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    Asset Prices Rise in Dollar Terms

    Assets around the globe have appreciated strongly in May. This is especially the case in US dollar terms. The dollar is again looking vulnerable and its decline as a unit of measurement results in a range of assets moving up in price. May proved to be a peak month in 2008 and there may be some concern as we head into June that asset prices have overextended in the short term.

    News reports indicate that stocks, oil, gold and global currencies are all rising – relative to the US dollar.

    Well respected analysts, BCA Research also believe that while the US dollar is becoming a bit oversold, the longer term trend remains down.

    The reason is that post the credit crisis, US policymakers faced a choice to devalue or to deflate. Choosing the former, they are also the most aggressive when compared to other policymakers. The aggressive reflationary policies place the dollar at longer term risk.

    The negative factors for the dollar are the massive US fiscal deficit and the cumulative debt position. Lenders are getting nervous and this is evident in the yield on 10 year debt that they are demanding. At the beginning of the year, lenders were accepting 2.6%, now they are demanding a yield of 3.6% for 10 year bonds.

    The decline in the dollar is evident in the following:

    Oil touched $66.19 - the highest price in almost 7 months. According to the FT, this is looking like the biggest monthly gain in more than 10 years.

    Gold was up trading at $975/oz.

    The dollar is weak against the rand. Through the R8 level to R7.95. It’s also weak against the Australian dollar and the New Zealand dollar.

    3 months copper prices are up at 3 week highs, trading at $4822/ton on the London Metal Exchange.

    Silver is heading for its biggest monthly gain in 22 years.

    Asset appreciation is linked to an increase in risk appetite, but also to a decline in the value of the paper that it is denominated in. It’s the latter factor that all investors need to watch very closely.

    Have a great weekend and enjoy the final.

    Regards

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

    Permalink2009-05-29, 16:08:38, by Mike Email , Leave a comment

    The financial instability hypothesis

    The Reserve Bank dropped their key repo rate by a further 1%, led by the exceptionally weak economic data released 2 days back. Across the globe the direction has been the same – i.e. not a response to inflation, but a response to a rapidly slowing economy with a high element of financial gearing

    The concept that greater and greater use of debt will cause instability in an economy was proposed by the late Hyman Minsky, a mid 20th century American economist (1919 -1996). He articulated a theory on financial instability in 1986 – called the Financial Instability Hypothesis.

    With the recent collapse of credit markets, his theory has proved, in the words of Paul McCulley from Pimco, “unnervingly prescient in explaining the rise and fall of shadow banking – and the dizzying journey of the global financial system over the past several years.”

    His theory provided a framework for distinguishing between stabilising and destabilising capitalistic debt structures.

    In the theory he provided 3 financial stages of increasing fragility with respect to debt.

    • Hedge financing (no relation to hedge funds) where income flows meet all debt repayments (i.e. interest and principal). This is typical of so called self liquidating debt. I.e. debt that finances assets that produce income.

    • Speculative financing where income meets interest obligations, but is unable to meet principal repayments. In these cases the principal obligations need to be rolled over, i.e. extended.

    • Ponzi finance, where the cash flow from operations is not sufficient to fulfil either the repayment of principal or interest. Here assets need to be sold to make repayments.

    Over a longer period of time economies will move from financial structures dominated by hedge financing to structures dominated by ponzi financing. Conventional wisdom is that economies are naturally stable, but Minsky observed that capitalism is inherently unstable.

    The longer people make money by taking risk, the more imprudent they become in risk taking. Risk premiums decline, asset prices are driven up, and gearing levels are increased. I.e. stability is ultimately destabilising.

    The financial system progressed steadily but surely up his risk scale moving from traditional financing to riskier financing such as subprime loans, mortgage backed securities, structured investment vehicles, negative amortisation loans etc.

    Paul McCulley notes that since the peak of the credit crisis, late 2007, early 2008 we have been in a reverse Minsky Moment with assets prices falling, risk premiums getting higher, leverage being scaled back and economic growth being squeezed.

    In sum a debt deflation environment.

    In a delevering environment we have what Keynes coined as the paradox of thrift. I.e. great at a micro level, but very negative for an economy when all citizens are acting this way.

    If we understand that greater and greater access to debt helped asset price inflation, we also understand that the excess and unstable debt needs to be worked out of the system before the cycle can turn again. We will need some patience.

    Kind regards

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

    Permalink2009-05-28, 17:22:16, by ian Email , Leave a comment

    Mr Prices Releases Annual Results

    A SENS announcement was released this morning at 8am before the markets opened with Mr Price’s annual results for the year ending 31 March 2009. The Mr Price Group (Share code: MPC) includes the various Mr Price retail outlets (Home, Sport, etc), Miladys, and Sheet Street. They target customers who value their competitive pricing.

    As indicated in yesterday’s report, data released by Stats SA shows that South Africa has entered a recession, Mr Price was therefore delighted that they were able to grow retail sales by 19.3%, which is comfortably above inflation for the same period. Part of the growth, however, can be attributed to the increase in their footprint by some 16.5%, and comparable sales were therefore only up by 11.4%. While this figure is only slightly above the overall inflation number, there is a larger gap between it and the inflation figures for Clothing and Footwear (4.9%), and Household Contents and Services (7.3%).

    Creating real growth in a period when the country is in recession can be seen in a positive light. Questions arise as to why Mr Price is able to achieve this kind of growth in a recession, can be answered by having a closer look at their business model. As the Mr Price Group is a value retailer they will typically have less cyclical earning than other high end retailers. Their products are typically at the low end of the cost range, and unless consumers completely stop consuming their product they will actually benefit from consumers ‘shopping down’ i.e. purchasing cheaper goods when times get tough.

    Mr Price has also prided themselves as a cash retailer, and this would have assisted particularly in the early part of the financial year when interest rates were higher. With cash sales comprising 84% of total sales, and decreasing bad debts from 8.6% to 6.6%, the quality of their earnings can also be lauded.

