extension of the underlying participants’ behavioural, and humans tend to over react on the upside when news is good, and on the downside when news is bad. Astute investors attempt to use these opportunities to their advantage, by selling to those investors who will buy their shares at any cost, and buying from those investors who are selling at any price.

    Enjoy your weekend.

    Take care,

    Mike Browne
    mike@seedinvestments.co.za
    www.seedinvestments.co.za
    021 914 4966

    Permalink2008-11-20, 16:25:03, by Mike Email , Leave a comment

    Signs of longer term value

    Despite value emerging across the board, as always it takes money to first find it and then start to move prices, so that the value is realised. A longer term investor won’t concern himself if prices move up next week or in 2010, even if they decline further in the interim.

    Today two companies gave profit updates. I also attached a graph of the longer term JSE All Share index superimposed with the historical dividend yield.

    Woolies is a company whose share price has been bouncing along sideways since around February. Today the company issued a trading update for the last 20 week period saying that sales are up 8,7%, with comparable store sales essentially flat at just 0,4%.

    The update cited trading down of customers and the upper and middle income consumers under some pressure. Given the sale of Woolies 50% stake in Woolworths Financial Services to Absa, earnings will reflect this once off R400m. This will impact EPS but not headline EPS.

    Results for the interim to end of December will be out around 19 February, and the directors have resolved to declare a special dividend of 94c.

    The share price slipped back by 1,9% to 1118c

    At this price the historical dividend yield is over 7%. The price paid for this company is under 10 times earnings.

    It’s likely that earnings will be under pressure in the next 2 years, given some factors such as the expansion of floor space and weaker economy.

    Reunert is finalising its annual results to September to be released next week. While earnings will almost double on a depressed base, headline EPS, which excludes the cost of the BEE deal will be between 6% and 12% higher.

    Reunert shares lost 2,3% to R42. It has declined from just under R80 a year back. The market cap of this company is down to R8,2 billion, the historical dividend yield at 7,6%, and the price to earnings at 6,5 times.

    The big question now is that while the historical numbers look cheap, how sustainable are corporate earnings and margins. Coming from a relatively high base, these are likely to be under some pressure across many industries. This will dampen enthusiasm for shares in the shorter period, but longer term, it’s starting to appear that at these prices, investors are being paid to take on risk.

    The graph below indicates the extent to which current and prospective bad news has been factored in. The markets historical dividend yield is up to 5% across all sectors. A big factor is the high historical DY on resources, but this is not exclusive.

    The last time an historical dividend yield of 5% was seen was after the 1987 market crash.

    Don’t hesitate to contact us to discuss any aspect

    Kind regards

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

    Permalink2008-11-19, 17:30:22, by ian Email , Leave a comment

    Relationship between GDP growth and share prices

    In wanting to develop the theme that stock market gains don’t necessarily match underlying economic growth for long periods of time, I recalled an article that I had read years back, in the Fortune Magazine written by Warren Buffett. In it he compared periods of economic growth and GDP growth in the US.

    He first looked at this in 1999, when he broke down the previous 34 years into 2 periods.

    Firstly from Dec 1964 to Dec 1981 the Dow Jones Industrial average moved from 874.12 to 875.00, exactly 1/10 of one percent gain.

    The second period from end of December 1981 to December 1998, the Dow Jones Industrial Average moved from 875 to 9181.43.

    He then looked at the commensurate period gain in the country’s gross national product (GNP), but found that for the first period, when the market was flat, GNP rose 373%, while in the second period, when the market rose substantially, GNP actually slowed to a total gain of just 177%.

    So in the first 17 year period, GNP grew twice as fast as in the second 17 year period, yet clearly this was not a driver of share price growth.

    He found instead that there were 2 main factors resulting in share prices to stay flat in the first 17 year period and race up in the second 17 year period.

    The first was interest rates. A quick economics 101 lesson. If interest rates are at 13%, then the present value that you will receive in future from an investment is not nearly as high as the present value of a dollar if rates are at 4%.

    In the first 17 year period, interest rates rose from 4,2% to 13,65% at the end of 1981. They then decline in the second 17 year period to 5,09%.

