Institutional imperatives

One of the tenets the book "The Warren Buffett Way" illustrates is resisting the institutional imperatives. Institutional imperatives are about looking over your shoulder to see what you competitors are doing, and do exactly what your competitors do. You think that if your competitors are doing it, then it will be OK for you to do it.

This kind of behaviour lacks independent and critical thinking, yet it is amuzing that the Wall Street and many CEOs act exactly in that way.

The recent subprime mortgage crisis in the US is an excellent example. A couple of investment banks thought it a good idea to package risky mortages into investment-grade collaterised debt obligations (CDO's)and sell these instruments to institutional investors. Soon other investment banks got wind of it and also wanted to be part of the action, while not really questioning the soundness of the product. Goldman Sachs, Deustche Bank, Merrill Lynch, Bear Sterns, Citigroup and others then offered it. All the major rating agencies, S&P, Moody's and Fitch joined the party and gave these CDO's their blessings as investment-grade instruments.

Alas, this party tumbled like a pack of cards. With rising interest rates and adjusted higher interest rates, many homeowners defaulted on payments. These investment-grade instruments became junk, and a lot of investors lost a lot of money. Major investment banks have to date written down more than USD100 billion as losses, and the heads of CEOs of a couple of these investment banks have rolled as a result. And we are not seeing the end of this crisis yet.

So, think for yourself. Don't follow the herd. And don't just listen to those investment analysts, thinking that they are professional and konwing what they talk about. Distinguish between investment salesmen and true investment professionals. Do your own homework.

The stock markets poised for more volatilities and further declines

Back in May 2007, I warned about the worrying inflation outlook and how it might negatively impact the stock market.

7 months later, we are seeing the CPIX inflation rising to 7.9%, far above the Reserve Bank target range of 3% - 6%. The Reserve Bank has raised the interest rates by 4% since the middle of 2006, with more interest rate hikes likely. Consumer spending slows down, car and durable goods sales have gone into the reverse, while property prices are growing slowly.

Globally, the US subprime mortgage problems have caused investment banks to write down more than USD100 billion, as well as credit crunch worldwide.

What we have seen over the last six months are very volatile stock markets. Although many stock markets have achieved new historial highs in the last six months, they have been going up and down in big swings.

There are a few things I think will cause our JSE to be range-bound, if not declining, over the next 6 months:

- High inflation and high interest rates: Consumers are already suffering the effect of high oil and food prices, as well as higher debt repayments. They will spend less on durable goods and high-value electronics, and they will be forced to buy less cars and properties.

- The US subprime mortgage crisis has already, and will continue to negatively affect banking stocks, even though our local Big Four have very little exposure to the subprime problems.

- With a slowing US economy, further price gains for base metals will be unlikely, limiting the future profit growth of our resource companies.

- Techinically, the JSE Top 40 index has been in a lower-lows pattern: Since September, it has failed to make new highs, while it continues to make new lows. The chart is pointing to further downside to come.

Traders should continue to trade with caution. Shorting is probably a better strategy than the long side at the moment.

The stories on the US Subprime Mortgages crisis

The US Subprime Mortgages problems have caused ripples throughtout the world's financial markets, destablising the markets and economies. Bloomberg is publishing a series of stories on how it all started, as well as its developments.

It is available on http://www.bloomberg.com/apps/news?pid=specialreport&srnum=2

New 'Great Game' for Central Asia Riches

Over the weekend I cam across this excellent article on how China, Russia and the West are all vying for the rich energy and mineral resources in Central Asia. It makes for fascinating reading, and developments in Central Asia will no doubt help shape the investment world.

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Saturday December 15, 2:28 pm ET
By Douglas Birch and Mansur Mirovalev, Associated Press Writers
China Ascendant in New 'Great Game' Over Central Asian Riches, Including Oil, Precious Metals


KHORGOS, Kazakhstan (AP) -- The driver of the 18-wheel tractor-trailer from China idling at the Kazakhstan-China border said apples were the cargo he brought to Almaty, Kazakhstan's booming commercial center.

For Kazakhs, there's a tart irony in the shipment.

Almaty's region is where the first apple trees were found and the first apple orchards planted. The city was a center of the Soviet Union's s fruit industry. Its very name means "Father of Apples."

In the past few years, Chinese fruit, vegetables, TV sets, T-shirts and tires have flooded markets along the old Silk Road in former Soviet Central Asia. Each day, all along the Chinese border, hundreds of tractor-trailers rattle west.

These goods are the most visible sign of Beijing's growing power here as China, Russia, the United States and others compete for financial and strategic advantage on the borders of some of the world's most turbulent countries -- Iran, Afghanistan and Pakistan.