    Commentary accompanying the results indicated that the International division added 10 franchise stores to their foreign operations (they now have 17 international operations). This is a segment of the business that they are looking to expand, particularly in Africa, and their business model of selling value goods for cash is one that is sure to prosper throughout the continent.

    A final dividend of 92.8c was declared and this, coupled with the interim dividend of 40.2c, has resulted in the annual dividend payment increasing by 14.7%, and brings the dividend yield to 5%.

    The share price was up 4.2% at one stage today, but fell a bit by the close to end up 1.1%, slightly better than the general retailers index, which was up 0.8%, and the ALSI, up 0.4%.

    CPI data for April was released today by Stats SA, and it came in at 8.4% down from last month’s 8.5%. Consensus forecast was for it to come in at 8.3%, so we can see that inflation’s stickiness remains. Downward trending inflation, albeit slower than expected, and poor GDP numbers will be good news for those hoping for a rate cut tomorrow.

    Take care,

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

    Permalink2009-05-27, 18:27:14, by Mike Email , Leave a comment

    Negative GDP numbers

    The percentage move in South Africa’s GDP was released today. The decline was weaker than expected at negative 6,4% over the final quarter of 2008 annualised. Most economies across the globe are experiencing declines in GDP and South Africa is no exception to this downturn.

    GDP is an acronym for gross domestic product and it is one of the primary indicators to measure the health of an economy. It tries to measure the total rand or dollar value of all goods and services produced over a time frame, usually on a quarterly basis and then seasonally adjusted and annualised.

    A steadily expanding economy is naturally positive as economic production is growing, jobs are being created, wage expansion can take place, businesses are expanding etc. Conversely a contraction in GDP from one period to the next indicates exactly the opposite.

    Stats SA released details of the extent of the contraction in the economy. A graph paints a picture of the decline following years of positive numbers.


    Source: Vunani Securities

    To get some perspective of the size of the SA economy, let’s consider the US. For 2008 this was estimated at $14,2 trillion

    GDP at market prices in SA is estimated at around $300 billion. At constant 2000 prices it is around $147 billion.

    In the first quarter construction with a 3,9% weight and government with a 12,8% weight added 0,4% and 0,5% respectively.

    Manufacturing with a 15,1% weight detracted a massive 3,3%.

    In the long run there is a correlation between GDP and share prices. But GDP stats are historical data. Share prices of companies already anticipated this decline a year back.

    Investors will be looking for the trough in GDP and global growth.

    We have published our latest Monthly Market Overview on our website or click here to get it.

    You can also view our 1 minute presentation - click here

    Kind regards

    Ian de lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144966

    Permalink2009-05-26, 17:00:08, by ian Email , Leave a comment

    Smart investor buys gold

    John Train’s The Money Masters includes as one of his winning strategies – keep an eye on what the master investors are doing. Because fund's quarterly reports are public information, by tracking selected winning funds, one can start to get a sense of what various managers are doing.

    But this is typically not that simple. Very often what one successful manager is doing, his equally successful colleagues are doing just the opposite. And when it comes to hedge fund managers, they are even more difficult to track.

    But one fund manager that has had a very successful run is John Paulson; president of Paulson and Co a New York based hedge fund that he started in 1994. The funds have performed exceptionally strongly in the last 18 months as Paulson correctly identified foreclosures and problems in the mortgage backed securities markets.

    Hedge funds have the ability to profit from share prices that fall and by correctly identifying weak shares, and selling these before price falls, they are able to generate positive returns. One of the group’s funds the Paulson Advantage plus fund generated 158% in 2007.

    This fund then gained 37,6% in 2008 – net of fees. According to company information, the Paulson Credit limited partners fund gained a phenomenal 589% in 2007 and 18,4% in 2008. This type of return attracts money and the fund size went from $100m at the start of 2007 to around $9billion at the end of 2008.

    At the beginning of 2009 Paulson and Co managed around $29 billion.

    So after a phenomenal run shorting financial companies like Fannie Mae and Freddie Mac, what direction is Paulson taking now?

    Now quarterly regulatory filings indicate an increased exposure to gold and gold shares. South Africans saw this when Paulson was the buyer of Anglos stake in AngloGold.

    Bloomberg reported that at the end of the first quarter Paulson was the largest holder of SPDR Gold Trust, holding some 8,7% and valued at $2,8 billion. SPDR is the worlds largest gold ETF, with over 1000 tons of gold. Its SA equivalent is Newgold.

    He purchased a 15% stake in Market Vectors Gold Miners ETF, a fund that mirrors the move in the Amex Gold Miners index.

    He became 4th largest shareholder in Gold Fields with a 2,6% stake.

    He acquired Anglo’s stake in AngloGold Ashanti in March for $1,28 billion – an 11,3% shareholding in this SA gold miner.

    He bought stakes in Kinross Gold corp., a Toronto based gold producer.

    It appears that his gold exposure is of the order of $5 billion. Given the ongoing uncertainties in the global economies, we think that this looks like a pretty smart move.

    Kind regards

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

    Permalink2009-05-26, 15:56:42, by ian Email , Leave a comment

    Smart investor buys gold

    John Train’s The Money Masters includes as one of his winning strategies – keep an eye on what the master investors are doing. Because fund's quarterly reports are public information, by tracking selected winning funds, one can start to get a sense of what various managers are doing.

    But this is typically not that simple. Very often what one successful manager is doing, his equally successful colleagues are doing just the opposite. And when it comes to hedge fund managers, they are even more difficult to track.

    But one fund manager that has had a very successful run is John Paulson; president of Paulson and Co a New York based hedge fund that he started in 1994. The funds have performed exceptionally strongly in the last 18 months as Paulson correctly identified foreclosures and problems in the mortgage backed securities markets.

    Hedge funds have the ability to profit from share prices that fall and by correctly identifying weak shares, and selling these before price falls, they are able to generate positive returns. One of the group’s funds the Paulson Advantage plus fund generated 158% in 2007.

