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    Daily Equity Report Wednesday 31 December 2008

    The JSE closed up 0.75% at 21509 with value traded at R 1.34 billion. Advances led declines 150 to 74 with 73 shares unchanged out of 297 active. Mining closed up 2.13% at 24798, while Industrials were down 0.17% at 20418 and financials ended the day up 0.05% at 15779.

    The best performing sectors of the day were FTSE/JSE SHARIAH ALL up 10.9% at 2273, FTSE/JSE RAFI 40 up 8% at 4298 and COAL MINING up 3% at 42859, while the worst were FTSE/JSE All Africa ex SA 30 with US$ values down 33% at 57, SHARIAH TOP40 INDEX down 32% at 2261 and FTSE/JSE All Africa ex SA 30 with S A Rand values down 27.8% at 69.

    There were 1 new lows today, including Alliance topped the list, down 1.3% at 390.

    Of the major stocks Woolies ended up 1.6% at 1271, Mtn was down 0.82% at 10850, Billiton ended up 3.21% at 17762, Anglo moved up 1.83% at 21099, Sasol ended up 0.82% at 28002.

    Biggest gainers of the day where Growpnt-n up 23.33% at 185 , Kap up 16.67% at 175 , some of the losing shares included Ellies off 6.67% at 140 and Granprade down 6.52% at 215

    The Dow was up 1.1% at 8760.30 and the S&P 500 up 1.1% at 900.15 a few moments ago.

    Gold was off 0.2% at $ 868.00/oz

    The rand was last trading at R 9.39 to the dollar, R 13.73 to the pound and R 13.12 to the Euro.

    Permalink2008-12-31, 18:51:37, by admin Email , Leave a comment

    Daily Equity Report Tuesday 30 December 2008

    The JSE closed up 0.52% at 21348 with value traded at R 3.05 billion. Advances led declines 151 to 122 with 82 shares unchanged out of 355 active. Mining closed off 0.46% at 24280, while Industrials were up 1.16% at 20454 and financials ended the day up 0.75% at 15771.

    The best performing sectors of the day were FTSE/JSE SHARIAH ALL up 9.6% at 2246, FTSE/JSE RAFI 40 up 7.5% at 4279 and Industrial Metals Index up 4.5% at 21469, while the worst were SHARIAH TOP40 INDEX down 32.9% at 2231, FTSE/JSE All Africa ex SA 30 with US$ values down 32.7% at 57 and FTSE/JSE All Africa ex SA 30 with S A Rand values down 27.7% at 70.

    There were 2 new 12 month highs today, including Truwths which closed up 1.4% at 3550, A-v-i up 0.9% at 2104 while there were 7 new lows of which Lib-int topped the list, down 5.1% at 6640, Ips down 1.7% at 345 and Bats down 0.5% at 24225.

    Of the major stocks Mtn ended up 2.42% at 10940, Anglo lost 0.57% at 20719, Billiton ended down 0.14% at 17209, Sasol was up 1.55% at 27775, Stanbank was unchanged at 8300.

    Best performers of the day were Pzgold up 16.67% at 140 , Anooraq up 14.29% at 400 , some of the losing shares included Psg down 10% at 1350 and Pergrin off 5.68% at 830

    The Dow was up 1.5% at 8608.42 and the S&P 500 up 1.5% at 882.41 a few moments ago.

    Gold was off 1.1% at $ 870.30/oz

    The rand was last trading at R 9.36 to the dollar, R 13.50 to the pound and R 13.21 to the Euro.

    Permalink2008-12-30, 20:06:54, by admin Email , Leave a comment

    Daily Equity Report 29 December 2008

    The JSE closed up 1.14% at 21238 with value traded at R 2.78 billion. Advances led declines 188 to 126 with 67 shares unchanged out of 381 active. Mining closed up 2.46% at 24393, while Industrials were up 0.39% at 20219 and financials ended the day up 0.21% at 15653.

    The best performing sectors of the day were FTSE/JSE SHARIAH ALL up 9.4% at 2242, FTSE/JSE RAFI 40 up 6.8% at 4251 and Platinum Mining up 6.1% at 52, while the worst were FTSE/JSE All Africa ex SA 30 with US$ values down 34.8% at 56, SHARIAH TOP40 INDEX down 33.1% at 2227 and FTSE/JSE All Africa ex SA 30 with S A Rand values down 29.3% at 68.

    There were 2 new 12 month highs today, including Nuclicks which closed up 7.1% at 1745, Foschini up 0.1% at 4625 while there were 3 new lows of which Elbgroup topped the list, down 11% at 800, Lib-int down 4.8% at 7000 and Metair down 1.5% at 580.

    Of the major stocks Mtn ended up 2.55% at 10681, Anglo ended up 1.75% at 20837, Bats ended down 0.63% at 24353, Naspersn was off 2.71% at 15951, Sasol gained 1.15% at 27350.

    Best performers of the day were Growpnt-n up 29.31% at 150 , Psg up 15.21% at 1500 , while the major losers were Pzgold off 14.29% at 120 and Elbgroup down 11.01% at 800

    The Dow was off 1.2% at 8409.93 and the S&P 500 off 1.4% at 860.93 a few moments ago.

    Gold was up 4% at $ 877.40/oz

    The rand was last trading at R 9.44 to the dollar, R 13.74 to the pound and R 13.39 to the Euro.

    Permalink2008-12-29, 20:07:22, by admin Email , Leave a comment

    Daily Equity Report 24 December 2008

    The JSE closed down 1.16% at 20998 with value traded at R 1.59 billion. Advances led declines 117 to 116 with 55 shares unchanged out of 288 active. Mining closed off 1.77% at 23806, while Industrials were down 0.7% at 20140 and financials ended the day off 0.61% at 15621.

