Caveat Equity Funds

Monthly Outlook

Market Report February 2013

International investment interest in South Africa

SA and Japan


It seems that Trade and Industry minister Rob Davies’s visit to Japan last year paid off, having left with an agreement between South Africa and Japan to collaborate to increase Japanese investing activities in South Africa. This lead to the signing of the official Memorandum of Understanding in Pretoria between the Department of trade and Industry and the Bank of Tokyo-Mitsubishi, Director General Lionel October who witnessed the signing, said that South Africa had seen an increase in investment activity from Japan. The agreement as it stands has no time limit but will be assessed on an annual basis. Both parties to the agreement see it as vital for taking the South African and Japan relationship to a higher level.


BRICS Summit


With estimates that the BRICS and other emerging markets will outperform the developed world with their large amounts of debts and their various sovereign problems in the not too distant future, South Africa is trying their best to grab any opportunity and become part of the future BRICS legacy. At the BRICS first African summit held in Durban this month, South Africa will try to improve business dynamics with other members of the BRICS such as Brazil, Russia, India china and other African emerging countries. "I do believe that China's key role in securing South Africa's membership of the BRICS was the correct initiative to create a nexus between Africa and the BRICS," Nkoana-Mashabane said. With the world’s second biggest economy backing South Africa we as South African could well see one of the most beneficial BRICS summit meetings to date for our country.

The World


Despite the numerous problems we are facing in the current economic environment, the JPMorgan Global Manufacturing PMI has been greater than 50 for the past three consecutive months. As stated before, a measure of above 50 indicates expansion and below 50 indicates contraction. With the Euro-Zone in a bad state and China slowing down, it seems that the United States’ modest growth as reflected in Q4 GDP figures remains a fragile driver of world markets. The latest report from the Institute of Supply management showed that new orders in the U.S. rose from 53.1 to 54.2 in February with higher sales as the primary driver of this trend. Even with the latest positive numbers in mind, the U.S. fiscal cliff and Euro-Zone crises keeps the U.S. manufacturing operations still in the woods with only glimpses of the proverbial clearing.
The crisis in Europe continues to weigh and negatively impact manufacturing activities and this has lead to the fifth straight quarter of declining output and a fall of 0.6% in real GDP for the Euro-Zone. Looking at the above figures of the Euro-Zone and keeping in mind that Europe is in a recession, one can only wonder if the figures could get worse. The unsurprising news is yes, yes they can. The Markit Eurozone Manufacturing PMI has contracted for the last 16 months. The importance of this information correlates with the importance of manufacturing activity. In short, manufacturing activity is a primary driver for economical growth for most countries and the world and what happens in one economical district will impact the others. Thus what happens in Europe impacts activities in U.S. and China, the BRICS and Asia. It should be noted that what seems to be if only recently the most important economy in Europe, Germany is showing signs of stability. It has been formally announced from the Obama administration that the U.S. would move forward with its comprehensive trade negotiations with the European Union in an attempt to improve European and American economies. If one looks at how many failed predictions there has been regarding the collapse of Europe, the Euro and the Euro-Zone so far and one looks at the prolonged negative outlook on Europe, one must sure start looking for the upside that nobody is talking about. All in all, we at Caveat are by no means bears on Europe, but rather cautious bulls.