To read the full story, click http://biz.yahoo.com/ap/071215/china_s_great_game.html?.v=1

Why Mutual & Federal is a low-risk buy

On Thursday Mutual & Federal announced the details of a special capitalisation award and discussions with Royal Bafokeng to buy Old Mmutual's interest in the company. The salient features are:

- Improved 3rh quater results, leading to a special dividend of R2 per share;
- Old Mutual are in discussions with Royal Bafokeng, with indications the offer may be R27.50 per share, escalating at 7% p.a. from 8 November.

Before the announcement, market rumours have pushed the M&F share price up to R29. Subsequent to the announcement, the market was disappointed with the indicated offer and pushed the share price down, to close at R26.40 yesterday.

However, from my view, the share is now a low-risk buy at around R26 - R26.50. The reasons are:

- The share is now trading below the indicated offer price;
- Minority shareholders are no obliged to sell;
- Mutual & Federal is a high-yield share, returning cash to investors.

At R26.50, the minimum upside is 3.77%. While this does not look impressive, traders can use CFDs and futures to magnify this movement and increase their returns. As the share price is now loosely underpinned by the indicated offer price, the downside risk will be small.

Gold stocks set to run

After a year of falling share prices, gold shares are, in my view, finally set to run given the strong gold price, both in dollar terms and in rand terms.

Back on 15 August, we mentioned two gold stocks in our watch list: DRD Gold and Goldfields. At that time DRD was at R4.15. Today it closes at R5.53 (up 33%). Goldfields was then R108.90, today at R113.85 (up 4.5%).

Gold shares have been performing poorly over the last twelve months as they were unable to capitalise on the rising gold price, due to declining production and escalating costs. In particular, company-specific problems, like Harmony's accounting dress-up, have hit the share price hard.

However, I believe many of the gold shares are now at a level that offers value. According to our valuations, the following three gold mining companies are undervalued and therefore of particular interest:

Goldfields: Its fair value is north of R160, and we believe in the next twelve months it should reach R170, if the strong gold price is sustained.

DRD Gold: Its technical chart looks promising, we believe it will reach R9.80 in the next twelve months.

Harmony: After the shocking announcement of its former CEO, Bernard Swanepoel, its share price fell by about 40%. It will take some time for the company to sort out its operational problems, but I believe the company presents value at the current levels. The target share price is R126.

Stanlib Value Fund

Equinox interviewed Stanlib's Value Fund manager, Lo Giyose, about his Fund. (http://www.equinox.co.za/article_1865.html) The Fund has been very successful over the last year, with a return of over 57%.

Lo Giyose is a colourful fund manager, quoting from famous sports coaches to illustrate hie views and beliefs. His investment style is different from the normal value fund approach, which focuses more on low PE's and high dividend yields. Instead, his approach is to seek out companies whose intrinsic values are underestimated by the market. He investment style may be better classified as Growth rather than Value.

What is interesting is his likes for Construction stocks as well as new listings. He believes the sector still has a long way to go, given the government's R400 bn infrastructural spend. The fund's total exposure to the construction sector is 38%. This exposure has contributed handsomely to the recent success of the Fund.

This contrasts with the largest equity fund in the country, the Allan Gray Equity Fund, which has little, if any, exposure to the construction sector, as it believes the sector is overvalued.

All of the construction companies are now highly rated, wih PE ratios in excess of 20. It will be interesting to see whether Lo Giyose's convictions pay off. Time will tell.

World of investment awaits Discovery

But Gore is still trying to turn around the fortunes of bleeding US arm Destiny, writes Adele Shevel

Discovery Holdings is free to move full force into the investment products market after FirstRand unbundled its 57.1% stake in the company and put it up for sale to new investors.

It also leaves FirstRand with a cleaner, simpler structure and makes the group a more attractive target for foreign buyers seeking a pure banking business.

Discovery has been reined in from the investment products market because of FirstRand’s ownership of life group Momentum.

Discovery started in healthcare but subsequently expanded into life cover, while Momentum focused on life and now offers health cover.

With Discovery’s extension into investment products it would have been treading on the turf of RMB Asset Management — also owned by FirstRand, and possibly resulting in more conflict in the stable.

The unbundling will also improve Discovery’s liquidity, or the amount of shares available to be traded — long a bone of contention in the investment community.

To read the full story, follow http://www.sundaytimes.co.za/Business/Article.aspx?id=559400

Gold stands proud as stocks are hammered

Gold was the big winner in what could be described as safe-haven buying when economic data releases surprised on the weak side on Friday.

According to Chris Craddock, head of derivative strategies at Plexus Capital & Securities, the big move came with the release of weaker-than-expected US jobs data that saw the dollar fall substantially.