    The best performing sectors of the day were FTSE/JSE SHARIAH ALL up 7.1% at 2194, FTSE/JSE RAFI 40 up 5.9% at 4213 and Mobile Telecommunications up 3% at 166, while the worst were SHARIAH TOP40 INDEX down 34.6% at 2177, FTSE/JSE All Africa ex SA 30 with US$ values down 34.1% at 56 and FTSE/JSE All Africa 40 Index with US$ values down 28.8% at 55.

    There were 1 new 12 month highs today, including Growpnt-n which closed up -48.9% at 116 while there were 1 new lows of which Bats topped the list, down 2.2% at 24507.

    Of the major stocks Mtn gained 3.12% at 10415, Invltd moved up 0.39% at 4122, Stanbank lost 2.83% at 8211, Steinhoff was off 1.2% at 1235, Sasol was down 2.2% at 27040.

    Biggest gainers of the day where Wesco up 23.76% at 250 , Eastplats up 14.92% at 285 , while the major losers were Growpnt-n down 48.9% at 116 and Granprade off 10.42% at 215

    The Dow was up 0.5% at 8457.96 and the S&P 500 up 0.4% at 866.61 a few moments ago.

    Gold was unchanged 0% at $ 843.10/oz

    The rand was last trading at R 9.74 to the dollar, R 14.29 to the pound and R 13.61 to the Euro.

    Permalink2008-12-24, 18:55:59, by admin Email , Leave a comment

    Daily Equity Report Tuesday 23 December 2008

    The JSE closed up 0.73% at 21245 with value traded at R 3.51 billion. Advances led declines 146 to 133 with 79 shares unchanged out of 358 active. Mining closed down 0.68% at 24235, while Industrials were up 1.81% at 20282 and financials ended the day up 0.41% at 15717.

    The best performing sectors of the day were FTSE/JSE SHARIAH ALL up 8.4% at 2222, FTSE/JSE RAFI 40 up 7.2% at 4266 and Mobile Telecommunications up 5% at 161, while the worst were FTSE/JSE All Africa ex SA 30 with US$ values down 34.9% at 56, SHARIAH TOP40 INDEX down 33.6% at 2208 and FTSE/JSE All Africa 40 Index with US$ values down 28.6% at 55.

    There were 5 new lows today, including Diamondcp topped the list, down 38.5% at 400, Howden down 5.9% at 745 and Jubilee down 1.4% at 138.

    Of the major stocks Anglo lost 0.05% at 20790, Mtn moved up 5.21% at 10100, Billiton was down 0.96% at 17520, Sasol moved up 3.36% at 27649, Implats was down 3.01% at 12900.

    Biggest gainers of the day where Brc up 100% at 300 , Witsgold up 17.14% at 4100 , some of the losing shares included Diamondcp off 38.46% at 400 and Pergrin off 13.46% at 900

    The Dow was down 0.6% at 8468.16 and the S&P 500 down 0.5% at 866.90 a few moments ago.

    Gold was off 1.7% at $ 834.50/oz

    The rand was last trading at R 9.64 to the dollar, R 14.18 to the pound and R 13.46 to the Euro.

    Permalink2008-12-23, 20:09:42, by admin Email , Leave a comment

    Daily Equity Report Monday 22 December 2008

    The JSE closed off 0.92% at 21091 with value traded at R 5.70 billion. Advances led declines 172 to 152 with 85 shares unchanged out of 409 active. Mining closed off 0.74% at 24400, while Industrials were down 0.53% at 19922 and financials ended the day down 1.36% at 15652.

    The best performing sectors of the day were Personal Goods Index up 0% at 4227, Development Capital up 12.3% at 566 and FTSE/JSE SHARIAH ALL up 7.7% at 2208, while the worst were FTSE/JSE All Africa ex SA 30 with US$ values down 34.7% at 56, SHARIAH TOP40 INDEX down 34.1% at 2194 and FTSE/JSE All Africa 40 Index with US$ values down 29.3% at 55.

    There were 4 new 12 month highs today, including Ambit which closed up 3.8% at 410, Adcock up 0.6% at 3900 and Lewis up 0.2% at 4766 while there were 7 new lows of which Brc topped the list, down 25% at 150, Lonfin down 19.4% at 250 and Twp down 18.4% at 449.

    Of the major stocks Anglo ended down 3.26% at 20800, Mtn was down 3.03% at 9600, Bats moved down 0.8% at 24900, Sasol was down 2.9% at 26750, Angloplat moved up 1.73% at 52900.

    Best performers of the day were Trnpaco up 24.39% at 510 , Pergrin up 22.35% at 1040 , while the major losers were Brc down 25% at 150 and Lonfin off 19.35% at 250

    The Dow was down 0.6% at 8524.55 and the S&P 500 off 1.6% at 873.95 a few moments ago.

    Gold was up 1.7% at $ 849.80/oz

    The rand was last trading at R 9.72 to the dollar, R 14.44 to the pound and R 13.57 to the Euro.

    Permalink2008-12-22, 20:04:27, by admin Email , Leave a comment

    2008 Daily Equity Report Wrap Up

    As Ian wrote in yesterday’s piece, 2008 will go down as a watershed year. After solid positive returns from the JSE from 2003 to 2007 of 16.1%, 25.4%, 47.3%, 41.2%, and 19.2% respectively, we are now facing a year in which a large negative equity market return will be posted (unless something freakishly happens over the next 6 trading days).