Unemployment and how it affects us


Unemployment affects us in South Africa regardless of who is unemployed. This of course is to a more or lesser degree dependant on factors such as trade negotiations between countries, a country’s resource requirements or in the way a single country’s economy can affect the world economy. For the purpose of this news letter I would like to focus on the South African and U.S. unemployment and we will start with the bigger economy of the two.
Why the U.S. unemployment affects you can be summarised narrowly by pointing out that as the largest economy in the world, most things that happen in the U.S. will trickle down and impact South Africa at some point. The second and most recent reason the U.S. unemployment affects us is called Quantitative easing. Buy now it should be very clear that Quantitative easing has played a big role in increasing asset prises and supplying liquidity to markets. Proof of this was the adverse reaction we saw in the markets round the 20th of February when there was speculation that QE would be ending much earlier than expected. What followed was an announcement from the FED linking the life of QE with that of the unemployment figures in the U.S again, bringing an end to the speculative talks of QE’s end. Officially it has been stated that QE3 will end if unemployment falls to 6.5%. The latest unemployment figure for the U.S. is painting a story of recovery. The data from the Labour Department showed that the jobless rate fell to a four year low and specifically, the jobless rate fell 0.2% to 7.7%, the lowest since December 2008. The drop in unemployment is good news because an economy must be able to grow and flourish without the help of external (Government) monetary intervention and that will be the consequence of this. The bad news is no more external monetary intervention (QE) that will boost asset prices; instead we will have to rely on the real economy and consumer spending.
Back on the home front the picture looks a lot bleaker. What shouldn’t come as a surprise, unemployment remains the single most pressing matter and in spite of our fearless leader’s commitment on bettering the situation, most challenging economical factor facing South Africa. The National budget recently released showed that S.A. has unemployment of 450,000 people below that of the levels pre 2008 financial crisis. With what feels like very little input from government in stark contrast to the situation in America, it seems the answer to the unemployment problem in South Africa will come from the private sector rather form the public sector. With the exceptional high degree of youth unemployment (40%), one can only hope that our youth and future of the country shares the sentiment “a rocky start is as good as any other start” and doesn’t get discouraged and resort to extremes like crime and immigration. The official unemployment figures are: there are 4.5 million jobless in South Africa and another 2.3 million people categorised as “discouraged” who are no longer actively searching for work, leaving South Africa with an unemployment rate of 33.2%. Considering that a third of S.A.’s work force is unemployed, a lot of our day to day problems are brought into perspective.  

Pains and gains of the market in February


The U.S. economy showing its robustness mites the speculation of an early end to QE3 posted modest gains. The DOW opened on 13 865 and closed up 189 points; the SP500 opened on 1498 and closed up 16 points for the month of February at 1514. The DOW and SP500 posted gains of 1.4% and 1.1% respectively. Our more fragile emerging economy once again showed how easily we can be shook and posted losses for February. The Top 40 index opened on 36 102 and closed 2.35% down on 35 255 and the All Share index opened on 40 570 and closed down 1.91% for the month on 39 710.

Written by Wihan Erasmus
Edited by Tertius  Relihan

 

Monthly Report January 2013

24 January 2013

For the broad investing public, "it's been five solid years of steady outflows from equities and inflows into bonds," said Liz Ann Sonders, chief investment strategist at Charles Schwab & Co "Even 3-1/2 years into this bull market and the gains we've seen since June, it has not turned that psychology around."

 

Year end and new beginnings

With year end, a lot of people and investors were surprised with just how much the major and South African markets were up for this period. Considering the constant bombardment of negative news, all the gloom and not even to mention the doom, it is not unexpected that a lot of investors didn’t come close to seeing the returns achieved by the respective indices. To recap, this is what the different indices did for the year

SP500 opened beginning of this year on 1283 and closed on 1448.3 for a gain of 12.8%

DOW opened on 12221 and closed on 13104 for a gain of 7.26%

FTSE100 made near 6% gains despite the euro zone crises

Top 40 opened the year on 28470 and closed up 6326 points higher to close on 34796 for gains of 22.2%

The All Share index opened on 31986 and closed December 2012 on 39250 for a gain of 22.71

Gold opened on $1282 and closed the year on $1447 ending with less than the spectacular gains that was expected for the yellow metal. A gain of 12.5% was all the infamously hard to price metal was able to make

US oil was a complete different story opening the year on $98.31 and closing on $92.97 with a loss of 5.43%

 

Much like last year the economical picture will be a mixed one for 2013. We can expect positive data surrounded by negative sentiment, worst case scenarios with positive underlying sentiment. Gain through the pains and a general uneasiness surrounding the markets

With the New Year underway, there has been plenty of talk of pension funds moving out of bonds and back into equities. With low yielding government bonds, it just doesn’t make a lot of sense to stay invested and chances are we will see this move. Should this scenario play out, arguably the best thing to do is stay invested in equities and start accumulating some commodities into your portfolio if you haven’t done so yet.