    The second factor is how many dollars investors expect to receive from companies. Looking back at the period 1964 – 1981, corporate profitability had been under pressure to a point in the early 1980’s after interest rates had been hiked, “to a level that people had not seen since the 1930’s”

    So in the run up to the early 1980’s confidence was down, the outlook for corporate profits was not good, and high interest rates were causing investors to discount low future profits even further. It started reversing as interest rates came down and profitability increased. In this period the business of the US grew, while investor’s valuation of that business shrank.

    This reversed in the second period to the end of the century in a period with much lower GNP. Coming off a low base in the early 1980’s investors in companies received a double whammy of higher and higher profits plus a revaluation of corporate profitability.

    Buffett took the relationship between GNP growth and stock market growth back to the start of the century in the US and found similar low correlations. He concluded that too often “People are habitually guided by the rear-view mirror and, for the most part, by the vistas immediately behind them.”

    We think that growth outlooks can’t really be factored into the outlook for share prices. As previously mentioned you will see a lot of negative economic news for some time yet. For sure this will continue to play on investor sentiment and hold prices down, but long before it changes into positive economic news, prices will have moved up.

    Sincerely

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

    Permalink2008-11-18, 18:18:59, by ian Email , Leave a comment

    consolidation

    Growth, either organically, or through acquisition, followed by a period of consolidation and cutting back is a natural progression of all businesses. Across the globe now, we are seeing most businesses start to cut back and consolidate. It’s painful but necessary for that next step up again.

    An offshore financial example is Citigroup, the 4th largest bank by market value in the US. It has already cut back staff by around 23 000 and now plans to cut back another 50 000 jobs, or 14% of its workforce.

    Locally, we see some signs of consolidation in real economy company Barloworld.

    Barloworld, after unbundling its stake in PPC and Freeworld Coatings (paint) distributes brands such as Caterpillar, owns car rental Avis, and vehicle distributor. Its year end results to September saw revenue up 18% to R46 billion. Headline earnings per share rose 13%, but excluding the once off BEE charge there was an increase of 29% to 760c.

    Their comment on the global financial crisis is that government intervention in the medium term should bring a measure of stability to global credit markets, but the effect will still be felt in the real economy for some time to come.

    Barlows is a company that operates in the corporate and consumer market and across geographies in the USA, UK, Europe and Australia. Mining and infrastructure project slowdowns in Siberia will impact profits.

    Locally sales of new and used motor vehicles in southern Africa are expected to remain under pressure next year. The car rental business should be stable with anticipated increasing activity in the second half of 2009. The fleet services business is set to benefit from recently awarded contracts while demand from fleet operators continues in response to the higher holding and operating costs of vehicles.

    Across the South African motor retail operations, a tightening economy led to some consolidation across the dealership network. They also concluded a deal to sell their 50% stake in Subaru to Toyota Tshuro Corporation from 1 November Corporation effective 1 November 2008

    Investors sold the shares down to 4648c, a drop of 4,15%, giving the company a market cap of R10,5 billion. This is down sharply from its highs.

    Cash flow from operations was down from R3,8 billion to R1,98 billion.

    The question is this? As far as investments go, is it a better investment at R46 as opposed to R125 – probably the former.

    But as the news starts to filter in from the companies, share prices have already reacted. The gloomy outlook across the globe though has continued to fuel the negative sentiment and so prices trend down.

    The global Government weekend workshop, the meeting of the so called G20 did not do much to inspire confidence. Lots of talk but no immediate action.

    The one tool that governments do have, is the ability to lower the cost of money, and it does look like they will continue to use this tool.

    Standard Bank’s Research Strategy note sees an ongoing spate of monetary easing, although noting that the ECB is still somewhat behind the curve. Their forecast for central bank’s base interest rates into the first quarter of 2009 is as follows:

    o US flat at 1%
    o Eurozone down to 2% from 3,25%
    o Japan down to 0,1% from 0,3%
    o UK down to 2% from 3%
    o Switzerland down to 1% from 2%
    o Canada down to 1,75% from 2,25%
    o Australia down to 4,25% from 5,25%
    o NZ down to 5,5% from 6,5%
    o Sweden down to 3,5% from 4,25%
    o Norway down to 4% from 4,75%

    The co-ordinated effort to lower the cost of debt in a deflationary world has yet to gain some traction.