    The market has, year-to-date, returned -24.8%, and will go down in history as one of the worst performing calendar years of all time. The poor year-to-date return came on the back of a -7.4% return in the last two months of 2007. From October peak to current levels this is a drop of over 30% and the drop from May’s new high is now approaching 35% in rand terms. Hard currency (dollar) returns over both periods are obviously far worse. The rand was trading at 6.72 to the US dollar at the October 2007 peak, and 7.66 at the May all time peak!

    While the above paints a gloomy picture, I was heartened to read a translated article by Kokkie Kooyman (fund manager at SIM) this morning entitled “2008’s worldwide financial crisis – a different perspective” the original of which appeared in Die Beeld last week.

    While not glossing over the fact that 2008 has been a dismal year in terms of equity market performance and global economic growth, he does point out that the policies that ultimately caused the collapse in the markets have over the past 2 to 3 decades created significant wealth for a large portion of the worlds population. By allowing markets to operate freely (to a large extent) innovation was allowed to thrive, which aided economic growth. Growth was also pushed along by credit expansion. Likewise wholesale regulation (while having good ideals of protecting the innocent) will result in a decrease in innovation, which will result in slower growth, which will be further exacerbated by a contraction in credit.

    He carries on to explain that human nature will dictate that these cycles will continue into the future, as on a basic level humans are greedy (which shouldn’t only be seen in a negative context as greed is a powerful driving force in human advancement).

    One statistic that I found in an Aurum (international Fund of Hedge Fund manager) newsletter that I thought was interesting was that “from 1950 – August 2008 the S&P 500 index ended the day gaining/losing more than +/- 5% on only 19 separate occasions over that 58 year period. Since 29th September 2008 such gains or losses have occurred 18 times, i.e. almost as much in two months as in the previous 58 years.” I think it is impossible to plausibly contest that we are living in extraordinary times!

    Hopefully we can look forward to a less volatile 2009!

    This is the last Daily Equity Report for 2008. We are taking a break, and will resume again on 5 January. We at Seed would like to take this opportunity to thank our loyal readers, and hope that you find these reports informative, educational, and enjoyable. Enjoy the festive season, and for those who are travelling to holiday destinations, travel safely!

    Take care,

    Mike Browne
    021 9144 966

    Permalink2008-12-19, 15:07:13, by Mike Email , Leave a comment

    Regulation is set to increase

    Regulation will increase.

    In many respects this week’s unravelling of the $50 billion pyramid or Ponzi scheme of Bernard Madoff caps a year that itself displayed signs of being a ponzi scheme. Millions of investors around the world have lost billions of dollars, euros or pounds and they will look for someone to blame. This invariably means increased government intervention and more regulation.

    The US SEC (Securities and Exchange Commission) is one of the worlds toughest regulators, but they failed to uncover what was happening at Madoff Securities, where it appears that investors have lost up to $50 billion.

    The SEC itself was created in 1934 after the great crash of 1929, with its main reason to regulate the stock market and prevent corporate abuses. It has 3800 employees.

    Invariably calls for increased legislation and regulation are made after major collapses. The same has started to happen again after a tumultuous 2008.

    After major corporate and accounting scandals from late 1990’s to early 2000’s caused investors to lose billion when the likes of Enron, Worldcom, Tyco etc collapsed, the Sarbanes Oxley Act of 2002 was enacted. This is also known as the Public Company Accounting Reform and Investor Protection Act of 2002.

    It was far reaching legislation for all public companies.

    2008 saw the failure of the world’s largest financial institutions. It saw the failure of credit rating agencies to identify and timeously notify risks in financial institutions and credit markets.

    Failure also extended to the UK, where the FSA (Financial Services Authority) enforcement did not manage to save the collapse of Northern Rock.

    The collapse of the 2 US government sponsored entities, Fannie Mae and Freddie Mac and the subsequent bailout by the Federal Reserve saw a change in their regulator to the Federal Housing Finance Agency.

    The weakening global economy has expedited president elect, Obama’s call for a trillion dollars economic stimulus plan to try and create jobs. He is calling on Congress to act quickly to pass the necessary legislation, which is still being crafted by his transition team.

    Europe and China are also looking to spend in order to stimulate their respective economies.

    The 1980’s and 1990’s saw an environment of less government involvement in global economies. This is now quickly moving back again to increased participation.

    Increased government regulation, increased government participation in the economy and increased government debt levels may not necessary have the desired longer term positive effect on an economy. The increased complexity combined with the speed with which governments are stepping up their participation has the real risk of unintended consequences.

    Looking back 2008 will be a watershed year.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2008-12-18, 17:12:10, by ian Email , Leave a comment

    2 weeks to the end of 2008

    2008 has less than 2 weeks to run. It’s been an exceptionally volatile year, which many investors would love to forget. Global asset prices received a boost from the decision in the US to lower their Federal Reserve Funds rate to an all-time low. Investors are now looking for signs of a market rally.

    With the US dropping the Fed funds rate to a range between 0% and 0,25%, on Tuesday, they gave every indication that they want to underpin asset prices. They are doing this by making money available at virtually no cost.

    In addition to flooding the banking system, the Federal Reserve will use other measures like buying up issues of securities by Fannie Mae and Freddie Mac, the mortgage issuers, under the control of government. It may even print money to buy longer dated treasuries – which keeps the yield on these bonds low for a time.

    After the unexpected announcement, US equity markets rallied up. However on Wednesday’s opening, the indices are trading down around 1%.