    This fund then gained 37,6% in 2008 – net of fees. According to company information, the Paulson Credit limited partners fund gained a phenomenal 589% in 2007 and 18,4% in 2008. This type of return attracts money and the fund size went from $100m at the start of 2007 to around $9billion at the end of 2008.

    At the beginning of 2009 Paulson and Co managed around $29 billion.

    So after a phenomenal run shorting financial companies like Fannie Mae and Freddie Mac, what direction is Paulson taking now?

    Now quarterly regulatory filings indicate an increased exposure to gold and gold shares. South Africans saw this when Paulson was the buyer of Anglos stake in AngloGold.

    Bloomberg reported that at the end of the first quarter Paulson was the largest holder of SPDR Gold Trust, holding some 8,7% and valued at $2,8 billion. SPDR is the worlds largest gold ETF, with over 1000 tons of gold. Its SA equivalent is Newgold.

    He purchased a 15% stake in Market Vectors Gold Miners ETF, a fund that mirrors the move in the Amex Gold Miners index.

    He became 4th largest shareholder in Gold Fields with a 2,6% stake.

    He acquired Anglo’s stake in AngloGold Ashanti in March for $1,28 billion – an 11,3% shareholding in this SA gold miner.

    He bought stakes in Kinross Gold corp., a Toronto based gold producer.

    It appears that his gold exposure is of the order of $5 billion. Given the ongoing uncertainties in the global economies, we think that this looks like a pretty smart move.

    For a copy of Seed Investment's latest quarterly newsletter. click here - www.seedinvestments.co.za

    Kind regards

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

    Permalink2009-05-25, 17:32:50, by ian Email , Leave a comment

    What is deflation?

    What is deflation? In a typically inflationary world, the concept of deflation is mostly foreign and difficult to grasp. It is important to understand because if economies, while stabilised, cannot move back into positive growth in the next 12 months, face the prospect of deflation.

    One definition is: A sustained fall in the prices of goods and services, and thus the opposite of inflation. It should not be confused with disinflation which is a slowing down of price rises (i.e. a fall in the inflation rate). Deflation may be the result of government policy (such as a move to raise interest rates and cut money supply) or can be caused by external factors, such as intense trade competition or the collapse of an asset bubble. Deflation may have short term benefits, particularly if it is the result of greater efficiencies in the economy, but if it lasts too long, or if it is the result of weakening demand, it can be a negative, self perpetuating influence on economic activity, discouraging consumption, reducing revenue and wage levels, pushing up bad debts and increasing the rate of bankruptcy.

    On the surface, and before deflation really sets in, this does not appear to be too bad – i.e. sustained fall in prices of goods and services.

    There is however another definition. This from Elliot Wave.

    Webster's says, "Inflation is an increase in the volume of money and credit relative to available goods," and "Deflation is a contraction in the volume of money and credit relative to available goods." To understand inflation and deflation, we must understand money and credit.

    It’s the latter type of deflation that the world has experienced. i.e. contraction of money and credit that has pulled back with it the prices of real assets.

    Elliot Wave says most people are unprepared for it because virtually everyone has leveraged themselves to the hilt. Unrealistically low interest rates over many years have “financed” cars, houses, furniture, etc.

    Falling prices mean lower profits for companies. Consumers delay purchases, which in itself is negative for business, further exacerbating the problem.

    Asset price deflation compounds the negative wealth effect.

    Clearly leveraged consumers and leveraged governments don’t want deflation. There has been a concerted effort from central banks to provide liquidity and, in the US to try and keep interest rates on long bonds low. It worked for a while, but long bond rates have been steadily moving back up.

    The worst situation that the US government could find itself in, is ongoing asset price deflation together with rising interest rates, which they will not be able to keep low.


    The market ended up today with gold reflecting the weak US dollar. It moved up to around $957 in US dollars. The JSE ended up 1,8% to 22425

    Have a wonderful weekend.

    We are pleased to inform you that we have published our latest quarterly economic report on our website.

    Also note that we have launched our new website last week. The site will give you a better idea of how we consult to our clients and we manage the portfolios.

    So pick up the latest quarterly report on www.seedinvestments.co.za

    Kind regards

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

    Permalink2009-05-22, 17:33:47, by ian Email , Leave a comment

    Investec results

    Investec reported their March annual results today. This is a company with a dual listed company with Investec plc primary listing in London and Investec Ltd’s primary listing on JSE. The combined market cap is in the order of R30 billion.

    In line with the economic crisis all banks were particularly hard hit. Some more than others and Investec, being an investment bank, with the added disadvantage of having acquired sub prime lender, Kensington, came off very sharply.

    Reporting in GBP, attributable earnings fell 13,2% to GBP261m. The return on average equity fell from 23,6% to 14,8%.

    However shareholders equity gained 18,6% to GBP2,6billion and total assets were up 8,8% to GBP37,1 billion. This resulted in an increase in net asset value per share to 308,8pence from 260,6pence. The price is trading at around 314 pence and so close to a 1 times net asset value.

    Diluted EPS fell 33% to 36,1pence and the dividend was slashed by 48% to 13 pence from 25 pence in order to maintain a higher capital adequacy ratio.

    This graph reflects the history of EPS from 1997. It is evident that, as with most businesses, there is no straight line in earnings growth. EPS fell sharply in 2003 before recovering and now down again by 25%.

    Adjusted EPS before goodwill and non operating items

    Source : Investec

    The share price fell from R60 in Jan 2000 to R17 March 2003, some 3 years later - a drop of 70%, while EPS fell 31% from the 2002 peak.

    The price peaked again in May 2007 at R106. 2 years later its at R40 – a drop of 62%. At its low of around R27, it was off 74%.

    This is clear evidence of the greater volatility in price versus a company’s annual change in earnings and it’s a function of the prices getting too expensive when company’s become very fashionable and too cheap when they are out of favour.