    Meanwhile businesses will shed costs and right size as quickly as possible.

    For investors in Cape Town who would like to meet and discuss their investment strategy, we are having meetings on the 20th and 21st November. Please mail Vincent@seedinvestments.co.za to set up a time.

    Regards

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

    Permalink2008-11-17, 18:14:15, by ian Email , Leave a comment

    G20 countries meet this weekend

    We mentioned the fact that the global news would now start to concentrate on the global recession and that this would be responsible for ongoing negative investor sentiment for a while. These will dominate the news services for a while now, but investors will need to look through the bad news to valuations.

    A quick review of headlines today affirms this.

    The Financial Times reports that Euro zone enters its first ever recession – i.e. 2 quarters of negative GDP “growth”. This is not strictly true, because the individual countries that make up the Euro zone have all had recessions in the past. But now as a grouping, economies are negative.

    But now official figures say Gross Domestic Product in the 15 country region fell by 0,2% in the 3 months to September.

    Only as far back as July the ECB was raising rates – now they have cut twice to 3,25% and will go further.

    The governor of the Bank of England, Mervyn King, announced that the UK economy has probably entered a recession which may continue into the second half of 2009. It now forecasts that UK economic growth could decline by as much as 2% over the next 12 months. The bank of England is highly likely to cut interest rates again.

    Bloomberg reports that retail sales in the US dropped in October by 2,8%, which is the most on record since this stat began in 1992.

    US unemployment reached a 25 year high.

    This coming weekend, US president Bush is hosting a meeting of the G20. I listened a bit to his delivery in defence of the free market system last night. He is correct in many respects that too much fiddling by regulators especially after the horse has bolted is not going to work.

    The U.S. president invited the G-20 leaders to Washington for their first-ever summit in response to calls from French President Sarkozy and U.K. Prime Minister Gordon Brown for a discussion of the causes and possible cures of the financial crisis.

    Naturally the declines at a country’s macro level reflect the sum of the specific company’s woes. Citigroup announced that they planned to lay off at least 10 000 employees in their investment bank and other divisions around the world.

    Staff layoffs will continue across small to large companies around the world.

    From here on out though we are going to be careful about not merely regurgitating the dominant bad economic news. For extended periods of time, there is little direct correlation between the economy and investment growth. In fact at turning points there is an inverse correlation. And so valuation and sentiment metrics are more important to investment success than an obsession with economic statistics.


    Have a wonderful weekend

    Sincerely

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

    Permalink2008-11-14, 18:04:48, by ian Email , Leave a comment

    some points on the bigger picture

    Prices of shares remain under pressure. The world’s financial markets are still hamstrung by the credit crunch, despite central bankers continuing to throw everything they have at the problem. But ongoing and concerted effort of global central bankers will slowly bring some normality into credit markets – i.e. the blockages of the flow of funds from institution to institution. What is likely to take a LOT longer to unravel is a global earnings recession.

    It’s important to try and sift through the constant barrage of negative headlines and sift into 3 distinct areas. The more immediate and shorter term credit crunch, the highly probable longer term economic recession and then importantly the investment case for companies.

    Credit crunch
    Share prices globally and locally mainly fell sharply as owners required immediate liquidity. In the SA context, foreign owners sold what was the most liquid and this included their exposure to large cap companies and commodities, exporting the money back home and in so doing weakening global currencies against the US dollar.

    This had an immediate and sharp impact on share prices, which would normally be a longer and slower process under a typical drawn out earnings recession.

    Recession
    The contraction in credit has precipitated the start of a long overdue contraction in global earnings. Across global companies, earnings are going to come under pressure, as consumer spending power has been drastically reduced.

    Today Bloomberg reported that more than $29 trillion has been erased from the value of global equity markets in 2009 with the S&P500 down 42%. Add to this the decline in US house prices and purge of home equity and one gets an impact on the likely consumer slowdown from an environment that relied heavily on asset price appreciation.