    The Tuesday rally took the S&P500 index rallied above its 50 day moving average. For many investors with a focus on technical aspect to prices, this is a positive sign.

    The weaker dollar has made gold more attractive. Gold is now at $876, up 6% on the day. The price now exceeds that of platinum, which is trading at $869/oz. This may be an indication of the longer term uptrend of gold. Prices of gold shares have moved up from recent lows.

    Money has continued to flood into US Treasuries and the yield on the 10 year bond fell to a low of 2,3%.

    As US interest rates were slashed so the dollar plunged against other currencies, falling to below 88 yen. Low interest rates also reduces the opportunity cost of owning gold, hence its recent gains.

    With oil dropping from highs to around $40, Opec announced a further 2,2m barrels a day cut. But this had little impact on prices given the assumption that these barrels come onto the market via some of the member countries not adhering to cut backs in production.

    Oil actually fell today to $44,68 / barrel, down 4,5% on the day.

    The local JSE rallied up on the back of firmer US and Asian markets. The JSE overall gained 2,77% to 22409. Financials put on 3,4%. Volumes remained high at over R13 billion traded.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2008-12-17, 19:14:44, by ian Email , Leave a comment

    US Automotive Crisis

    For a long time the US automotive industry has been a source of national pride. From the time that Henry Ford implemented assembly production of the Ford Model T, making automobiles affordable for the general population, Americans have beamed with pride in their rich motor producing heritage.

    As recently as 2005, the US was still the top motor vehicle producing country in the world. They have since slipped to second on the list, behind Japan. According to Wikipedia the US produced 10.8 million vehicles in 2007, behind Japan’s 11.6 million. This is down 11.01% since 2003, while Japan’s production increased by 12.74% over the same period. Other Asian countries have also upped their production over this period, with China doubling production to 8.9 million cars over this period, and South Korea increasing production from 3.2 million units to 4.1 million from 2003 – 2007.

    Reasons for the declining production in the US can possibly be attributed to several factors. Firstly, the US is an extremely wealthy nation (as measured by per capita GDP) which has historically had a culture of car ownership. According to the US Bureau of Transit Statistics for 2006 there were over 250 million registered vehicles in the US (Wikipedia) which equates to a penetration level of around 83% of the 300 million US population. As penetration levels increase the opportunity to increase sales at a rate faster than the population growth rate becomes more difficult.

    Secondly, the US automotive industry isn’t globally competitive as a result of higher wage costs, and less efficient methods. The higher per unit wage can be partly attributed to the unionised labour force, which is much less competitive than the Asian countries. As a result, importing cars is often more cost effective unless the government heavily subsidizes the industry or imposes import duties on the imported vehicles.

    Finally, the massive increase in the oil price over the last 6 years or so (notwithstanding the massive fall in price since June) has resulted in the affordability of cars decreasing. It will be interesting to ultimately see what the final production figures are for 2008.

    The credit crunch hit an already ailing industry (General Motors’ share price fell by 66.8% from 28 April 2000 – 27 July 2007 – before the sub-prime crisis began) and its share price is now nearly 96% off its 2000 high (Ford has fallen 91.8% since its 1999 high), and 87% lower than it was before the beginning of the sub-prime crisis.

    While the industry is clearly struggling, there is the political will (at least from the Democrats) to prevent the ‘Big Three’ (a moniker that refers to Ford, General Motors, and Chrysler) from going under. Some economists estimate that as many as 3 million jobs will be lost if these companies go under, as it’s not only their employees that will lose their jobs, but their suppliers and other related businesses will go under. While short term pain can be avoided if some form of bailout is passed (it was turned down last week) there are some that are questioning whether protecting the industry will ultimately be the optimal decision for the long term economic health of the nation.

    Ultimately the result of current negotiations will be a balance of political and economic considerations, and will undoubtedly have a large impact, whatever the outcome.

    Enjoy your public holiday!

    Take care,

    Mike Browne
    021 9144 966

    Source: Wikipedia.org

    Permalink2008-12-15, 16:10:15, by Mike Email , 1 comment

    A Look at Monetary Policy Across the Globe

    I was fortunate enough to come across some analysis by Stanlib economist Kevin Lings yesterday that showed how the 47 countries that they track had altered (or not) their interest rates over the last two months.

    While the majority have cut rates in order to encourage growth, there was a selection of 19 countries (before South Africa’s rate cut yesterday) that had either kept rates constant or increased rates over this period. The vast majority of countries that haven’t cut rates are developing countries, where inflation remains the primary concern.

    A quick economics 101 lesson on why central and reserve banks use monetary policy is in order: Many reserve banks are mandated to target a certain inflation range, and they are generally given monetary policy autonomy in order to achieve this. The predominant method of attempting to keep inflation in the target range is through increasing and decreasing interest rates. The theory behind this method is that by increasing interest rates it makes it more difficult for the population to borrow more, thus discouraging spending, and it also encourages saving, as the return on your deposit increases. The relevant authority will therefore increase rates when they feel that inflation is at risk of going above the target band. Conversely when they decrease rates it encourages more borrowing, as the payback becomes less demanding, and discourages saving, as the return on your deposit decreases.

    As the monetary policy cycle has an approximate 18 month drag, the reserve banks typically act in a counter-cyclical manner, raising rates when inflation is low, and lowering rates when inflation is high.

    At the start of this year, and through the first six months or so rising inflation was the primary concern for global policy makers in both developing and developed markets as food and fuel prices soared on the back of higher commodity prices. Since the middle of the year we have, however, seen these prices come off dramatically, with Brent Crude dropping over $100 a barrel from its high of around $147. The massive fall in the price of inputs has been further exacerbated by the sharp reduction in demand, as the credit crunch has started to severely affect the man on the street.