“This resulted in commodities moving higher. Also moving higher for the week was oil as inventories continue to fall below expectations,” he said.

SA stocks, bonds and the rand were battered on Friday after the unemployment data raised fears of a slowdown in the US, hitting emerging markets across the board. US payrolls declined last month for the first time in four years, fanning concerns that a housing and credit crisis may shift the world’s biggest economy towards recession.

The full story is available at http://www.sundaytimes.co.za/Business/Article.aspx?id=559381

Buying opportunities emerge amidst the US sub-prime turbulence

Over the last month or so we have seen sharp pullbacks of stock markets around the world, due to the problems and concerns about the US sub-prime mortgage market and its ripple effect.

While the stock market is now retreating to a probably more reasonable level of valuation, some shares have been unnecessarily depressed and are now offering excellent buying opportunities. The stocks on our watchlist are:

JD Group, Ellerines, Nedbank, PSG, DRD Gold, Goldfields, Aspen.

Mirror, mirror on the wall, who is the fairest of them all?

As promised at the end of May, we have conducted an in-depth analysis of asset managers and unit trusts, with the intention of providing readers with our list of recommended asset managers and unit trusts. We examined asset managers' investment philosophy, proceeses and track record. We aimed to identify asset managers that will provide consistently superior long-term returns for investors.

Our recommendations are as follows:

Domestic Equities: Allan Gray; Tim Allsop of Polaris, which manages Nedgroup Investments Rainmaker Fund; PSG Alphen; John Biccard, who manages Investec Value Fund; Anthony Sher of Stanlib Small-Cap Fund.

Domestic Bonds / Income Funds: Nedgroup Investments Gilt Fund; Henk Viljoen of Stanlib Bond Fund; Investec Opportunity Income Fund

Domestic Prudential Funds: Allan Gray Balanced, Allan Gray Stable

Property Funds: Oasis, Marriot, Stanlib and Investec

Global Equities: Orbis / Allan Gray Global Equity Feeder Fund; Investec Strategic Value Fund; Investec Worldwide Equity Feeder Fund; Old Mutual Global Equity Fund; Momentum Global Fund; Sanlam Global Best Ideas Feeder Fund; Berkshire Hathaway

Happy investing!

AltX clocks its fiftieth company

Below is the official press release from JSE:

"On the 3rd of July, AltX listed its fiftieth company, William Tell. The board opened without any listings at the end of October 2003 and listed its first company, Beige on 29 January 2004. Since then there have been 10 listings in 2004, 7 in 2005, 23 in 2006 and so far 10 in 2007.

According to Noah Greenhill, head of marketing and business development at the JSE, “We have said initially that three interdependent aspects are needed for a successful market: number of companies, market capitalisation and liquidity. AltX has exceeded the JSE’s expectations in all three areas. The board now has a market cap of approximately R17 billion.”

Investors would have done rather well to invest in AltX shares. If they would have bought every share at closing price on listing day, their portfolio would be up 134%.

Greenhill believes the success of the market is on account of the quality controls which have been imposed on the companies and their advisors. “Our initial strategy was to ensure that this was a quality market. To make this possible we made sure that companies had to be recommended by the AltX Advisory Committee comprised of market experts, that company directors have to attend a Directors Induction Programme to ensure good governance and the companies needed full time designated advisors to ensure compliance with the listing requirements.”

The board has also started to see appetite from foreign companies to dual list on AltX. This is on account of the marginal cost and maximum value proposition, says Greenhill, “We don’t impose another regulatory regime and offer both an alternative pool of capital and liquidity. We have an example of an AIM listed company on AltX where the primary listing is offshore but the majority of trading takes place locally.”

The JSE has also supported AltX companies to market their shares. Monthly showcases are held nationally where companies get introduced to potential investors. Local and international, institutional and retail investors have taken an interest in AltX counters.

The AltX index which began on 3 April 2006 at 2000 points, closed yesterday at 4 581 points.
According to Greenhill, the pipeline of quality companies for the remainder of the year looks very promising, “We see that the nature and size of companies coming to market is improving all the time. We weren’t sector specific since the start and are now seeing companies from diverse sectors coming to market. This bodes well for the future.”

www.altx.co.za"

We at Daberistic also see investment opportunities in some of the AltX companies at right prices.

Rand futures open for trade

The Yield-X division of the JSE that trades credit derivatives and the bond market launches rand futures trading on the 18 June. Classic Business Day speaks to Allan Thomson from the JSE. Follow the link below to find out how the first day of trading went.

http://transcripts.businessday.co.za/cgi-bin/transcripts/t-showtranscript.pl?1182205065

Asset managers you can rely on to deliver

We are in the process of conducting a unit trust survey. Based on the results of our survey and our up-to-date knowledge of the asset management industry, we will publish a list of recommended asset managers and unit trusts around the middle of June. This will be very useful for our client and the general investing public. So watch the space!

