Monthly Archives: September 2019

Central Banks


The functions of a central bank are to maintain the stability of the country’s currency and to ensure growth. Unfortunately, these two objectives are mostly mutually exclusive because growth tends to cause rising inflation while controlling inflation means taking the wind out of the economy’s sails.

When the central bank becomes concerned about inflation, which is often caused by excessive demand, it raises interest rates to curb spending – but, of course, this tends to reduce spending because everyone has to pay more interest on their bonds overdrafts and credit cards. Conversely, when the central bank reduces rates to stimulate growth the increased spending inevitably results in higher inflation sooner or later.

So the Central bank’s monetary policy committee meets every two months (in normal circumstances) to either put their foot on the economy’s accelerator (by reducing rates) or the brakes (by increasing rates). They conduct a very delicate balancing act between economic stimulation and currency stability. In South Africa, that balancing act is considerably complicated by the strength or weakness of the rand against first world currencies.

Changing the level of interest rates is not the Central bank’s only weapon. They can also engage in “open market operations” – which basically means either buying or selling government bonds on the open market. When the central bank buys bonds they are injecting cash into the economy and vice versa. Read More

Spur


The decision to buy into a share is often scary. What if the share falls after you have bought if? You may then have to execute your stop-loss and lose money. There is a tangible feeling of risk.

Obviously, you want to buy a share when it is at a low point in its cycle – after it has fallen so that you can get it cheaply. But when a share falls there is always a reason – and you might be concerned that it could fall further. There is usually considerable negative press which accompanies a falling share and you will definitely feel the risk of investing. In fact, if you don’t feel the risk you are probably not going to make any money.

Of course, the ideal place to buy a share is somewhere close to its cycle bottom – and that means that you must “see a mountain behind you”. In other words, the share should preferably have fallen from a much higher price.

At the same time, it is far better if the share is an established blue chip with a solid business and a long track-record of being profitable. That way you can be fairly certain that it is not going to fail completely and that sooner or later institutional fund managers will begin buying it again.

One of the ways to mitigate the risk is to at least wait until the share has turned and is moving up again. Ideally, you want to buy it when it is past its lowest point and is recovering. You are looking for some sort of upside breakout.

So, where do you find such a share? In this article we would like to draw your attention to a high-quality share which may be worthy of your consideration. Read More

Our Response to the Stockman Article


This article is in response to a request for our opinion about an interview with David Stockman from one of our clients – click here to read what Stockman says.

The adherence to Keynesian economics means that whenever there is any kind of stock market crash, the central banks step in and compensate for the wipe-out of wealth (caused by the crash) by injecting funds. This idea was first put into practice by Alan Greenspan after the 1987 crash and has been used by central bank governors in every major stock market melt-down since – but the amount of money needed to create a recovery has been growing. In the 1980’s it was tens of billions of dollars, in the 1990’s it was hundreds of billions, and in the “noughties”, at the sub-prime crisis, it was trillions. Except that following 2008, the Fed and other central banks ran out of money and had to resort to quantitative easing (Q/E). Altogether, they printed and injected at least $12,5 trillion into the world economy. And they only just managed to rescue the situation – it was touch-and-go for a while. But now the US economy is flourishing on the back of that massive monetary stimulation, plus ultra low interest rates for more than a decade. All the other major central banks followed the Fed’s lead to a greater or lesser extent. So now we have trillions of dollars worth of excess cash sloshing around in the world economy – and, as Stockman says, creating various asset bubbles. We have been mainly concerned about the bubble in shares and predicting what would happen there. But this background explains why we have been almost continuously bullish since 2009, when we said we were looking at the “greatest buying opportunity of the century”.  Read More

The Confidential Report – September 2019


Political

The concerted attack on President Ramaphosa and his retinue has seen the rand fall to almost R15.50 to the US dollar. But this fall also includes and is confused with a sharp international shift to “risk-off” as a result of Donald Trump’s trade war with the Chinese and their currency retaliation, which makes it difficult to accurately assess the impact of the attacks on Ramaphosa. The best way to evaluate the importance of these attacks and distinguish them from what is happening internationally is to look at the yield of the South African government’s 10-year bond, the R186. Consider the chart:

R186 Bond May 2016 to September 2019 – Chart by ShareFriend Pro (Click to Enlarge Image)

Read More

Omnia Breaks Up


On 12th July, 2019, we carried an article about Omnia. The essence of that article was that Omnia was a large blue chip chemicals company which had dominant positions  in agriculture, chemicals and explosives throughout Africa.

This company took a significant risk by buying two companies, Umongo Petroleum and Oro Agri for around R2bn – which over-extended its balance sheet, loading it with excessive debt. To bring its debt levels down, the company was forced to conduct a rights issue of 100m shares at R20 a share – substantially below the price that the share was trading for at the time in the market (which was closer to R30).

The rights offer is now unconditional and fully underwritten. The nil-paid letters of allocation will begin trading alongside the ordinary shares on 4th September 2019.

The execution of this rights offer clearly demonstrates that the gamble which the board of directors took has now paid off. They have managed to persuade shareholders to inject the necessary funds. Read More