    The ECB perceived the inflation threat quite seriously earlier in the year, enough in fact, to increase interest rates as recently as 9 July. Since 8 October they have dropped rates by 1.75% as they seek to stabilise asset prices and spur growth. Preventing their economy from going into recession and/or their region experiencing deflation are now their top priorities. This same focus can be seen across the globe.

    Just yesterday the Swiss National Bank dropped rates to 0.5%, with South Korea and Taiwan down to 3% and 2% respectively. These countries are currently doing everything to try and prop up their economy.

    Only time will tell how much all this policy response will impact economies going forward, hopefully they will have the desired effect.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2008-12-12, 16:44:21, by Mike Email , Leave a comment

    Some Reprieve from the MPC

    The MPC (Monetary Policy Committee), headed by Tito Mboweni, sat down for their bi-monthly meeting yesterday and today to discuss how much, if at all, they should change the repo rate by. The repo rate is the rate at which the Reserve Bank lends to the banks.

    To give a brief background, the MPC is mandated to keep CPI-X between 3% and 6%, and using monetary policy (increasing and decreasing interest rates) the attempt to control inflation. While a fairly blunt tool, it has been deemed the most appropriate tool to grow the economy over the long term.

    Monetary policy typically has an 18 month or so lag, and so you will often find the MPC increasing interest rates when inflation is low, and decreasing them when inflation is high. By increasing rates they attempt to manage spending levels, while decreasing rates encourages spending (as consumers and business have to spend less on servicing their debt).

    While inflation was still safely in the target band (4.1%) in June 2006 rates were raised by 0.5% for the first time in this cycle. At the time general consensus was that inflation would increase but that it wouldn’t breach the upper band. Rates were increased by 0.5% at each of the following 3 meetings in August, October, and December, when it was sitting at 9%. CPI-X dipped back to 4.9% in February 2007, after touching 5.3% in January 2007, and this is where the MPC paused on the rate increase. The resumed their 0.5% rate hike in June 2007 and didn’t stop (bar the end of January 2008 meeting) until August this year.

    Over this time CPI-X seriously breached the upper end of the target band, and rose as high as 13.6% in August this year, and with the release of October inflation data has now spent 19 consecutive months outside of its target range. The MPC expects inflation to only re-enter the target range in the third quarter of next year.

    The South African economy has been severely affected by the global economic slow down, to such an extent that GDP growth in the third quarter of this year was a measly 0.2%. While the main mandate is to control inflation Tito Mboweni realises that growth is also a priority, and no/negative growth will encourage deflation which is far harder to control.

    The weakening economy, coupled with an improving inflation outlook, resulted in the MPC deciding to cut interest rates. At the announcement market participants clearly weren’t impressed with the decision, as the ALSI dropped around 2% during the press release of the statement of the MPC. By the end of the day, however, the ALSI had recovered to levels close to where it was trading before the MPC release.

    The 0.5% decrease in interest rates was perhaps a little lower than some were hoping for, but it is at least a step in the right direction to reviving the economy. And just as the MPC were reluctant to increase rates by more than 50bps on the way up, it seems that they want to take the cautious route on the way down.

    A quick calculation shows that investors with a R500 000 bond at prime will save around R185 per month on their interest payments, while those with a R1 000 000 bond at prime will save R370 pm. It should make for a little breather in the Christmas season.

    Here’s to more rate cuts in the New Year to help the economy, and especially those with bonds and cars to pay off.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2008-12-11, 17:44:19, by Mike Email , Leave a comment

    JSE Play on BESA gets Support

    At the end of October the JSE Ltd made a conditional offer to the shareholders of the Bond Exchange of South Africa Ltd (BESA), the rationale behind the offer (after having an eye on the company for around decade) was to improve the service offering.

    Global financial markets are highly competitive and the JSE clearly wants to remain at the cutting edge of the industry. They felt that acquiring BESA would allow them to improve risk management procedures, reduce the cost of transacting (to market participants) through economies of scale, increase the variety of product offered, and increase the liquidity.

    As we have mentioned before the profit driver for the JSE (and likewise for BESA) is volume traded. To a large extent the systems and hardware set up to handle the transactions are a fixed cost, and so the JSE and BESA encourage trading through various methods (including widening the product range offered on the platform) in order to boost profit. Integrating the systems (where possible) furthers economies of scale, which reduces the unit cost of transacting. At the same time by offering one platform (that has an increased product offering) the idea is that they will be able to further boost liquidity, which is a more desirable trait not only for the JSE, as they increase the level of trading (and hence profitability), but also for investors, as they are able to transact with less friction.

    While there clearly are commonalities and synergies to be achieved through the two companies joining, the BESA board and shareholders felt that the offer at R90 a share, valuing the company at just over R173 million, was too low. The offer also had certain conditions which allowed the JSE to adjust the price downwards under certain scenarios. The conditional offer was rejected.

    Both companies did, in the interim, indicate that they were still in talks in respect of a deal, and made a joint announcement this morning that the JSE had increased their offer to R125 a share, and removed the condition that the price could be adjusted downward in certain circumstances. BESA noted further that the JSE committed to retain their existing fee structure for the next 2 years, and to retain all BESA staff.

    Through the proposed scheme the combined JSE/BESA group will look at ways of improving the fixed income offering through a variety of strategies.