    As a bank, Investec does not have high gearing. Core loans and advances are at 6,2 times equity, up slightly from 2008 at 5,8 times. Investec has held relatively high liquid cash and near cash of an average of GBP4,9billion and the company wants to increase its diversification of funding sources, relying less on the wholesale interbank market.

    Investec operates under a number of business divisions and has been successful in slowly but surely increasing its percentage of recurring type income.

    • Private clients includes private banking and portfolio management
    • Capital markets includes advisory and various financial products
    • Investment banking including corporate finance, private and direct equity etc
    • Asset management
    • Property
    • Group Services includes international trade finance and central funding.

    The percentage contribution to operating profit of these divisions can be seen on this chart


    Source : Investec

    With the price substantially off its peak, many value managers have been buying at these recent levels.

    Please visit the recently updated website of Seed Investments at www.seedinvestments.co.za.

    If you are already in retirement or nearing retirement and need advice and ongoing management of your investments, please don’t hesitate to contact us.

    Kind regards

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

    Permalink2009-05-21, 17:15:06, by ian Email , Leave a comment

    Conflicting views can be confusing

    Today listening to an array of equity and fixed income fund managers it was interesting again to note their views and some of their concerns about various assets going forward. When listening to varied opinions, its understandable that on a global scale market prices are so volatile. With so many diverse opinions, it is very easy to be mistakenly sidetracked and chop and change a longer term investment strategy.

    With regard to global inflation there was an element of consensus in that most believe that inflation is heading higher, given the concerned effort of central banks, government stimulus packages and massive fiscal deficits. What they don’t necessarily agree on is the timing of this, with some thinking that it will come sooner and others later on.

    Local inflation however has not reached vey low or negative levels and is unlikely to do so. It is proving to be sticky on the downside, despite the Reserve Bank having adopted a more conservative approach to interest rates. But because of the weak economy, there is still room for interest rates to decline.

    On shares, whether the current up move is a bear market rally, or a more meaningful start of the next up phase remain debatable. On a pure bottom up analysis of company valuations there is value, but some remain cautious until such time as the economic indicators reflect more than merely a stabilisation, but the start of a global recovery.

    One of the biggest concerns is the extent of global private indebtedness relative to various metrics. i.e. the global economy over the last 20 years has been driven by credit expansion. Now following the credit crisis, a general freezing of new debt and households starting to pay down debt etc, the aggregate of this has and is likely to have a huge negative impact on economic growth.

    Given the extent that government borrowings will increase, fiscal deficits expand and economies will contract there does appear to be an element of consensus that lending long to governments – i.e. buying long dates bonds is a poor investment. But this is where the “scared money” is finding a home. It was reported today that the SA government issued $1,5 billion 10 year bond has attracted bids of around $6 billion.

    Given the extreme pessimism at the beginning of March, global market participants have become less risk averse over the last 2 months, pushing the global markets up from their highs. This has been seen in a number of indicators.

    • Volatility indicators are down.
    • Risk currencies such as the rand have been strong performers against the US dollar.
    • Crude oil is up, as is gold.
    • More and more analysts earnings changes are upgrades

    Rally or not, investors should be concentrating on defining their longer term investments goals and constructing a portfolio that has a high probability of achieving the objectives, irrespective of market volatility. At the extremes it is important to downweight expensive asset classes and overweight others.

    Kind regards

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

    Permalink2009-05-20, 17:11:10, by ian Email , Leave a comment

    Inflation or deflation

    One of the biggest single factors that an investor needs to assess in order to construct a portfolio is the future direction of inflation. When measured, deflation is the steady and sometimes not so steady downward spiral of prices. Inflation is the opposite. Currently the debate is which will grip economies.

    A Standard Bank G10 fixed income report poses the question, “inflation or deflation?” They note that while some countries are experiencing deflation and others will soon join in, especially given the fact that the price of oil peaked in July 2008, the longer term problem is likely to be inflation.

    Of the developed countries, those experiencing negative annual inflation include the US, Japan, Switzerland, Ireland, Portugal, Sweden and Spain. Others will soon join this list, given the base effect of the price of oil a year back.

    There is a definite probability that deflation takes hold as global demand hits rock bottom, firms and individual put off purchases and economic activity slows.

    Adding to, or possibly causing the deflationary problem has been the implosion in the total global bank claims. The December quarterly BIS – Bank of International Settlements report had total bank claims shrinking by $1,8 trillion or 5,5% to $31 trillion. This is the largest decline ever and at this rate an annual decline of 22%. This is the extent of the contraction in the global banking and represents a contraction in genuine deposits reported by the BIS.

    Central banks are fighting the devastating effects of a deflationary environment. They will do this by trying to devalue their currency against local goods and services and for many, “the way to do this is to supply vast sums of cash through quantitative easing.”

    And so the scare of a deflationary world is very real.

    A factor that the Standard Bank report looks at is the price of gold as an indicator of liquidity and possibly future inflation or deflation. With the price, as measured in US dollars, still maintaining its long upward momentum, longer term inflation and probably goods price inflation will be positive.

    Source: Standard Bank Ecowin

    Either way, inflation or deflation the risks are real. A balanced portfolio will attempt to protect against the risks of both, until it becomes much clearer which is the greater threat.

    Kind regards

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

    Permalink2009-05-19, 17:17:04, by ian Email , Leave a comment

    Vodacom Listing

    The much awaited listing of Vodacom (share code: VOD) happened on the JSE today. Usually listings happen without too much controversy, but investors were made to wait for a high court ruling over the weekend to be sure that the listing would occur.

    Trade union COSATU had brought the application to court arguing that by allowing British company Vodafone to increase its stake in Vodacom from 50% to 65%, the country was giving control of a national treasure to a foreign entity. This argument is valid, and does bring the risk that the company gets run in a fashion that isn’t beneficial to local customers, but there are many positives to the transaction.