Stanlib's Sher tops SA funds

I like portfolio managers who do the real diligent work to assess investment targets. Anthony Sher of Stanlib is one such portfolio manager, and he has results to prove his hard work.

Anthony Sher was one of only three fund managers to buy when Esor first sold shares last year. The stock of the engineering company, which he visited after seeing the name on signs at building sites in Johannesburg, has jumped sixfold since then.

Observation is one of the skills that has made Sher South Africa's top fund manager and helped his R820m Stanlib Small-Cap Fund beat his benchmark and rivals this year and in the last three years.

"We don't ignore anyone, as you never know what they may become," Sher, 37, said. "Opportunities are opening up down the size scale rather than up the size scale."

Sher says he plans to maintain the 45% of his fund now invested in industrial stocks, as they are domestically focused and will be boosted by faster economic growth in South Africa. In the last two quarters he has added to his stakes in mining and steel companies, which make up 12% of his holdings. He expects the rand to weaken and lift the value of their dollar-based sales.

Sher draws on his past as a bank and insurance analyst at Standard Bank's asset-management unit, where he worked for two years, to pick small companies not covered by brokers and usually bought by individual investors. He also asks rivals, customers and suppliers about a business he is following, and sometimes holds stocks for more than five years.

To read the full story, click http://www.moneyweb.co.za/mw/view/mw/en/page41?oid=107888&sn=Detail

Inflation breaches target range

More evidence of inflation creeping up and out of control:

"South Africa's targeted CPIX inflation pierced the upper end of the central bank's band in April, rising 6.3 percent year-on-year, official data showed, and hardening the case for higher interest rates.

Figures from Statistics South Africa showed that key measure jumped from 5.5 percent in March on higher food and fuel costs, while the all-items consumer price index increased by an annual rate of 7.0 percent, from 6.1 percent previously.

A Reuters poll had predicted that CPIX would rise by 5.9 percent while CPI would grow by 6.5 percent."

To read the full story, click http://www.moneyweb.co.za/mw/view/mw/en/page87?oid=107987&sn=Detail

The retail and financial sectors of the market are likely to be under pressure over the next week. Should the Reserve Bank decide to raise the interest rate, the market may fall even further.

Inflation trumps housing in US Fed Minds

This story appears in Yahoo! Finance, see http://biz.yahoo.com/ap/070530/fed_minutes.html?.v=15

Fed Minutes: Central Bank Saw Inflation As Bigger Threat Than Slumping Housing Market.

To quote from the story, "Concerns about inflation trumped worries about the slumping housing market last month in the minds of Federal Reserve officials who voted to hold interest rates steady.

While Fed officials said the downturn in housing was turning out to be more severe than expected, worries about inflation continued to dominate the May 9 discussions among Fed Chairman Ben Bernanke and his colleagues, according to minutes of the closed-door discussions released Wednesday.

"Nearly all participants viewed core inflation as remaining uncomfortably high and stressed the importance of further moderation," the minutes said.

The Fed on May 9 left the federal funds rate unchanged at 5.25 percent. It marked the 7th straight Fed meeting -- nearly a year -- in which the central bank has held the funds rate steady.

Many economists said the minutes strongly suggest the central bank may be content to keep rates unchanged for the rest of this year."

As per our earlier article on inflation outlook, I think inflation is likely to surprise central bankers around the world on the upside. This means they will either keep the rates steady or raise them. Increasing interest rates are generally negative for the stock markets.

JD Group - buying opportunity is coming

Yesterday JD Group and Steinhoff announced their merger talk is now off, due to insufficient JD Group shareholders' support.

JD Group is also recently in the news about it charging its customers much higher interest rates on furniture loans. This, together with its relatively poor profit outlook, has weighed on its share price.

Judging from the price chart, it has broken the shoulder line of a head and shoulder pattern, which is negative. It is likely to test the R77 - R79 level.

However, should it reach the R77 level, it will be a good time for investors to buy the stock. It will be at a lower PE. In addition, JD Group offers high dividend yield.

Value Group - more downside expected

The company announced yesterday its full-year HEPS is likely to fall between 60% to 80% compared to the previous year. This is worse than its earlier update, which indicates its HEPS is likely to fall between 40% and 60%.

We therefore expect the share price to fall further. Traders may short at R2.60 - R2.70 and take profit at R2.30.

