Friday, December 21, 2007

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.

Wednesday, December 19, 2007

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

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.

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