    Judge John Murphey dismissed COSATU’s application with costs, and COSATU are now urging their union members to switch their cellphone providers to Vodacom’s rivals.

    The granting of the interdict (had it occurred) would not only be a blow to the Vodacom listing, but it would also have damaged South Africa’s credibility as an investment destination, which would have affected future potential foreign transactions, and by extension foreign currency flows.

    Some of the benefits of the transaction are the injection of R22.5 billion of foreign currency into the country at a time when the country has a large current account deficit. We have seen large injections into the equity market during the last bull market, but these were generally portfolio flows, as opposed to the more sticky foreign direct investment (FDI) that Vodafone has made. Portfolio flows do help the currency, but they leave just as easily as they arrive, something that we saw when financial markets plunged last year. FDI is preferable as it is generally a longer term commitment by the entity, and there always is the prospect that more capital gets invested as they attempt to grow the business.

    Another potential risk of the listing is that the parent company (in this case Vodafone) siphons profits out in the form of dividends being paid to the holding company, which would be a drain of foreign investment. Although investments into Africa are generally accompanied by follow up investment as Africa is seen as a growth play as opposed to a cash cow, so this shouldn’t be an issue.

    With Vodacom being unbundled from Telkom as part of the listing we also today saw the share price of Telkom almost halve, as the market cap of Vodacom was taken out of Telkom and distributed to Telkom shareholders (along with a special dividend).

    Vodacom traded up at nearly R65 a share early in the day, before settling back to around the R60 a share level for most of the day, and closing at R58.80. The JSE has confirmed that Vodacom will be included into the Top 40. They release their results tomorrow.

    Telkom opened the day just under R60 a share and spent most of the day in this territory, closing at R60, to give it a market cap of approximately R31.2 billion, down from its Friday closing market cap of R58.8 billion.

    Take care,

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

    Permalink2009-05-18, 17:10:54, by Mike Email , Leave a comment

    Anglogold Releases 1st Quarter Results

    Anglogold (share code: ANG) released their 1st quarter results this morning before the markets opened. The results included a mixed bag, with some positive news and other disappointing areas.

    We have given a great deal of our focus over the last 8 months or so to the area of gold bullion and gold miners. When we saw the collapse of Lehman’s, and the extension of what was at one stage a financial crisis into a global economic crisis, we realised that gold might start playing a greater role in the market than it had done for some years. It is well known that gold has had a large role in the financial world for hundreds of years now, and while its importance has ebbed and flowed, and its position varied over time, it always seems to regain its (for want of a better word) golden allure.

    In periods of turbulence investors seek whatever safe havens that they can find. Since the Lehman’s debacle it has been easy to see where those safe havens have been:

    • Global Bonds as measured by the JP Morgan Global Bond Index (and even more so US Treasuries) up 11.9% in ZAR
    • US dollar strength against most major currencies (upwards of 17% against Sterling) and weakness against the Yen, where carry trade (a strategy that requires no turbulence) has been unwound.
    • Gold. Gold bullion is up 28.4% in ZAR over this period, and with gold companies typically geared to higher gold prices they are up some 57.3% (Gold Mining Index – J150)!

    Gold has clearly been an investor’s favourite over this period.

    Taking a brief look at Anglogold’s results

    One of the measures that CEO, Mark Cutifani, has been overseeing over the past year is the reduction in their gold hedge book. Basically gold companies hedge their forward book (lock in prices for future production) when they think that the gold price will fall. Anglogold has historically had a large hedge book which helps earnings in periods when the gold price is low (and they are contracted to sell at above market rates), but in the current environment has been a drag on earnings as they are contracted to sell their gold at below market rates.

    This process has been going well, with the hedge book reduced by 154 000 oz in the quarter, which helped the price received for their gold jump 25% when compared to the gold price that rose 14%. They have now reduced their hedge book almost in half since this time last year, and plan on reducing their hedged position even further going forward, which will bring them closer to being a pure gold company play.

    On the disappointing side production out of the company dropped by 13% when compared to the December quarter as mines were affected by their annual shut down as well as safety related closures in South Africa. Despite only coming in at 1.103m oz for the quarter Mr Cutifani remains upbeat that the target of 5m oz mined for the year remains within reach.

    Other significant news in the quarter was that Anglo American sold their remaining interest in Anglogold to financial services group Paulson and Company.

    That’s all for this week.

    Take care,

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

    Permalink2009-05-15, 15:48:47, by Mike Email , Leave a comment

    Private equity or small caps

    I noted an interesting report from well respected value fund manager Brandes in the US, where they looked at various studies on the long run performance from private equity and then looked at the performance from small cap listed shares before asking the question if small caps are a viable alternative to private equity.

    While performance data is readily available for public shares, the same is not necessarily true for private equity.

    In performing the research Brandes therefore looked at various academic research reports that tackled private equity returns in various ways.

    Research does indicate that some upper quartile private equity managers produce returns substantially better than listed shares, but according to a number of academic studies, they found that the average private equity returns appear to be less than historical small cap listed returns.

    They then looked at US listed or public shares and compared the large cap shares as measured by the S&P500 to US small cap shares. What is commonly accepted is that given their higher risk and volatility, the performance from small caps over the longer period is superior to that of large caps.

    Annualised return and standard deviation small cap vs large cap 1926 – 2008

    Therefore over the longer period small caps outperformed large caps by 3,6% per annum.

    They concluded that given the drawbacks to private equity such as the higher cost, long lock up periods, extensive commitments, etc small cap public equity offers a definite viable alternative.

    Kind regards

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

    Permalink2009-05-14, 17:45:40, by ian Email , Leave a comment

    Company Announcements

    At least 3 companies reported interim results today. Results were generally under pressure from previous periods. Across industries this is what we are seeing. Local markets followed global markets into negative territory. Gold mining was one of the few sectors that showed a positive day as gold bullion traded through $927/oz.