Steinhoff - buyable at R23

After rising from R5 in early 2003 to R24 in May 2006, the share has been in a consolidation phase, trading between R23 and R26 most of the time since August 2006. R23 has been an important support level.

As Steinhoff is an excellent global furniture manufacture and distribution company with solid growth potential, its fundamentals are sound. Investors can look to buy when the share price falls to around R23.

Goldfields - another buying opportunity

Since hitting a high of R152.50 on 11 April on takeover rumours, Goldfields' share price has been retreating to the important support level of around R120. It now presents a buying opportunity. Take profit at the R130 - R132 level.

Currency futures are almost here!

Last night I attended a JSE presentation on Rand futures, which are to be listed on Yield-X. JSE together with its partners have been working on this over the last couple of years. In his Budget Speech on 21 February 2007, Minister of Finance Trevor Manual stated, " ... further developing South Africa's financial markets and increasing liquidity in the currency market by permitting the JSE to establish a Rand futures market."

I consider this to be an exciting development, for hedgers and traders alike. A currency future contract is a contract that allows market participants to trade the underlying exchange rate for a period of time in the future. The underlying instrument of a currency future contract is the rate of exchange between one unit of foreign currency and the South African Rand. Dollar/Rand contracts will be the first to be traded, with many more currency futures contracts expected to follow thereafter.

The initial margin is 6.45% on the near contract. This translates into 15.5 times gearing.

So who can trade currency futures?

• Individuals and foreigners
• Pension Funds and Long-term insurance companies using 15% offshore allocation;
• Asset managers using 25% foreign allocation.

Corporates wishing to trade currency futures need to obtain exchange control approval from the SARB.

The currency futures are expected to start trading from the middle of June.

Benjamin Graham's core principles for investing

Benjamin Graham, arguably the Father of Value Investing, was professor and teacher to Warren Buffett, the greatest investor of our time. I recently came across an article by Alphen Fund Management, which stated Graham's core principles for investing as described in the book Intelligent Investor were as follows:

1. A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business.

2. The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.

3. The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.

4. No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on what is called the 'margin of safety' - that is by never overpaying, no matter how exciting an investment seems to be, can you minimize your odds of error.

5. The secret to your financial success is inside yourself. If you become a critical thinker that takes no Wall Street 'fact' on faith, and you invest with patient confidence, you can take steady advantage of even the worst bear markets. By developing your discipline and courage, you can refuse to let other people's mood swings govern your financial destiny. In the end, how investments behave is much less important than how you behave.

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These are pearls of wisdom for investors who are serious about long-term wealth creation.

China tries to control stock market balloon

China has taken its first decisive step to deflate a dangerous bubble building in its stock market.

The central bank announced late on Friday that it was raising benchmark lending and deposit rates, lifting bank reserve ratios and widening the yuan’s trading band, its strongest package of steps since it began tightening policy a year ago.

Equities may fall sharply early next week, but fund managers and analysts expect a correction rather than a crash.

“You will see a correction in the market, possibly a sharp one,” said Zhu Ping, chief investment officer at GF Fund Management, which manages over 3.9-billion.

“Banks will be among the biggest losers on Monday. Their business relies too much on lending. Investors have been worried about that for a long time,” he said.

A fevered bull run has taken Shanghai’s composite index up 51% this year, after 130% last year, while daily turnover has ballooned to as much as 10 times year-earlier levels.

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In our view, the Chinese stock market is very overvalued, and there is significant downside risk in that market.

Worrying inflation outlook

Despite what economists are saying and what investors are hoping for, signs are price inflation is increasing and it will have a significant impact on the markets over the next 6 to 12 months.

Exhibit 1: Metals commodity prices are near or at all time highs. These will filter through to the cost price and eventually retail price of goods.

Exhibit 2: The interim results announced by Astral and the annual results announced by Sovereign Foods show there is a sharp increase in maize prices compared to last year, due to crop shortage caused by a severe draught. This sharp rise in maize prices has already caused food and meat prices to rise sharply.

Exhibit 3: Locally, the energy cost will continue to rise, due to Eskom hiking the electricity prices and the ever rising petrol and diesel prices.

The more I think about the possible consequences on consumer spending, Reserve Bank's interest rate decisions and corporate profits, the more I am nervous about the markets at current levels.

Trade cautiously.

Interesting AltX companies

On 22 March my colleague and I had the opportunity to attend the AltX T-Sec Investor Forum, during which a number of AltX companies presented their investment case.

The companies that presented were Dialogue Holdings, IFCA, Myriad Medical Holdings, Workforce, SAB&T Ubuntu, Acc-Ross, African Dawn and OneLogix. The presentations are available on http://www.jseshowcase.co.za/.