    There is no debate about the fact that global economies are in or quickly heading into a recession.

    Expect to see a lot of news on this in the media, which will concentrate on company earnings slowdowns, liquidations up, car sales down, unemployment up, company sales down, profits down, lower IMF forecasts of economic growth etc etc.

    This is where the media, economists, commentators will focus their attention. The overwhelming bulk will be negative, which naturally fuels negative investor sentiment.

    An excessive attention to this area without a follow through to how to make money from it is pretty meaningless. Example - the amount of debate on whether global economic will be 4,5% or 5,5% absorbs a lot of time, but has absolutely no relevance to whether a company’s valuation is attractive or not attractive.

    Which leads to the most important issue.

    Share prices and valuations
    So while the media will focus on the recession, there will be little to no attention from them on company valuations – it’s simply not what they do.

    At some point in time – far ahead of the turn up of the economy, prices will get to very depressed valuations. This will be the point just as sentiment is at its lowest.

    So at some point (and yes this is the million dollar question) while news flow will continue to depict an ongoing negative economic environment, share prices in general will start to turn up.

    In general it appears that given the widespread price declines, valuations are attractive, but not ultra cheap.

    However there are always pockets of value – i.e. the stock market is not one ubiquitous share. Value managers and many of the hedge fund managers will try and take advantage by avoiding or shorting the expensive shares and buying the ones that represent value.

    Remember that one of the most expensive resources for any investor is short term comfort. Those investors who constantly seek comfort over the short-term ultimately give up a fortune over the long-term.

    As Warren Buffett noted in his recent New York Times article in mid October titled Buy American, I Am, “fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”

    Please feel free to contact me at any time to discuss your investments and longer term investment planning.

    Kind regards

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

    Permalink2008-11-13, 21:17:20, by ian Email , Leave a comment

    Investment Strategies

    Many investors out there have, since the beginning of this year, altered their overall asset allocation drastically (or at least have wanted to), and typically it has been in favour of cash or other lower risk assets.

    There will undoubtedly be investors that have got their timing right, and they will look to the various tools that they used to make their decision to assist them with getting back into the market.

    There will also, unfortunately, be those who pulled their investments out at a low point, who will now be lamenting the poor market returns, and who will likely not trust the market in the future, preferring instead to remain in the safe haven that cash is perceived to be.

    Research reports have shown time and time again that one can’t consistently time the market. Certain indicators will no doubt work some of the time, while others will work in other periods. Being able to trust your ‘gut’ can no doubt assist in certain conditions, but there is no indicator that ALWAYS rings the bell at the bottom of the market, and this is where a great deal of risk lies. Investors who get out of the market are compelled to decide when the market has bottomed, and thus when they should get back in.

    I am by no means saying that I think that the market has bottomed (or even turned the corner) but just having a cursory glance at the ALSI since the low it reached near the end of October (both in ZAR and USD) until its close on Monday (27/10 – 10/11), shows that investors who got out at the bottom would have forgone an increase of close to 15% in rand, and 26% in US dollar terms, which is significant for those investors who panicked too late. They may get another opportunity to get back in at those prices (or even lower), but if markets continue sideways or up, this will be a missed opportunity.

    The market is now trading at an attractive dividend yield of 4.57% and a PE ratio of 9.03, and while dividends and earnings may fail to be maintained going forward, these ratios are at extremely attractive levels. Prices have fallen by over 35% in rand and 50% in US dollar since the end of May (which is not to say they won’t fall more). It therefore stands to reason that for those investors who have the capacity (i.e. cash available) to buy now and not worry about capital or dividend yields over the next ten years, we are experiencing an excellent buying opportunity. We don’t know for certain that the opportunity that is currently presented will materialise in good long term returns, but we do know that good long term returns are built on purchasing high yielding assets at cheap multiples.

    Unfortunately investors who require their portfolios to provide income need to be more circumspect. Here those investors who strictly adhered to a solid investment strategy throughout the bull market should have been positioned according to their needs. Investors who only fully embraced the bull in 2007 (when many shares started falling) would have more than likely violated a prudent investment approach, and will in all likelihood have felt much of the market down turn.