Platinum recovery

Late last year we started to see signs that a recovery in the platinum sector might be underway. This came amid negative data from China, lay-offs and labour unrest in the mining sector and the production disruptions that followed. It seemed that we could see a rebound in the platinum price and even the share prices of the various platinum producers come 2013. Our view seems to be supported by the latest platinum supply data released. The platinum surplus estimated at one point in 2011 at 500,000 ounces is now expected to turn to a remarkable 400,000 ounce deficit in 2013 with South Africa producing some 300,000 ounces less.
There has also been renewed interest from Asian investors in our general mining sector. This comes as the major mining houses cut back on spending in favour of yield; Asian investors have recognised this as an opportunity. The last quarter of 2012 saw a flood of Chinese investments in Africa’s mining sector. The West Africa iron ore sector alone is estimated to have attracted R25bn in investments, much of it from China according to a report of JP Morgan. We expect the international and national mining markets to remain volatile, but there is definitely money to be made for 2013

 

Emerging markets

With the remarkable gains made by the various major and emerging indices, we expect a more subdued but still positive continuation of the Bull Run in South Africa and other emerging markets. “Citygroup cuts its regional stock ratings for Asia and for Central Eastern Europe, Middle East and Africa, adding that emerging market equities are unlikely to match their 2012 performance due to less attractive valuations” Citygroup continued to say that they expected a 9% return in dollar terms for emerging markets equities and a total return on equities for the MSCI Global Emerging Market Index of 12%. Citygroup also cut South Africa and India’s ratings to underweight from neutral. By sector we saw Citygroup raise emerging markets industrials to neutral from underweight while cutting telecoms to underweight – Information from Reuters

Before we all start planning our vacations for the coming December based on these estimates, know that these are only estimates and more so than not, these internationally recognised rating agencies get them wrong.

 

Adding to South Africa’s pain, the rating agency Fitch decided to downgrade SA’s debt, this comes after a string of downgrades by other rating agencies downgrading South Africa’s debt last year. According to Fitch South Africa’s sovereign Debt is now on BBB level and on stable outlook. “Economic growth performance and prospects have deteriorated, affecting the public finances and exacerbating social and political tensions,” a Fitch statement said explaining the key reason for its action. - Sapa-AFP

Developed countries

With the American markets still looking strong, it seems that the negative information surrounding the US fiscal and monetary situation is nothing more than smoke, more smoke and mirrors. Not to suggest that economical information that has been released out of the US is worthless or even made up, but it has done nothing except to keep the retail investor out of the markets and the institutions pushing us ever higher. So eventually they did come to some form of compromise on the US fiscal cliff, late December, so the jobless claims are still high, so unemployment is still round the 8% mark. None of this seems to matter much as the FED keeps on pushing cheep money into the markets.

 

U.S. Employment and price index data

 

Data Series

July
2012

Aug
2012

Sept
2012

Oct
2012

Nov
2012

Dec
2012

Unemployment Rate

8.2

8.1

7.8

7.9

7.8

7.8

Change in Payroll Employment

181

192

132

137

161

155

Average Hourly Earnings

23.52

23.52

23.60

23.59

23.66

23.73

Consumer Price Index

0.0

0.6

0.6

0.1

-0.3

0.0

Producer Price Index

0.3

1.6

1.2

-0.2

-0.8

-0.2

U.S. Import Price Index

-0.7

1.2

1.0

0.4

-0.8

-0.1

 

Bureau of Labour Statistics

China

One has to wonder how much of a hard or soft landing China will have considering that china’s latest data has literally lifted the risk appetite in Asia. With manufacturing data picking up and moving back into positive territory and the latest trade data astonishing the world economist, it would seem as if China is still a force to be recognised with. China’s trade surplus jumped to $31.6b in December comparing to expectation of 20.1 billion (b). Exports rose by 14.1% overshadowing the expected 5% increase. Imports also rose to 6% compared to the expected 3.5%. For the year of 2012 trade surplus soared 48.1% to 231b with exports up 7.9% to 2.05 trillion (T) and imports up 4.5% to 1.82T. It should be no surprise that commodities are enjoying higher valuations on the back of Chinese data