The companies that I have found to offer superior growth potential are as follows:

• Dialogue Group: Their main business is outsourcing, in particular call centres and business processes. Call centres are a rapidly growing global industry. South Africa has the advantages of being in the same time zone as Europe, has neutral English accent, and call centres being a growth industry targeted by the government. In addition, telecommunication costs, although still very high, are falling.

Dialoue Group currently employs 1,800 people in CT, JHB and DBN. It handled 48 million calls in 2006 and has a list of blue chip companies as its clients. It listed on the JSE at R1. The 2007 HEPS forecast is 9.1 cents.

Given the growth potential of Dialogue Group, I would buy their shares at R1.50 or less.

• Myriad: Their business is the sourcing and distribution of medical devices, a segment of the health care industry that offers a lot of consolidation opportunities. It wants to grow its business through organice growth, product range expansion and regional expansion.

One thing that is particurly attractive about its business is medical devices and consumables have steady, increasing usage, as more and more people visit doctors and hospitals. The half-year HEPS to 30 November 2006 is 4.9 cents. Let's wait for the company's next set of annul results, which should be published in August.

• Acc-Ross: When they listed last year, I stayed away from this counter, as I didn't like the valuation and the way they spending millions in advertising the fact that they were listed on the AltX. I was right. The company went through quite a lot of problems, and the CEO resigned. But now under the new CEO, Wilfred Robinson, the company is on the right track: It now has a much better strategic focus, is more intelligent in how to employ its capital. It is certainly on the road to recovery. It listed at R1, then fell all the way to 13 cents. It has since recovered to 50 cents. Acc-Ross is in our 2007 model portfolio, and its share price has risen sharply from 32 cents at the beginning of the year to 50 cents.

• African Dawn: It is a provider of finance and financial services. It has the following distinct divisions: short-term secured finance (bridge finance), home improvedment finance, cellphone banking solutions, financial literacy solutions and property sales. It has a strong marketing force. Its share price has risen 1,400% from 4 cents at inception to R2.30 at time of the presentation. Its profits are growing strongly. It is a gem, a buy at R2.50 or lower.

• OneLogix: A niche player in logistics, it focuses on logistics that have high barrier to entry and high margin. It is in our 2007 model portfolio. Buy at R1.10 or less.

SA's first hedge fund blow-up

Since late last week a lot has been written about the demise of a hedge fund, The Evervrest Aggresive Fund, and surely more will be written about it.

To read the full story, click http://www.moneyweb.co.za/mw/view/mw/en/page53?oid=90650&sn=Detail.

So how did the fund manager, Marc van Veen, managed to lose 66% of the fund value in the space of 1 month, especially when the stock market continued to boom?

This is because a typical hedge fund uses financial instruments such as futures and CFD's (contracts for differences) to obtain gearing / leverage, in order to try to increase returns. In addition, a fund manager can short the stock, meaning to borrow shares in a company he does not own, selling them in the market, with the hope of making a profit by buying them back at a lower price.

This is what Marc van Veen did. He anticipated Sanlam's share price to fall. He took a large short position on Sanlam and expected to make a handsome profit on this position.

Alas, Sanlam's share price continued to rise, by as much as 17% in April. And the expected handsome profit turned out to be severe losses.

It seems to me this fund manager did not use the correct money management techniques, including stop loss and diversification. If he had employed these techniques, the losses would not have been as large.

The following links take you to related articles.

http://transcripts.businessday.co.za/cgi-bin/transcripts/t-showtranscript.pl?1179088611

Hedge Funds: how not to burn your fingers
http://www.moneyweb.co.za/mw/view/mw/en/page53?oid=90872&sn=Detail

Sasol - Oversold on weekly chart

Since closing at an all-time high of R278.80 in June 2006, Sasol's share price has been declining steadily to close at R215 last Friday. While the proposed windfall tax certainly weighs on its share price, it is now oversold on both the daily and weekly chart.

Fundamentally, Sasol is trading at a PE of less than 10. With an increasing demand for its Gas-to-liquids and Coal-to-fuels technologies, its business prospects are excellent, and many years of growth are expected.

We believe it now offers a good buying opportunity for both traders and investors. The short-term price target is R250.

Are we near the end of the current shake-up?

Over the last two weeks the stock markets worldwide have been very volatile. It was first triggered by the Chinese stock market falling 9% in one day, then by the nervousness in the US about the fallout in its sub-prime lending market. Our own JSE has seen days with more than 2% or 600 points movements in the Index.