    You will no doubt pick up from this report that everyone’s investments should be personalised as all investors can’t be painted with one brush. By examining your own personal circumstances, and getting your investments positioned as close to your optimal strategy as possible, you will be increasing the odds of investment success.

    Kind regards,

    Mike Browne
    mike@seedinvestments.co.za
    www.seedinvestments.co.za
    021 914 4966

    Permalink2008-11-12, 19:06:47, by Mike Email , Leave a comment

    fund manager models

    Most fund managers construct their portfolios using various developed models. Some managers create sophisticated quantitative models that generate buy and sell signals, while most models play a part in assisting the manager in analysing an abundance of data to make asset allocation, share selection and share rankings.

    An example of a successful fund manager that only uses quantitative models to manage money is James Simons, founder of Renaissance Technologies, a hedge fund management company. Their Medallion fund, founded in 1988 has been one of the most successful hedge funds ever.

    Active managers will look overlay the data with their assessment of the company.

    Some of the valuation factors that may go into a model will include the following:

    o Assessment of valuation based on current price versus expected growth over the next say 2 years.
    o Valuations based on prices to book value.
    o A ranking according to growth rates in earnings per share.
    o Estimates of earnings revisions.

    Added to the valuation factors, fund managers overlay various sentiment indicators. These can never be precise but try and gauge the general investor mood at any point in time. Investor moods do change over time from periods when investors as a whole get too optimistic to too pessimistic. At the extremes the optimism and pessimism turn to greed and fear respectively. It’s at these peaks that sentiment indicators are more important than valuation metrics in driving prices.

    Investor sentiment can move very quickly, with no real change in the underlying valuations and this makes it difficult to foresee. We saw this year how sentiment around the globe moved from positive to negative extremely quickly and the impact that it had on prices. A sentiment indicator therefore attempts to gauge the mood.

    Sentiment indicators vary and some could be contrary indicators. Merrill Lynch (in the process of being acquired by Bank of America) has a sell side indicator, which looks at the broker consensus asset allocation. It is a contrary indicator because when sell side analysts (i.e. stockbrokers) are at their most conservative in terms of asset allocation, often its time to be aggressive and vice versa.

    Another sentiment indicator that we use is prices moving away from their 200 day moving averages.

    In discussions with various fund managers over the last few months, it is apparent that many models, which worked well over the last few years, did not cope with the sudden “shock in prices”. Models need constant updating.

    Markets across the global have fallen sharply, and now it’s a matter of assessing when its time to get positive. Valuations are attractive given the level of fear in the markets – now it’s a matter of assessing when investor sentiment is at its lowest.

    Kind regards

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

    Permalink2008-11-11, 18:34:10, by ian Email , Leave a comment

    Living annuity asset allocation

    Many retirees are tending to opt for a living annuity with their capital lump sum from a defined contribution as opposed to a guaranteed annuity. The bulk of a retiree’s capital from a pension fund must be used to buy an annuity, but with the annuity structured as a living annuity, the investment risk becomes that of the retiree.

    Unlike a compulsory annuity, the income or annuity is not guaranteed, but flexible around a value of 2,5% and 17,5% per annum of the total portfolio.

    The flexibility of the income, the fact that the remaining lump sum can be bequeathed on death and the enhanced investment options, make living annuities attractive vehicles for many retirees.

    But they come with risks. Naturally the biggest question posed by a retiree is that of the ability of a portfolio to generate a sustainable, inflation proof income stream for their lifetime.

    The 3 biggest risks that an investor with a living annuity faces include:

    o Longevity risk. i.e. the quantum of capital is insufficient for the possible extended lifespan of the investor
    o Investment risk. The risk of each investment and the combined portfolio lies with the investor.
    o Drawdown risk. Drawing down at too high a level will place unacceptable pressure on a portfolio.

    Because of the flexibility of the annual drawdown level and the availability of investment options, allocating funds to a living annuity, as opposed to a once off purchase of a guaranteed annuity is typically the better option.

    But the risks identified above need to be taken into account when determining:

    o the level of income drawn down from the portfolio.
    o the asset allocation of the portfolio.