 

Market Report 15 October - 15 November 2012

An interesting month of October


"In investing, what is comfortable is rarely profitable." - Robert Arnott

If anything, it seems as if South Africa can’t fall further. October has brought with it a string of unpleasant, unlucky and just plain dreadful series of events that has done nothing other than further cripple our foreign investment appeal.  One of the first pieces of bad news was when Standard & Poor, the ratings agency downgraded South Africa’s sovereign rating another notch down to BBB and left us with a negative outlook. This was the second ratings agency to downgrade S.A.’s sovereign rating. What this means is that South Africa is currently rated only two notches above “speculative”, effectively increasing the cost of insuring the country’s debt by seven basis points. According to Markit, we have seen a rise of over forty basis points since early August.

South Africa’s problems were compounded by the recent and still ongoing strikes within the mining and transport sectors. It seems as if an increasingly darker cloud is forming and to the dismay of many spreading the poison of discontent throughout the workforce of South Africa. October saw how large players in the resource market were brought to their knees due to illegal strikes. Looking back, it seems as if the darkest cloud came from a Lonmin mine Marikana where 34 people were killed in a confrontation between police and strikers. Wage disputes seemed to have started within the platinum sector and then moved to the gold mining sector, leaving us with the fears about the stability of the work force in the Coal sector. The Result of the labour instability is reduced capex spending of companies’ within the borders of South Africa and a further deterioration of foreign investor confidence in S.A.

The rand, a barometer of the strength of South Africa’s economy has come under significant pressure throughout October. The weakening of the rand compared to the dollar was a direct result of the above mentioned misfortunes and other lesser acknowledged factors that were present in South Africa. This negative pressure on the Rand brought us within view of a three year low against the dollar.

With all this negativity in the markets we still see the SP 500 trading above the 1400 mark and our markets trading at the  an all time high mark. This if anything should show that the general world sentiment is still positive and strong. We at Caveat believe that this positive sentiment should hold throughout November and December, keeping us in positive territory until year end. A final positive note is the re-election of Barak Obama, with his re election we are almost guaranteed that the money printing press won’t stop soon and this is positive for equities.

Bonds

South African yields rose in October more than in two years as a result of the strikes in the country. “The bond market got hit by an increase in global benchmark yields and ongoing concerns over the labour unrest in the economy’’ Theuns de Wet, head of fixed income at RMB said. “Increasing pressures on the fiscus, lower growth and social pressures will continue to weigh on the sovereign risk premium.

The Bond market is a financial market designed to supply liquidity for long term securities. Bond markets are often without a centralised exchange system and transactions are completed in an over-the counter fashion. Bond market liquidity is generally provided by dealers who commit risk capital to trading activity. In the bond market the counter party to an investor or investment fund which either purchases or sells a bond is almost always a bank or another securities firm acting as the dealer. Bonds are debt, by purchasing debt an investor becomes a creditor to the corporation or government. The primary advantage of being a creditor is that you have a preferential claim on assets, better than share holders. This is of course in the case of bankruptcy; a bondholder will get paid before a shareholder. Bonds are considered a risk-off trade and will generally provide less risk than say equity at the cost of a lower return.

Although bonds traditionally earn lower returns than stock, there remain compelling reasons to invest in bonds.

  1. Diversification – Bonds tend to be less volatile than stocks and can therefore stabilize the value of your portfolio. A combination of both equities and bonds held for the long term in an investment portfolio can often provide comparable returns with less risk than just holding a single type of investment
  2. Stability – if an investor is sure that he will need a certain amount of money in the near future, it can make sense to invest in bond or bonds that are less volatile than equity. This is because the majority of the returns on bonds are from interest payments (the coupon), fluctuations in the price of a bond will have less impact on the value of the bond investment than equities.
  3. Consistent income – Coupon payments are consistently distributed at regular intervals to investors
  4. Better than the bank – The interest rates on bonds are typically greater than the rates paid by banks on savings accounts. As a result, if an investor does not need the money in the short term, bonds will give him a relatively better return without adding much risk