The question on every investor's mind is: Is the worst over, or still more downside to come?
Consider the following:

1. The loose lending practice in the US shows up the banks in the now higher interest rate environment, as many lower income home owners cannot afford the instalments. Banks repossess these houses, forcing home owners to vacate their properties. It is estimated up to 1 million home owners face such fate. This is bound to have social and economical ripple effect in the US.
2. Inflation continues to be a concern. The oil price hovers around $60 per barrel; climate changes cause droughts in many parts of South Africa, hurting crop output. Maize prices are rising rapidly, which will impact other food prices. Higher inflation is likely to lead to further interest rate hikes by the Reserve Bank. As we know, higher interest rates are generally bad for the stock markets.
3. Geopolitical problems: Iraq, Israel-Palestinian, Zimbabwe, and ongoing terrorist threats. These risks have not been priced into the valuations of stock markets.
4. Trade imbalances and carry trades: A lot has been writtten about trade imbalances and carry trades. The US runs huge fiscal and trade deficits, while China has big trade surpluses, flooding its economy and stock markets with cash. The low interest rate in Japan has made carry trades a worthwhile, profitable transaction, increasing money flows into global stock markets. If not properly managed, these imbalances may cause disruptions to the world economy and negative consequences to the stock markets.
5. An article we published at the beginning of the year suggests the JSE is in expensive territory, and more volatilities and downside are likely.

Given the reasons above, we expect the JSE to move sideways or down for at least the next couple of months, if not longer.

Accordingly, traders should trade with lots of caution. Investors should be patient in sitting out the volatilities.

Buying opportunities in a plummeting market

Over the last few days the JSE, in sync with the world markets, has fallen sharply from its all-time high. The All Share Index, having reached 26,932 on 26 February, fell 7.5% to close 24,919 today. The Top 40 index fell from 24,284 on 26 February to close 22,416 today. The market has given back all its gains this year.

Keen readers of this blog may remember that, in early January, I published an article titled “At what level should the JSE Alsi index be?” I mentioned in that article the JSE is some 30% to 48% overvalued. I believe that, even after the current pullback, the market is still very overvalued, and another 10% to 20% decline would not surprise me.

But it is time like this, when panic selling forces prices of all stocks down, great buying opportunities start to present themselves. Undervalued companies become even more undervalued, and smart investors will buy more of these companies.

Right now, we find the following companies on our watch list offering value:

BHP Billiton - the Chinese growth story is not reversing, so prospects for Billiton are good. At a PE of around 9, it is a buy at or below R140.

Telkom - High dividend yield, low PE, growing earnings.

Astral Foods - has pulled back sharply, now trading at below 8 times PE. Also high dividend yield, this one is a gem.

Metrofile - buy at R1.25 or lower.

Sasol - strong support level at R220, its fundamentals are sound.

PSG - buy at R25 or lower.

Past newsletters to be added to this blog

In the next month or so, I will be adding the newsletters I have published since 2002 to this blog. The purpose is two-fold:

- to allow investors to view and search all our past newsletters; and
- for investors to see the track record of investment advice provided by us.

As always, your comments and suggestions are welcome.

Rand currency futures

In his budget speech last week, Finance Minister Trevor Manuel introduced the establishment of rand currency futures. Finance Minister said the rand currency futures market would “deepen SA’s financial markets and increase liquidity in the local foreign exchange market”.

THE potential market for a rand currency futures platform in SA is huge, given how large the foreignexchange market is. Not only will the JSE’s new market provide a single forum in which currency exposure could be hedged, it will enable individual investors to take a punt on rand movements.

The rand futures market will operate on Yield-X, the JSE’s interest rate exchange.

Traders, get ready to trade the Rand futures! With the Rand's notorious volatility, it will provide seasoned traders many opportunities to profit.

The resources sector and China's game plan

Clem Sunter, a world-renowned scenario planner and strategist, recently shared China's game plan in the world economy.

According to Sunter there are four players in the Chinese game. "The West - with its brands and technologies as well as its markets; the developing countries - supplying raw materials; the Communist Party - effectively the management team of China; and Chinese citizens - who are the hardest working, most dedicated people in the world."

China has the ambition of becoming the world's largest economy by 2040.

The full story is at Fin24.

This means the demand for base metals and raw materials by the Chinese will continue to grow, and this is positive for the outlook of metals prices, gas and oil.

Did I hear Billiton and Sasol screaming loudly, "Buy me, buy me?"

South Ocean - an update

I called South Ocean and spoke to the Financial Director, Koos Bekker, to obtain more information on the company. Based on our discussions, the company is currently trading at a PE of around 15. It is looking to increase the revenue by about 10% this year. In terms of profits, it will very much depend on the copper price, which affects the input costs.

While this is a solid company in operation for many years, investors should wait until the price falls to R5 - R5.50 before investing in the company.

Alert Steel debuts on the JSE

Newly listed Alert Steel targets diversified growth in construction industry.