    Reunert, which operates businesses in the electronics and engineering space such as African Cables, Nashua, Panasonic etc reported interim earnings to March. This reflected revenue flat at R5,1 billion while operating profit fell 27% to R531m.

    Of this Nashua was the biggest component, generating operating profit of R269m with CBI electric R179m, down from R310m and R289m respectively.

    The commentary to the results started by saying that since 2008 results reported in November last year, market conditions have deteriorated radically. It ends by saying that it is unlikely that the South African economy will turn positive in the short term, with recovery dependent on a global recovery.

    The dividend was cut from 78c to 65c a share.

    At R41/share the company has a market cap of R8 billion. The price has halved from over R80.

    Dimension Data reported its interims to March. This was once one of the best loved companies on the JSE. After falling from favour, it has slowly been recovering. It generated revenue of $1,85 billion and operating profit of $87,4m up from $85m at a margin of 4,5% up from 3,9%.

    Because of the strong US dollar its sales in dollars was negatively impacted. In constant currency terms it says that revenue is up 8,1%.

    EPS in US cents increased slightly from 3,7c to 3,9c.

    Didata remains a complex business across many trading regions. In their outlook they are also saying the stock standard - market conditions remain challenging and business visibility will be uncertain.

    The price, which once traded as high as R70 – and even higher as some index tracking funds acquired – fell dramatically as the technology bubble burst to a low of around 170c in 2003. It has progressed, but not necessarily steadily, trading up to R9 and then down to R4 in October 2008. Today it was at 634c, up in a weak market.

    Astral Foods is involved in animal feeds and broiling. Its brands include Meadow Feeds, National Chicks, County Fair, Earlybird Farms etc. A week back it came out with a trading update saying that EPS will decline by 35% to 40%. Today it released its results with EPS down 39%. Revenue was up 18% but operating profit down by a third.

    The company has just seen the resignation of long standing CEO, Nick Wentzel, who was in place when the company listed in 2001.

    At R96 the company has a market cap of R4 billion. The price has come down from R150.

    On a company by company basis value managers are definitely seeing good value. As always it may take some time for profits to stabilise, as costs are cut and margins steadied, but in a lot of cases the prices have already come down dramatically.


    Kind regards

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

    Permalink2009-05-13, 16:54:22, by ian Email , Leave a comment

    The price of oil moves through $60

    Headline news less than 12 months ago had oil at $147/barrel and lots of forecasts anticipated that it was heading for $200. The financial crisis that took effect in the second half of 2008 brought the price down very swiftly from this high to a level that few would have anticipated.

    Before the end of 2008 the price had fallen to a low of around $34/barrel.

    It then jumped up to around $40 and mid $40 trading generally sideways but steadily up.

    Today it traded above $60/barrel for the first time in 6 months. This was the price for the June Nymex West Texas Intermediate. This is a jump of almost 85% from the recent low.

    Global markets have generally benefitted from the lower price of this input. South Africans have benefitted from the double whammy of the weaker oil price and the firmer rand. This allowed the price of petrol to drop back from highs, which in turn helped inflation down.

    But with the rand now at R8,44 / dollar and a firmer oil price, this will put upward pressure on the petrol price and be detrimental for inflation.

    The FT reported that this increase in the price of oil comes ahead of an Opec meeting later in the month when the cartel will look at possible further production cuts to keep an underpin to the price.

    Reports also indicate that the price increase is mostly financially driven with no real change in the underlying supply and demand fundamentals. BBC News reports that US crude inventories are at their highest in 19 years.

    Given the slower to negative growth projected for global economies in 2009 a generally lower price per barrel is expected. But as with most asset prices they tend to overshoot on the up and downside and so some equilibrium level between $147 and $35 needs to be found.

    Sasol is naturally a beneficiary of the firmer oil price. The share price has fallen from over R500 to around R250, before trading sideways and steadily back to around the R300/level.

    The consensus forecast for Sasol earnings for its June year end is EPS of 3299, which puts the current price on a forward PE of 9 times and an expected DY of 3,8%. This is more or less in line with the overall market.

    In the first quarter of 2009 we saw some of the more astute fund managers accumulating this share at the cheaper prices.

    Kind regards

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

    Permalink2009-05-12, 17:15:31, by ian Email , Leave a comment

    Is it another case of sell in May?

    There is an old market adage that says sell in May and go away. It definitely applied in 2008. Locally the market peaked on the 22 May 2008, when the JSE All Share index closed over 33000.

    It subsequently plunged to 18500 in October and has since bounced up and down in a sideways pattern broadly between 18000 and 22 000.

    Seeking Alpha website noted that during a bear market in shares, this adage does not apply. Although selling in the month of May would have typically worked in 2 out of 3 years, after a bear market decline in prices, there has typically been strong up rallies from the month of May.


    Source: Seeking Alpha

    This table looks back at bear markets and the moves from May – October. These have on average been fairly strongly positive. But no matter what statistics indicate from past experiences, they never replicate exactly.

    From its high, the US index the S&P500 fell to make an intra day low of 666.79 on the 6 March. It has already jumped a massive 39% to its current position.

    Jeremy Grantham from fund manager GMO, who at these attractive levels, has turned bullish from being long time bearish, indicates in his latest report that as a firm they have moved up from un underweight equity position to almost neutral position.

    They are value managers and are willing to suffer short term volatility believing that medium to long term they should be acquiring shares at these lower levels, where they see the fair value of the S&P500 at around 880.

    While he says that he believes the market index has a 1 in 3 chance of sharply retreating in the future and a 1 in 5 chance of coming down in the future to a new low he thinks that it is “quite likely by the end of the year…” that the index soars over fair value to the 1000 to 1100 range driven up by liquidity, hopes from stimulus program and the “usual morally hazardous promises from the Fed.”

    While we continue to see a semblance of managers that are positive and others that are negative, price action is likely to be sideways.