    When it comes to asset allocation many investors make the mistake that if a money market account is providing a 12% return, then its safe to draw down 10%, which will leave 2% available for growth in the portfolio. i.e. a portfolio skewed to shorter term money market.

    What is forgotten in this portfolio construction is the fact that the each year a bigger and bigger rand drawdown is required just to keep up with inflation. Its not only shorter term nominal returns that are required, but longer term high real returns from the assets.

    Certain assets such as money market provide stability; depending on their starting yields, some assets such as bonds, have an ability to provide a low real return; while others such as equities provide the highest real return, but with the greatest volatility. It’s the combination of these assets that is important.

    The last 12 months have been difficult for all investors drawing down on their portfolios. With certain asset classes showing higher prospective real returns, it’s important to continually look at the asset allocation mix.

    Kind regards

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

    Permalink2008-11-10, 18:53:48, by ian Email , Leave a comment

    Preventing Value Destruction

    Ian mentioned in the last report how Central Banks in the developed markets are getting more aggressive in the nature that they are dealing with the current global issues. They realise that they will play a key role in getting asset prices to stabilise over the next period (how long it will be until prices stabilise is at this point debatable).

    By lowering interest rates and increasing money supply Central Bankers are able, to a certain extent, to increase demand for goods and services, and thereby stimulate the economy. While we have fortunately seen a concerted effort to address this problem, you may ask what you, as an individual investor, can do to help prevent the value of your assets from plummeting.

    Paramount to wealth generation are two key principals. Firstly, you need to be invested in growth assets in order to generate wealth in real terms. This is a no brainer; you will be unable to generate wealth unless you invest in assets that have the ability to generate wealth. Cash is an asset class that is unable to deliver wealth over any long term period.

    The second principal is that you must at all times seek to avoid permanent capital loss. First prize is obviously avoiding any capital loss, but this is extremely difficult to achieve (especially in the current environment) unless one purchases risk free assets (which are guaranteed not to provide real capital growth). Permanent capital loss is circumvented by avoiding deep capital drawdowns. The graph below shows what return you need for various levels of drawdown just to get back to your starting point. As you can see the curve is exponential!

    Your question may now be how you avoid these capital losses especially when we see stock markets around the world down from their peak in the magnitude of 40 – 60% and more in some circumstances.

    We believe that by diversifying your investments into various growth assets you are able to enjoy the benefits of diversification. Yes, there will be times where some of your assets won’t be firing on all cylinders, but equally there should at all times be some assets that are appreciating in value. It is important to be diversified throughout the cycle, as most asset class blowouts occur at the peak of their popularity. Sticking to a disciplined strategy to help you avoid being sucked in by ‘the herd’.

    Now that you’ve diversified you can look to tilting your portfolio away from expensive assets towards cheaper assets. By consistently rebalancing in this fashion you should be able to improve performance over time.

    While wealth creation isn’t an easy game, having a proper game plan will certainly assist you in achieving your goals.

    Enjoy your weekend!

    Take care,

    Mike Browne
    mike@seedinvestments.co.za
    www.seedinvestments.co.za
    021 914 4966

    Permalink2008-11-07, 16:05:05, by Mike Email , Leave a comment

    Central banks get more aggressive

    It was widely expected that the Bank of England would cut their base rate by 0,5% today, but they surprised with a 1,5% rate cut, bringing their key rate down to 3%. Naturally this gives a high level of indication of the problems in the global and more specifically UK banks. The ECB cut their rates by 0,5% as expected, while the Swiss lowered their key rates by the same 0,5%.

    The EBC reduced their base rate to 3,25%. Both the ECB and the Bank of England are expected to be aiming their base rates to around 2%.

    At 3% this is the lowest since 1955.

    Inflation is yesterday’s story as far as central banks are concerned.

    The ECB especially has been behind the curve in lowering rates. Just a few months back, they were still concerned with inflationary pressures. But commodity prices have fallen substantially, economies have slowed and they have had to quickly re-adjust their stance.