    The JSE have received irrevocable undertakings from shareholders holding around 63% of the voting rights to vote in favour of the scheme. This is a step in the right direction for the JSE, but they still require approval from both JSE and BESA shareholders at a meeting whose date is yet to be set. If approval is gained they will then require the regulators to approve the transaction.

    The JSE Ltd closed down 0.45% after opening up 6.78% on yesterday’s close. This compares unfavourably to the resource led ALSI, which was up 4.67% for the day.

    Ian mentioned yesterday how 3 month US Treasury bills were issued that yielded only 0.005%. I read today that they issued 1 month T bills yesterday at a yield of 0%! As mentioned yesterday investors are currently more concerned about return OF capital than return ON capital.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2008-12-10, 17:33:30, by Mike Email , Leave a comment

    Private equity 101

    Investors have moved from risk seeking to absolute risk avoidance in a very short space of time. Today we contrast the ultra thin yield that buyers of US treasury paper are receiving, versus the demand for private equity funds 18 months back.

    The massive mood swings in investor sentiment affects prices across all asset classes over the shorter term. At times the general mood is euphoric, resulting in more buyers than sellers. It has changed quickly into a buyers market, but there are currently few buyers out there.

    This is evident in how money is currently seeking out return of capital, and not return on capital. Today the FT announced that the US Treasury sold $27 billion worth of three-month bills at nearly 0% on Monday. The actual rate came in at 0,005%

    These bills are sold at a discount to the face value. i.e. investors outlaid $999,987.36 to receive $1m in 3 months time - a return of just $12,64. The 0.005% yield was the lowest ever.

    From a peak of 17,14% in December 1980 it has been coming down and down to its current 0,005%.

    The demand for return of capital is contrasted with the demand for return on capital only a relatively short while back.

    Contrast this with the demand for risky assets as evidenced by the listing of the private equity firm, Blackstone Group in June 2007 on the New York Stock Exchange.

    The extent to which investment banks were providing gearing for mergers and acquisitions, resulted in Blackstone growing to a level that made it attractive for its owners to list the business.

    It was the ultimate paradox. The founders, owners of a private equity business, selling their own shares to a hungry market. In these situations wealth is transferred from the uneducated to the well-informed. The founders of the business listed their business by selling shares at $31 and raising a total of $7,78 billion with a substantial portion going to the founders of the business.

    The price promptly started falling from the date of listing. Reaching a low of just below $5 – now at $6.89.

    The decline in the share price of this substantial private equity business says less about the merits of private equity as it does about valuations and transfer of wealth. The founders perfected the timing of the sale of their equity. The buyers of the equity at $31/share were facing some very smart people on the other side of the transaction.

    In a future article, we will look at private equity as a specific investment class.


    Ian de Lange
    021 9144 966

    Permalink2008-12-09, 18:43:24, by ian Email , Leave a comment

    US proposed spending lifts markets

    Monday got off to a good start after the weekend announcement from US president elect that the US government would be spending billions in infrastructure spend. Obama pledged to spend record amounts of money on infrastructure including schools, sewer systems, electrical grids, dams, power etc.

    Monetary easing will eventually work, but given the fact that the financial system is not, for various reasons, delivering the cheaper cost of debt to the end users, the US government is looking for alternative methods of stimulating the economy.

    November job numbers indicated a loss of over 0,5 million, which escalates the past 12 months to nearly 2 million in jobs lost. This probably still under estimates the actual position.

    Clearly the incoming US administration is concerned about the economy heading deeper into recession and has announced the biggest ever public works construction program as one mechanism that will alleviate job losses and help revive the economy.

    There is a lot of anecdotal evidence supporting the view that the US needs to spend on its infrastructure. The only question is how will this be paid for? The US does not have accumulated savings to now spend on capital infrastructure. On the contrary, it has high debt, and the financing of increased government spend will have to be added to the ballooning debt levels.

    The US Federal budget deficit is heading for $1 trillion. There have been reports of this number coming in a lot higher. It does appear that the US government is digging a deeper and deeper hole in terms of its debt levels.

    Public works spending as a means to pull an economy out of a hole, is hugely controversial. Bigger government crowds out the private sector. Its also uneconomic investment.

    The announcement was partly instrumental in sparking a rally in share prices around the world on Monday. Asia’s Hang Seng index gained 8,66%. Germany, France and UK were up strongly.

    The local JSE bounced up 7% or 1363 points to 20 643.

    Gold shares gained 10,6% as the price of gold put on $21 to $770/oz.

    Billiton raced up 13,8% to 16790c

    Goldfields put on 14,5% to R85, as Gold gained around 3% to $771/oz.

    Advances on the JSE outnumbered decliners by 244 to 104.

    The US S&P500 is up at 908, a gain of 3,75%. The question is whether markets will be able to hold onto their gains for the start of a bear market rally.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2008-12-08, 18:21:40, by ian Email , Leave a comment

    Tobin's Q ratio

    Another longer range valuation tool is the Tobin Q ratio, developed by the late James Tobin in 1969. It measures the value of listed shares with the value of company’s equity book value or the replacement value of the net assets. It’s similar to the price to book ratio, but instead looks at the replacement value of assets.

    The ratio is calculated by dividing the market value of a company by the replacement value of the book value.

    The logic behind the ratio is that where the Q ratio is above 1, then the market is valuing a company at more than it costs to reproduce it and stock prices should decline.

    Conversely where the Q ratio is below 1, it is indicating that shares are undervalued because new businesses can’t be created at as cheap a price as they can be bought in the open market.