Shares in Alert Steel Holdings Limited (Alert Steel), which listed today on Altx, began trading at 159 cents per share, a premium of 59% to the 100 cents per share price at which the shares were placed with institutions during a private placement ahead of listing.

To read the full story, visit Moneyweb.

Insitutions that participated in the private placement are already in the money. This company seems to have a solid track record and good growth prospects. However, at R1.59 and forward PE of 14, it is pricey. For traders, wait for the price to fall to R1.10 to R1.20 before getting in. For investors, wait for the next couple of sets of financial results

Telkom - more upside to come

Telkom has reached our target of R173, and has completed a saucer bottom formation. It now points to a medium-term target of R240. Investors continue to hold, traders buy on dips in share price.

Goldfields breakout

Goldfields has been in a decline since July last year, but yesterday it has broken out of a falling wedge pattern, now pointing to a target of R160. Traders buy.

Our sister blog

I have created another blog focused on personal finance, www.myfinance.iblog.co.za. This blog aims to equip people with general personal finance knowledge and news, so that people may achieve financial security and freedom. Please pay a visit, and let me know what else you would like to see on that blog.

South Ocean to list: An interesting prospect

I have read a transcript of Business Day about South Ocean. South Ocean is a cable manufacturing company, and judging by what its financial director and analysts say, it should be a solid investment. That is provided you can get the shares at reasonable price when they list. Click the link below to read the story.

http://transcripts.businessday.co.za/cgi-bin/transcripts/t-showtranscript.pl?1170980125

BHP Billiton on the way up

BHP Billiton broke out of the falling wedge on 13 January. Last week its share price has been rising, accompanied by increased volume.

THe fundamentals of BHP are sound: the demand for base metals from China and India continues to rise; metals prices are still strong compared one year ago. It has a diversified resources portfolio. It continues to buy back its own shares. Its earnings per share this year is likely to be 20% to 30% up from last year. Its PE is quite reasonable relative to Anglo American. Plus, it is a rand hedge stock, its rand share price will benefit from any rand weakness.

Investors should buy at R130 - R134 and hold. Traders may get in now, or buy at price dips, with a minimum target of R140.

Goldfields presents buying opportunity

Goldfields’ price has been falling since July 2006, making a new low of R117.50 today. While it is still in a downward trend, the weekly chart suggests positive divergence.

According to my valuation, Goldfields presents value at these levels. Investors may buy into Goldfields at R110 - R118, using a small portion of their portfolio (gold stocks are by nature volatile).

Aggresive traders may buy at further dips in share price.

Sasol - more downside to come

Sasol has been following the oil price weaker over the last two weeks, and its chart points to further weakness. My analysis (inspired by Simba, I must mention this!) shows Sasol’s fair value is about R230, at which it is currently trading. Buy when it falls further to around R220 for a rebound. Short-term traders please have stop loss in place.

Telkom - upside potential

In my article on our 2007 yearly model portfolio, I commented that Telkom had gone nowhere last year, and yet it is still fundamentally sound and undervalued.

From its price chart, it appears it has completed an inverse head and shoulder pattern and subsequently broken out, pointing to a medium-term target of R173. I would not be surprised if its share price exceeds this target this year. Traders buy and hold until at least the target is reached.

At what level should the JSE Alsi index be?

I remember that, in the second half of 2006, The Citizen/Moneyweb had a business headline "JSE to reach 25,000 by year-end". Well, it came close, with the JSE Alsi index closing the year at 24,915, up a staggering 37.7% for the year.


So what does 2007 hold for investors? More of the upside, or time to be cautious?


If you have been following my articles, you will know that it is time to be very cautious. I have recently performed an extensive analysis, based on the JSE Alsi index since 1960, as well as economic data. My analysis shows that:

- The current market PE is 17.7, which is 65% above the 46-year average of 10.7. Even if we take into account changes in the inflation and interest rate regime and use a "reasonable" PE of 12, the current market PE is still 48% above where it should be.
- The market PE was as high as it is now during 1968 - 1969 and again 1993 - 1994. The market performance immediately after these two periods was pedestrian to dismal.
- Using various measures, the market is currently between 30% to 40% overvalued.

So, although the market could continue to run for a while, the bias is now to the downside.

What does this mean for investors?

1. Take profits, if you have already made handsome profits and are still in the market;
2. Be selective in the stocks you invest. There are few companies that offer value at the moment;
3. For traders, go short Alsi 40 when it reaches 22,500 ~23,000. Wait for a reversal signal.
   

Older posts at www.invest.iblog.co.za

Investors and traders who are interested in reading my older articles can find them at www.invest.iblog.co.za