    A UK strategist in a presentation last week noted the fact that for the first time ever, global central banks are acting in unison in terms of attacking the global credit crunch. Now more than we have seen in a long time, they are being aggressive about easing.

    The investor focus is on the immediate problem, but the permutations of this global monetary easing are not all predictable.

    Its unlikely to have an impact in the shorter term because global investors are risk averse. But in the medium to longer term, its almost foolproof – reduce the cost of money to virtually nothing, provide credit lines to the main banks, buy back their “toxic” assets, and eventually the more aggressive investors begin to catch on that maybe, just maybe its time again to start borrowing at next to nothing and investing back into some asset.

    At this stage, its difficult to ascertain what asset class that will be.

    Central bankers are not infallible. They have an objective to protect the purchasing power of their currencies over time, but even in an official low interest rate environment, consumers have first hand knowledge of the impact of more and more money in circulation.

    The banking collapse has had an immediate and sharp contraction of global credit. The eagerness with which central bankers are now acting to belatedly ease the pain, has a high probability of putting back too much money into the global system – against an already contracted asset base.

    Kind regards

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

    Permalink2008-11-06, 17:34:56, by ian Email , Leave a comment

    Two construction companies

    The US voted in Barack Obama as the 44th president. The recent demise in the country’s and world’s economies were ascribed to the incumbent political party and the democrats come in on a platform of sweeping change. Gains yesterday were reversed today – perhaps as some of the reality sunk in that there is still a lot to do. Today however I looked at two companies in the construction industry which listed in 2006 to get a sense of profitability.

    The first is Alt X listed WG Wearne, a quarry and ready mix concrete business, which came to the market in early 2006, listed just under R2, traded up to R6 a year later, but then fell steadily but swiftly to 130c on Tuesday. Results for the 6 months to end of August reflect revenue up 14% to almost R300m, but attributable profit down at R5,3 million from the previous 6 months of R24,2m.

    Fully diluted headline earnings fell from 15,5c to 3,7c.

    Why the dramatic decline?

    Two general industry factors listed include:

    o The dramatic increase in the price of fuel, which could not be passed on to customers timeously.
    o A slowdown in the residential property market.

    Some specific factors were lower production through a mobile crushing contract, a temporary closure of dump in Carltonville and losses at a newly acquired quarry.

    The price was impacted and fell a further 7% to 120c. At the peak levels, exuberance set in for a newly listed company in one of the preferred sectors of the time, i.e. construction and related.

    The company had provided guidance on this decline in earnings in late October.

    The company has made some acquisitions and now has a market cap of R220m, down from a peak of around R900m


    Esor was also well received by the market in March 2006. It listed around R2 and traded up to a high of 925c one year ago. From this peak it has more than halved to 385c.

    Esor is a geotechnical engineering company, providing services to customers in the construction industry, executing projects for parastatals, local government and corporations either as partners in a consortium or as the primary contractor for underground construction projects.

    It is typically involved in more of the early stage work. It also acquired Franki, a piling business for large scale projects.

    Today it released its interims to August. These reflected revenue up R578m, profits before interest tax, depreciation up 12,5% and headline earnings flat at R56m. Headline EPS fell from 25,6c to 23c.

    They cited the rising cost of steel and fuel as negative factors. Also given the relatively short duration of their contracts, they could not escalate contract prices quick enough. They also cited intensified competition.

    Still they say that the prospects for the local civil engineering and construction industry remain buoyant, which is positive for this company.

    The share price fell 6,4% to 365c.

    Prospects for this industry still look good, but what is worrying is that both companies continue to make acquisitions. Often this can boost earnings in the shorter term, but be negative in the medium term as dilution sets in.

    That’s all for now

    Regards

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

    Permalink2008-11-05, 17:38:17, by ian Email , Leave a comment

    Trading updates

    Tuesday ended positive and there is a semblance that global markets are normalising. The JSE ended up 2,4% with Gold up 3,3% and Industrials up nearly 3%. Libor the London Interbank Offered Rate has been declining fairly sharply, which is positive and gives an indication that money markets are slowly thawing.

    In the past the Libor rate has trade around 0,25% above that of the Bank of England’s base rate. The 3 month sterling Libor came down to around 5,77%, which is now just over 120 points or 1,2% above the Bank rate, from a peak of around 185 points.

