PDSnet Articles

The Confidential Report – April 2020


The US economy, along with economies around the world, is in partial lock-down. Estimates of how this will impact on economic growth vary, but the general consensus seems to be that GDP will shrink in the current quarter by between 10% and 14%. Unemployment is expected to surge from 3,5% before the pandemic to as much as 10%. Weekly jobless claims are expected to climb to around 2 million – from as little as 280 000 before the collapse. This is thought to be tolerable – so long as the lockdown does not continue for more than about 1 month. Compared to the Great Depression of 1929-1939, however, these figures are relatively mild, mainly because the contraction is expected to be much shorter. By the end of this year, most economists expect the world economy to be rapidly returning to normal. Most first world countries have dropped interest rates to close to zero and have announced massive stimulus packages (most notably, the US’s $2 trillion package). During the Great Depression unemployment in America reached as much as 33% and the contraction went on for 10 years. During the 1918 Spanish flu epidemic, 50m people died world wide and GDP declined by about 7%. Because this is a truly unique event in the financial markets, investors really do not know what to make of it. The chart below shows that they initially sold the market down sharply, but in the last five or six days there has been something of a rally.

S&P500 January to March 2020 – Chart by ShareFriend Pro (Click to Enlarge Image)

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The Hang Seng Leader

If you currently own a portfolio of shares, and did not have or implement a stop-loss strategy, then our advice, at this point, is to wait and see how this market unfolds – especially if you have high-quality rand-hedge shares. We do not see this “quarantine recession” and its concomitant bear trend lasting very long. Our view is that markets, world-wide, will begin to discount a recovery before the end of this year, probably beginning with markets in the far east.

For example, consider the comparative relative strength of the Hang Seng index against the S&P500 since 19th February 2020 when the S&P made its last all-time record high at 3386:

Comparative Relative Strength Hang Seng and S&P500 Indexes – December to March 2020

This chart shows the Hang Seng in the top half of the chart and a relative strength of the Hang Seng against the S&P500 in the bottom half. The vertical line is drawn in on 19th February 2020 – which is the date from which the corona bear trend began. Read More

Green Shoots

Amidst the bloodbath on the JSE, there have been some winners among the losers. Consider this market carpet of the JSE sectors for the week ending 20th March 2020:

Market Carpets – ShareFriend Pro

Amazingly, five sectors showed positive growth during that most horrendous of weeks – and they can give us some pointers as to where we should be looking in the crisis for potential investment opportunities.

In the Steel and Other Metals Index, Kumba stands out. It was clearly over-sold and bounced 23,7% in the week.

In the Media index, the Multichoice group jumped 21,9% – probably on the idea that self-isolation is inevitably going to increase the demand for entertainment at home. Read More

Bear Trend?

I saw my first bear trend in 1969 – I was 16 years old and still at school. I did not really understand what was happening – but it made a deep impression on me. Since then I have studied all the major bear trends going back to the 1907 bear market.

I did this because I believe that the only intelligent way to predict the future is to study the past. Consider: the only reason you know that the sun is going to rise tomorrow is because you have seen it happen before. If you had not seen that, you would not know.

All the bear trends that I have studied were based on human economics. In very simple terms, when the economy is booming, people are borrowing money on an excessive basis and spending it. This leads to an economic boom, the anticipation of which predicates a disproportionate rise in share prices. The rise in share prices then creates additional significant wealth resulting in an upward spiral.

Sooner or later, usually because economic booms inevitably lead to inflation, the government is forced to step in and slow the boom down – usually by increasing interest rates. This forces people to repay some or all of what they borrowed and so the level of spending in the economy slows down dramatically causing businesses to make less profits, and retrench workers. That, in turn, results in falling share prices and a general reduction in wealth – a downward spiral.

From a technical perspective, once the market has collapsed, it goes through a period of “backing and filling” while investor confidence is rebuilt and then gradually begins to rise, ultimately reaching and exceeding the highs from which the bear trend began. Read More

Standard Bank

Buying shares in Standard Bank has always been a long term investment in South Africa and Africa in general.

The company is enormously profitable producing over R28bn in headline earnings in the year to 31st December 2019 – and it is the ultimate service business which receives its income from a spread of millions of individuals and companies. Banks are the only organisations in the economy that can literally go into your bank account, without your permission, and take money out whenever they need to.

Of course, they do compete, which tends to control their urge to charge exorbitant fees. The competition in South Africa is intense right now with the likes of Discovery Bank and Tyme Digital entering the arena, but Standard Bank is deeply entrenched in the South African economy and, like all iconic brands, has a substantial amount of what Warren Buffett has called “share of mind”. Customers are generally reluctant to change from one bank to another simply because of the huge inconvenience of doing so.

Standard Bank does have a substantial staff complement which makes it vulnerable to union action, but its staff are generally well-paid and skilled which reduces the potential for collective bargaining. So, for all intents and purposes, this is a blue chip service company with almost no working capital problems and a solid, dependable annuity income.

Its latest results were not quite as good as those of 2018. In 2018, it managed a return on capital employed (ROCE) of 18,1% and in the 2019 year that has dropped to 16,8%. But it is still enormously profitable, and it has a very strong balance sheet. In other words, despite all the rigours of last year, this is a company which just kept on producing massive profits. Read More