    As with many indicators, in the shorter run they tend to be volatile and not very useful. But looking back over longer periods of time, it’s apparent that such a ratio must be mean reverting around 1. As Pimco’s Bill Gross noted, “As long as capitalism is a going concern, Q should mean revert to 1.”

    This ratio indicates that equity relative to replacement cost was cheap in the late 1970’s to mid 1980’s.

    Then in the mid to late 1990’s equity relative to replacement cost started getting expensive. This normalised from around 2000, but with equity prices now tumbling sharply, the value of equity relative to the replacement cost is once again cheap.

    The 1990’s were the time for private business owners to list their equity at premiums.

    Existing private equity owners will now not find it attractive to list equity, while the market itself won’t be receptive to new listings.

    Rather we are entering into a time, when larger entities, private equity players and management will find bargains in listed equity and look to buy them in management buy outs.

    Have a wonderful weekend


    Ian de Lange
    021 9144 966

    Permalink2008-12-05, 16:30:00, by ian Email , Leave a comment

    Using 3rd Party Investment Managers

    Over the past week or so Ian has been writing on various investment options. Most cases involve a certain extent of delegation of investment responsibility to a manager/consultant. I write today on some crucial aspects to take into account when delegating investment responsibility.

    Using a third party to manage your investments has both strengths and weaknesses. Some of the positives include allowing non professional investors access to professional fund managers who will invest on their behalf, and pooling trading costs and fees across a large investment base generally reduces trading costs. As is the case with all professionals, fund managers take a fee for their efforts, and this is where each investor needs to decide whether they believe that the fee is justified, which can partially be answered by asking whether they would be able to perform better than the manager (comparing both after trading costs and the manager after management fees).

    With the assortment of investment products and strategies out there it is crucial for the investor (or their consultant) to have a firm grip on what the underlying funds’ mandates and strategies are. Not understanding the mandate and strategy is usually the first area of grievance as the investor’s expectations aren’t matched by the fund manager’s performance.

    A simple example is where an investor invests into a hedge fund with an aggressive mandate, and then doesn’t understand why the fund doesn’t move up consistently month after month like more conservative hedge funds do. Another example is where an investor invests in a commercial property venture, and then wonders why it doesn’t perform as well as a residential property portfolio in a booming residential property market.

    Not understanding the dynamics of the fund that you are invested into is the surest way of underperforming. Investing into equity based unit trusts requires a long term time horizon, but those investors who saw these funds going up month after month during the bull market could have been deceived into thinking that one only required a short term horizon and that parking cash in one of these funds for a few months before switching out was the easiest way to grow their investment. When the bull market finally ended it was these investors who were forced sellers, as many required the capital for other projects.

    By not aligning the investor’s objectives (parking capital for a few months) with the objectives of the fund (long term capital growth, with likely short term volatility) the investor was disappointed and possibly angry that their manager had lost them money.

    On the other hand an educated investor who correctly matched their long term horizon with the equity unit trust might be (relatively) happy with a return of -15%, when the ALSI is down 35%, and the average equity fund manager returned -25% (hypothetical numbers). The investor will no doubt not be happy to have lost this capital, but will realise that their manager has displayed some skill in outperforming both the ALSI and the average manager.

    It is where there is a lack of understanding that investors switch/withdraw their investments at exactly the wrong time.

    The bottom line is to find out as much as possible about the constraints (generally found in the investment mandate) that are imposed on the manager in the management of your investment. Managers don’t have super natural powers, and if you constrain your manager to invest in money market instruments, then they will give you money market (not equity) returns. If possible, find out how your manager intends on managing your portfolio through various scenarios to get a better understanding of what you can expect.

    Education can mitigate the risk that errors are made based on poor judgement. No-one can always make the correct call, but education can help prevent ill informed decisions.

    Have a good weekend.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2008-12-04, 15:51:57, by Mike Email , Leave a comment

    Investing in your own business

    Investing in your own business is said to be one of the best investments available. Our view is that this is often the case because the investor is really maximizing what we all know to be the best investment, i.e. an equity ownership.

    Without going into any detail on the ins and outs of your own company, I am rather going to discuss what we believe are the most important attributes making ones own business a good investment.

    If we look at the basics, the equity ownership of a business is really a claim on the long term future net cash flows generated by that business. After the creditors have been settled for all cost of sales and overheads, and the bank repaid its interest on any debt, the owner enjoys full access to the available free cash flow.

    The owner will decide what proportion is paid out and what is reinvested into the business for growth.

    In this way the equity ownership is a perpetual claim on all future cash flows generated by a business.

    These investments have no maturity date, but there are no guarantees as to the sustainability and growth of the future cash flows.

    In essence then there is no difference between investing into a business that is listed or investing into your own business.

    However factors that can make an investment into ones own business more successful include:

    o Owners understand that it’s a long term investment and accordingly understands that capital and intellectual input in earlier years will drive long term cash flows in the future.

    o An owner typically buys an existing business at a decent price. This can be as low as a cash payback of say 3 - 5 years, or for asset rich businesses, possibly a price not much in excess of the replacement cost of assets.

    o Alternatively an owner starts his own business. Here capital buys assets at cost price and the owner adds intellectual capital to the mix. Use of bank gearing further reduces the initial equity required.

    o An owner reinvests excess cash generated into building capacity that will generate greater cash flows in future.

    Highlighting the similarity of private ownership to ownership of a listed company, the graph below is the analysis of the present value of a business (in this case all the companies in the S&P500). The chart reflects the proportion of value contributed in the first 3 years, the next 5 years and then long term.

    What Societe Generale strategist, James Montier is conveying is that the first 3 years of earnings contribute just 10% of total value, the next 5 years slightly more at 15% and the longer term earnings stream by far and away the greatest contribution to the net present value of a business.