    There is a valid assertion that many companies, both local and global are trading at earnings levels which are unsustainable. Given the evidence, this is likely to be true across the market, but there are always going to be companies that are coming off a lower base of earnings and fund managers will be looking for those companies that have sustainable earnings over the next few years and are not trading at expensive multiples.

    A few profit updates

    Stefanutti Stocks Holdings in the construction sector, previously reported that profits for the 6 months to August would be up between 85% and 105%. Now they report that these earnings will be up between 95% and 115%. The share has come down substantially from its highs, ending down 10c to 1190.

    Barloworld issued a trading update for its results to end of September. The local Equipment business is delivering strong performance, but Equipment Siberia is suffering from construction downturn.

    The motor retail division is struggling, but overall the group’s results will be up due to the equipment business. While there are a number of once off items, normalised headline EPS should be up between 25% and 35%. The shares ended up 1,28% to 5875c.

    Sugar business, Illovo said that its results are materially affected by world sugar price and rand dollar exchange rate. Both have been working in the companies favour, offset by decreases in production estimates. Headline EPS for the 6 months are likely to be between 25% and 35%. . This is likely to decline for the full year to March. The share price gained 4,6% to 2260c. The consensus one year forward Dividend yield is 4,3%.

    JD Groups trading update was not as rosy, but at least expected. Operating profit before debtor’s costs, net finance costs and tax for the year to August is expected to be between 25% and 35% lower than prior year. At the headline earnings basis however the decline is expected to be 47% to 57%. The shares have been so derated that they declined just 20c to R27

    Last week, chemical and fertiliser company Omnia came out with a trading update for its 6 month results to September. It expected headline earnings to increase between 275% and 285%. The price gained 6,7% to R64.

    Today the rand appreciated against a range of currencies today. Last trading at R9,71/dollar, R15,61/pound and R12,61/euro.

    On election day in the US, the markets are trading up. The Dow is up 3%, the broader S&P 500 up 3,8% and the Nasdaq up 2,8%.

    Have a great evening.

    Regards

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

    Permalink2008-11-04, 18:30:33, by ian Email , Leave a comment

    US presidential elections and interest rates

    There seems to be a collective sigh of relief that October is over. It proved to be an extremely volatile month. At one point the JSE All Share index was down over 22%, before recovering strongly in the last week to register a drop of 11,65%. The rand declined around 16% to the strong US dollar.

    This is a busy week with a lot of attention on the US presidential elections tomorrow. Also further interest rate cuts likely from the ECB and the Bank of England on Thursday.

    There has been a lot of analysis on correlations between the US dollar index and market performance on the one hand a change in political parties. A Standard Bank report today highlighted some analysis on the dollar going back in time and concluded that turning points in the dollar seem to be more closely related to central bank intervention than any change in president.

    As to the impact on equity prices, they also state that it probably does not make any difference who wins, especially in the short term. Such is the state of the economic issues in the US that the next president, democrat or republican, is inheriting an economy into recession and higher government debt requirements. This is typically symptomatic of a democrat incumbent, but under the republicans, official government debt was raised from $5,727 trillion to just over $10 trillion now.

    In nominal terms at least this was the biggest under any US president.

    The fact remains that no matter who arrives next at the White House, the US government will need to keep on raising debt (i.e. the Fed prints and the Treasury borrows) in order to continue to support the balance sheets of a growing number of institutions.

    The European Central Bank and the UK’s MPC will announce on interest rates this Thursday. Standard Bank thinks that both need to get their rates down to 2% as quickly as possibly, and that each will lower by 0,5% this week.

    The ECB’s rate is currently 3,75% and the UK at 4,5%.

    This chart below reflects the size of the US Federal Reserve’s assets jumping up sharply to $2 trillion and the recent gain in the US dollar versus a basket of currencies.


    Source Ecowin and Standard Bank

    That’s all for now.

    Don't hesitate to contact us if you would like to discuss your investment planning

    Regards

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

    Permalink2008-11-03, 19:02:24, by ian Email , Leave a comment