PDSnet Articles

US Economy and the Rand

The US Federal Reserve Bank’s (The Fed) decision to sell $20bn worth of bonds a month is a monetary policy decision aimed at reducing the size of the American money supply. When a government sells bonds it takes money out of the economy and replaces it with something that is not money (a bond) thereby reducing the money supply. Trading in government bonds by the central bank is known as “open market operations” and is a normal mechanism of monetary policy. The Fed’s pace of bond-selling might increase to $50bn a month or more. This will have the effect of making the US dollar more expensive against all currencies, including the rand. It is an effort to reverse the effects of the previous eight years of quantitative easing (Q/E). Read More

Steinhoff Breaks Up At Last

When a blue chip, institutional share like Steinhoff falls heavily, there are always private investors looking to buy it at its much reduced price hoping to make a quick profit. But there is great danger in taking a position too early.

Immediately after the Viceroy report was published, Steinhoff fell from around R55 to below 465c and hovered there for just over a week. Then it began to rally, reaching as high as 860c. This is a classic “bull trap”. Excited private investors jump in thinking the bad news is all discounted and the company cannot possibly have wiped out a net asset value of over R56 per share. Read More

The S&P500 Revisited

Three months ago, on 6th April this year we wrote an article about the S&P500 and the correction up to that point. We suggested that strong support had been built by the four unsuccessful attempts to penetrate the 2581 level (the green arrows). We said that the bulls would take heart from this and drive the market higher, back towards the all-time high of 2872. Consider the current chart:

S&P500 Index January 2018 to July 2018 – Chart by ShareFriend Pro

Here you can see the complete anatomy of the correction since its inception on 26th January 2018. Since our previous article, the S&P has entered a clear upward sloping channel, defined by parallel upper and lower channel lines. Resistance at 2786 has been encountered and the S&P has fallen back from it to find the lower channel line last week on Thursday (28-6-18). The channel line held and an “island” formed. Now it is apparent that the market is moving back up to test the resistance at 2786 – which it will almost certainly do in the coming weeks.

Aside from the fact that the S&P500 was overdue for some sort of retracement, this 5-month correction can probably be laid, quite substantially, at the feet of Donald Trump. He has seen fit to initiate an international trade war with some of the largest economies in the world. Anyone who has the least knowledge of economics knows that such a trade war is as pointless as it is costly. Nobody wins and everybody loses.

But the US economy, driven by forces which were set in motion before Trump even thought of running for the presidency, continues to grow. And since the stock market must sooner or later reflect investors’ perceptions of future economic growth, the S&P continues to look strong. Even in the midst of the correction there are clear signs that  the republicans themselves are becoming alarmed at Trump’s uncoordinated, unpredictable and blundering moves. Nobody really thinks that such a stupid policy can survive for very long.

So seasoned investors are betting more and more on a resumption of the nine-year-old bull trend and that optimism is becoming visible in the chart.

MSCI Emerging Markets Index

Together with about 22 other countries around the world, South Africa is regarded internationally as an “emerging market”. This means that investments in this country are seen as more risky than those in first world countries. That, in turn, means that we have to offer and pay a higher return to attract those investments.

Our bench-mark government bond (the R186) is currently offering a return of close to 9% per annum. The equivalent bond (T-Bill) in America is offering about 3%. This means that investors have put a value on the risk in this country of about 6% per annum.  Read More

The Confidential Report – July 2018


Over the Zuma years there were any number of plans to develop the economy, the latest iteration of which was the National Development Plan, produced in 2012 with a vision for 2030. None of these plans have been effectively implemented. In fact, the economy is probably in a worse position now than it was 10 years ago from a structural point of view. But now we have the Ramaphosa era and he has begun well by mostly saying the right things and doing the right things – like changing the boards of the worst of the state owned enterprises (SOE). He wants to bring in $100bn in foreign direct investment (FDI) over the next 5 years – and he travelled to the G7 conference as part of this effort. There, he was persuading skeptical investors that policy certainty is going to happen in South Africa – especially in the mining industry and with land reform. He was trying to convince them that he is putting South Africa back onto a rational economic path. Of course, he had to be balanced with the fact that he faces an election in 2019 where populist ideas are likely to be important. So there is a limit to what he can do before that election and he is orchestrating a delicate balancing act between necessary and rational economics and the expediency of South Africa’s version of populism. Read More