    With private equity the proportions will be similar, but again depending on the entry price paid for the equity, skewed more in favour of the earlier years.

    Private owners often receive a bonus by selling out cheaply acquired equity at higher valuations.

    By simply taking a longer term view on the expected cash flows and by not overpaying on the original right to those cash flows, a private owner often enjoys a far higher return than that of owners of listed equity.

    For high net worth clients who would like to discuss a total strategic plan of their investments, please don't hesitate to contact Vincent Heys on vincent@seedinvestments.co.za


    Ian de Lange
    021 9144 966

    Permalink2008-12-03, 16:58:16, by ian Email , Leave a comment

    Internal rate of return

    When evaluating various investments, a useful tool to use is the internal rate of return. For some investments, like a bank call account the internal rate of return is easy to identify because the bank tells you what it is. For example, a 9% call account has an internal rate of return of 9%.

    For most other investments, you have to do some work to calculate the internal rate of return. This is especially the case when assessing an investment such as a new business that will absorb capital in the first say five years, before generating a cash return.

    This kind of investment generally does not pay a return in a consistent manner like a bank account does. Nevertheless, you can calculate an internal rate of return for these investments, and use it to decide which investments meet certain minimum hurdles.

    To evaluate investments and calculate an internal rate of return an investor must first assess the likely income stream. Any investment can be expressed as an income stream. An income stream lists months or years and the expected quantum of money that flow in or out. Naturally some investments have more predictable income streams than others.

    Lets consider 2 different investments as an example:

    o Invest R1m in a bank account to generate a 5% p.a. interest rate.

    o Invest R1m into a machine for a factory (new project) that will generate a profit of R200 000 per annum for 6 years, but which will have no value after the 6 years due to wear and tear.

    The best way to assess which investment is the better option, before adjusting for risk, is to use the internal rate of return.

    First look at the income streams.

    Option 1

    The net cash flow is R0,3m

    Option 2

    The net cash flow is R0,2m

    On a purely cash basis the bank account appears more attractive. But the key concept here is present value. While the net cash flow from the bank is higher than for the new project, most of the cash flow is in the form of a large lump sum at the end of year 6.

    The new project pays less in total, but it pays more money per year in the years that come sooner.

    One way to compare investments is to calculate the internal rate of return for each. This effectively calculates the investment’s discount rate, which makes the present value of the cash flows equal to zero.

    A higher internal rate of return, implies a higher discount rate. Where the IRR exceeds a required rate of return, the investment may be attractive.

    In the example above, the first investment has an internal rate of return of 5%, while the new project has an internal rate of return of 5,47%, making it slightly more attractive before any adjustment for risk.

    The IRR is an important measurement tool when comparing one investment against another.


    Ian de Lange
    021 9144 966

    Permalink2008-12-02, 19:22:07, by ian Email , Leave a comment

    Debenture Investments

    A debenture is a certificate of agreement of loan which is given under the company’s stamp and which carries an undertaking that the debenture holder will receive an agreed rate of return and the principle upon maturity. The return is often, but not necessarily, fixed as an interest rate.

    In essence a debenture is a debt instrument issued by a company, but there are multiple variations on the structure and the terms, pricing and valuation of these instruments can become quite complex.

    Debentures are not secured by a physical asset or collateral, but by the general creditworthiness and reputation of the issuer.

    A convertible debenture is a bond that can be converted at a pre agreed date, or trigger event, into the equity of the issuing company at some pre announced ratio. To this end it is a hybrid security, with both debt and equity features.

    They can work as follows:

    An investor wishes to take a stake in a company, but instead of buying equity, the company issues a convertible debenture paying a coupon of say 9% per annum, convertible into equity after 5 years at a pre-determined rate. The right to convert is typically at the option of the debenture owners.

    In this way the investor acquires a longer term equity ownership in the company, but at the same time secures an interim return on capital in the form of fixed obligatory coupon payments.

    The debenture structure can include the right to redeem at the option of the issuer.

    Some years back, private equity company Venfin acquired a stake in Didata with Didata issuing a $100m convertible debenture to Venfin

    Listed debentures

    Two listed debentures that come to mind are those issued NewGold Issuer Limited, a public company, which uses the proceeds to acquire 400oz London Good Delivery Bars of gold, held in custody.

    Instead of paying out a fixed coupon, the value of the debenture tracks the rand price of gold with each debenture initially valued at 1/100 of one fine troy ounce of gold.

    Another is Foord Compass debentures. This was originally a property loan stock company, but when the Foord consortium acquired control in 2001, the ordinary shares were delisted, leaving the listed debentures. These are unsecured debentures, which pay out at least 90% of the company’s distributable income.

    Private debentures

    As mentioned debentures are flexible as to the initial and agreed terms between lender and issuer. For this reason, they are often used as the method that investors access an underlying investment.

    Many local hedge funds have structured investor stakes via debentures. The debenture trust deed allows for a variable rate of return per annum, dependent on the performance of the underlying portfolio.

    When investing into a debenture, it’s important to ascertain the identity of the holder of the ordinary shares, security provided if any for the debenture holders, specific terms of the debenture deed especially as regards any interest terms, maturity and conversion terms.

    Investors then need to assess the difference in valuation and risk between acquiring a stake in the ordinary issues shares or the debentures of the same issuer.

    From time to time unlisted debenture offerings come available that may be attractive. Please mail us your details if you would like to be included on selected offerings.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2008-12-01, 17:23:22, by ian Email , Leave a comment