    For high net worth investors that would like Seed Investments to provide a holistic investment plan, please contact Vincent Heys at vincent@seedinvestments.co.za

    Kind regards

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

    Permalink2009-05-11, 16:57:04, by ian Email , Leave a comment

    Green shoots or bear rally

    With a daily barrage of contradictory economic and financial information it gets very difficult, but extremely important to work through in order to try and assimilate the bigger picture. Investors always need to ask the fundamental question – does the yield and hence potential return compensate me for the risk that I am taking on in allocating to this investment.

    At the moment there is more and more data supporting the so called “green shoots” theory. This says that there are definite signs that global economies have reached the bottom and are starting to turn.

    At the same time there is a lot of data to indicate that perhaps the current up rally on markets is nothing more than just that - a bear market rally.

    On the green shoots theory, a further support was released today – the US non farm payroll. After falling by a massive 699 000 in March, the number for April was expected to be around 600 000 in April. It came in at a decline of 539 000 – i.e. better than expectations.

    This pushes the official unemployment rate in the US to 8,9% with some 5,7 million jobs lost since December 2007.

    So still negative, but definitely helped by recent government stimulus and bailouts to financial and industrial groups.

    A question asked by Wachovia economic group is this. As positive signs start to appear, will the government authorities start to cut back on the stimulus that they have being providing. Or will they stay too long and generate policy contradictions from too much stimulus. The timing of a perfect exit therefore remains a definite challenge.

    The extent of the stimulus required from the government is made difficult when foreigners are moving in the opposite direction.

    The chart below indicates in annual dollar terms the foreign purchase of US issued debt and shares. Foreign purchase of corporate bonds took off after 2005, crashing down in 2007.

    Purchasers of US treasury bonds increased as money moved to so called safety.

    Essentially the large amount of global savings surplus from Asia over the 2002 – 2007 period forced yields of assets lower and lower, setting up its own correction as risk became under priced.

    Now except for certain assets such as US treasuries, the tide has swept back out. As Wachovia points out, “Overpaying for the flight to quality today presents a possible risk that low [yields] today fail to account for inflation, currency and supply risks ahead.”.

    The quality that they are talking about is government bonds.

    Have a great weekend

    Kind regards

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

    Permalink2009-05-08, 17:08:08, by ian Email , Leave a comment

    Lessons from GM

    The numbers for US motor manufacturer are truly staggering. The company founded in 1908 and was built into one of the world’s biggest manufacturers with operations spread across the globe. Until recently it was the world’s largest car maker by sales ahead of Toyota, but has been propped up by the US government

    But the FT reports that over the last 5 years since 2004, the company has cumulative losses of some $88 billion.

    Today it reported a further $ 6billion quarter loss.

    With these losses and a balance sheet that has a large amount of debt, it has been left with only 2 real options. The first it to go into liquidation, or bankruptcy in the US, and the second is to restructure its balance sheet.

    In both instances shareholders effectively lose their investment.

    Reuters reports that this week the company announced plans to issue up to 60 billion new shares in order to raise capital to repay borrowing from the US government, other bondholders and the United Auto Workers union.

    But the only buyer at shares priced even at a heavy discount to the current price of $1,60 / share is again the US government. Issuing such a massive number of shares dilutes down all remaining shareholders that essentially the company becomes a US government subsidiary.

    In such a dilutionary deal, current shareholders will end up losing their investment as the shares in issue multiplies dramatically, while the value of the company remains static. The current market cap at a price of $1,60 is just less than $1 billion. The share price will fall to around 2 cents.

    This from a price of $80 and a company that has been in the Dow Jones Industrial average for around 75 years.

    GM share price

    source : Yahoo finance

    When we look at the dilutionary impact that substantial issuance has, it points to the possible devaluation of other assets where there is enormous issuance. Here I am talking about sovereign or global bonds, where governments are in a position where they have no real choice, like GM, but to continue to issue more and more paper to finance their expenditure.

    With this in mind, it’s important to strategically assess your bond exposure across your total investment portfolio.

    For investors looking for an investment advisory and management firm, please don't hesitate to contact us.

    Kind regards

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

    Permalink2009-05-07, 17:37:57, by ian Email , Leave a comment

    Interactions of Different Markets

    One is often asked whether the rand will weaken or strengthen if interest rates are cut, or if the stock market goes up, or if gold price will be affected if global markets go up. These are all valid questions, as they should all have some relationship with each other. Being able to accurately predict what happens to the one variable for a change in the other would be an investor’s Holy Grail.

    Unfortunately, however, the answers aren’t as easy or straight forward. There will, of course, be theories backing up many relationships, and they are often conflicting in their results, but while they may have conflicting conclusions they will more than likely have some merit. We need to also remember that all markets are forward looking, and directional movements will largely be based on what is already priced into the market (in the short term at least).

    Firstly, if one is to attempt to come to any conclusion one needs to establish a causal relationship between the two variables that you are analysing. We regularly see two variables moving in conjunction with each other. Just because this is the case, doesn’t mean that the movement in the one variable causes movements in the other or is related to the movement in the other, it could just be co-incidence.

    “Is there a sound, logical reason for there to be a relationship between these two variables?” if your answer to this question is “Yes,” then you can move onto which variable causes the other to move, or if there is just a relationship in their movements.

    In a simple non investment analogy, it is pointless to sit and wait for a plant to grow, and then predict that it will rain. It makes more sense to wait for rain, and then predict that the plant will grow. Moving further, if you are able to predict when it’s going to rain, you should be able to have a good idea when the plant will grow, and therefore when to plant.

    Unfortunately investment relationships, as mentioned earlier, don’t always react the same way all of the time. However, there will be periods when certain relationships will hold. Casual relationships will clearly hold more weight than mere relationships in price movements, but one should be wary of blindly believing in the relationship.

    One such relationship that has been recently bandied about is that if good (or not as bad as expected) global news is released and global markets rally, emerging market equities and currencies will perform better than their developed market counterparts. This has been theorised, as the perception is that global investors will be taking on more risk, and emerging markets are still perceived to be more risky places to invest. Therefore local market strength will result in local currency strength and vice versa.

    This has been the case over the last couple months. The beginning of March was when we saw most markets hitting their lows, and we have since seen some impressive rallies. As you can see in the charts below the ALSI has strengthen, as has the S&P 500 in their respective currencies.

    JSE ALSI (ZAR)

    Source: Sharenet

    S&P 500 (USD)

    Source: Google

    Returns from 9 March 2009 to 5 May 2009 have been 17.5% for the ALSI (in ZAR) and 33.5% for the S&P 500 (in USD). On the face of it, the S&P 500 looks like it has done better. Remember the thesis that the rand should strengthen against the US dollar should global markets rally. Below is a 3 month chart showing the rand strengthening since the beginning of March vs the US dollar.

    ZAR/USD

    Source: CNBC

    In US dollars, the ALSI has done a massive 50.6% since 9 March, comfortably beating the S&P 500’s 33.5%.

    Remember that this may in fact not be a relationship, and even if it is it might not be sustainable, but the practice of thinking about possible relationships in the market, and how they will move and evolve, will assist you in developing a more complete investment strategy than if you compartmentalise your ideas.

    Take care,

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

    Permalink2009-05-06, 18:30:06, by Mike Email , Leave a comment

    Is capitalism under pressure?

    Are the rules to capitalism changing? This is essentially the question that many are asking of that once bastion of capitalism, the US. In the latest report from bond managers Pimco, Bill Gross continues to highlights the fact that while government intervention into business has some merit, it will also come with adverse longer term consequences.

    Where government starts to interfere in the rules of capitalism, wanting to effectively dilute down the benefits that accrue to owners of business, through a process of “burden sharing” and increased regulation, then the expected financial flows from assets will be reduced.

    In explaining the destruction of value, he mentions comparing the value of a FedEx against the US Post Office. Now while many of us would assume that the US Post Office is more efficient than our local counterpart, the mere fact that it is government owned and operated means that an investor will apply a substantial discount to its private competitor.

    As the government infiltrates more and more businesses, this has and will impact long run values.

    Yesterday we also saw US president Obama announce his intended crackdown on US corporates and individuals making use of offshore tax havens such as Bermuda and Cayman Islands. Through changing some of the tax laws, they are looking to raise $210 billion over the next 10 years.

    A big number sure, but when the current deficit is reaching towards the $2 trillion level, then it’s not that big and these estimates often don’t materialise. The reality is that the US government has a bigger and bigger expenditure requirement and it needs to look at every angle it can to raise and collect taxes.

    It has been reported that over the first half of the US fiscal year personal income tax revenues fell 14,7% to US429,7 billion. Tax revenues from corporates fell 57%.

    It’s a similar picture across the globe as government revenues fall short of projections, but expenditure climbs.

    The scenario is definitely not ideal for lenders of savings to these governments. For sure they will be repaid with a deflated currency. We continue to watch the US 10 year treasury yield as a barometer. It was artificially depressed as the Federal Reserve purchased bonds, but the yield has been steadily climbing, which is negative for owners.

    US 10 year Treasury yield


    Source: Yahoo Finance

    If you are looking for professional advice on the asset allocation of your total investment portfolio, please contact us on contact details below.

    Kind regards

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

    Permalink2009-05-05, 17:11:55, by ian Email , Leave a comment

    Notes from Berkshires AGM

    The annual general meeting of Berkshire Hathaway Incorporated draws a crowd bigger than most annual general meetings of companies. It was estimated that 35 000 made the annual pilgrimage to see Buffett and his partner Charlie Munger in action.

    They make a weekend of the annual regulatory event, which most companies dispatch in a couple of hours.

    The company in question, Berkshire Hathaway, has a long history. Buffett took over as the major shareholder in Berkshire in 1965. It was originally a textile manufacturer with a long record of unprofitable operations.

    When Buffett closed his original investment partnership business, he retained his stake in Berkshire and continued to run the business as a type of investment trust. Essentially it is an investment vehicle with a wide open mandate for Buffett and his co manager to make whatever investment decisions they feel necessary. This ranges from investments in listed and unlisted businesses and derivatives.

    In the formative years he tended to acquire large stakes in listed businesses, while in recent years given the sheer size of the deals that he concluded he has tended to acquire 100% of unlisted businesses.

    I think that a major reason for buying unlisted versus listed businesses, in addition to the scale is the valuation issue. For many years – probably since the late 1980’s, listed shares traded at premiums to unlisted businesses. However in the book The Money Masters, referring to his comments about values of listed versus unlisted it said, “Negotiated purchases, he notes, simply can’t be made on the bargain basis sometimes possible in common stock investment. A sole owner never becomes as crazy as the market sometimes does. The most he hopes for in a private purchase is a reasonable deal, not a great one.”

    Now however the company has a cash pile of around $20 billion and he has recently elected to make some substantial investments in common and preferred shares due to the massive declines in share prices.

    He has recently invested into preferred shares in Goldman Sachs Group and General Electric Co, as well as buying corporate debt. He has also reached an agreement for a $2,6 billion investment in Swiss Reinsurance Co.

    According to a quote from Buffett on Bloomberg, “That wouldn’t have happened” without the recession, Buffett said.”

    To some extent this gives an indication of the value available as prices have come down massively through a lot of forced selling.

    As with most listed shares, the share price of Berkshire itself has fallen substantially from a high of around $140 000/ share to a low of around $72 000. It now trades at $92 000/share.

    Berkshire Hathaway share price


    Source: Yahoo finance

    As value managers, Buffett and his partner are not too concerned about the short term decline of Berkshire shares. They are more excited about the general value available in markets and see this as a time to steadily accumulate.

    While they are not infallible, all investors should glean some insight into how a true long term value investor operates. As investment managers we certainly pay some attention to his comments.

    Kind regards

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

    Permalink2009-05-04, 16:06:56, by ian Email , Leave a comment