Disadvantages

  1. Interest rate risk – Bond prices are inversely related to interest rates, so if interest rates increase, the price of the bond will decrease. The interest rates on bonds are set at the time it is issued. If interest rates increase, other investors will be unwilling to purchase the bonds in the secondary market at lower rates. This can be illustrated by a bond that was issued with 7% coupon and interest rates have increased to 8%. This will result in a decrease of the price of the bond so that capital appreciation can make up for the difference in interest rates
  2. Credit risk – government bonds are deemed to be for the most part immune to default. Bonds issued by companies are more likely to be defaulted on as companies go bankrupt. The result of a bond default is that the remaining value of your investment can be lost.  With the use of the rating system on bonds, an investor could easily see if a certain bond is suited for the clients’ risk profile
  3. Call Risk – Some bonds can be called by the company that issued them. That means that the bonds have to be redeemed by the bondholder, usually so that the issuer can issue new bonds at a lower interest rate

What the markets did in October

The Dow and SP500 had a difficult October, both losing ground before the elections. The Dow opened on 13438 and closed down on 13096, a 2.52% drop. The SP500 saw similar losses, opening at 1440 and closing 28 points lower on 1412 locking in a loss of 1.98% for the month. In stark contrast our markets did the exact opposite. The All share opened on 35741 and the Top40 opened on 31515. Both indices rallied throughout the month and closed in positive territory on 37156 and 33008 for a gain of 3.91% and 4.73 for the All share and Top40 respectively

Written by: W Erasmus
Edited by:   TI Relihan

Market Report September 2012

Caveat Investments Market Report for 15 Aug-15 Sep 2012

Up up and Away- not what popular analyst had to say


August and so far September has kept true to tradition by being volatile and full of surprises. August was characterised by low volumes and great uncertainty as fund managers and private investors alike were worried about the where economy was going to push the stock markets next. Bad news seemed the order of the day, with higher than expected jobless claims in the US, renewed worries about Spain’s banking system and a hard landing for China. China, who dragged us out of a recession in 2008, seemed to play a significant role in the general dismal feel we all felt in the markets. China’s manufacturing sector shrunk in August according to official figures. It was the worst showing in 9 months and much worse than analyst had expected. Unofficial figures painted an even worse picture for investors. The HSBC Purchasing Manufacturing Index reported its worst figures since March 2009. The index has now been falling for the past ten months. With the growing pessimism about China, advice of shorting the Australian currency became wide spread... advise that at least in the short term could have proven fatal for your portfolio. I’ll explain more about this later.

3 prong attack to start the next leg of the rally

Mario Draghi has spoken, and the world really listened. With his infamous words “we will do everything in our power to save the Euro” the 1st glimmer of confidence returned to the markets. This statement was just before the ECB meeting that Europe and the world waited for in anticipation, a meeting that very easily could have been a make or break meeting for Europe... and it seemed to make the non believers believe in Europe again. The ECB started by keeping the interest rates on hold, but this was a side show. The main news was that the ECB would buy an “unlimited” amount of government bonds via Outright Monetary Transactions (OMT), subject to a constitutional court ruling in Germany about the validity of the program and the European Stability Mechanism (ESM). With the ball firmly in Germany’s court... we saw a strong return with a court ruling stating that the ECB plans were in fact in line with German Law.

The Federal Reserve announced it will take aggressive moves to boost the economy and improve unemployment figures. This move by the Fed is known as QE3, and from what history has shown us, comes with a limit. This time however Bernanke showed us just how big his economical stimulus bazooka can be and how little he is worried about inflation. The Fed said it would purchase $40 billion a month of mortgage backed securities to spur economical growth and help reduce unemployment. If this sounds all too familiar your right, this is just more QE talk, but this time round there was an unexpected twist. Unlike the previous two bond buying programs introduced by the Fed with clear defined limits on the amount of bounds that would be bought, this time QE3 is different. The Fed said that it will keep buying the securities until the job market shows substantial improvement. The central bank also announced that it would continue “Operation Twist” whereby the Fed sells short term bonds and uses the proceeds to buy longer-term bonds in order to keep longer term rates lower. The combination of QE3 and Operation Twist means that the Fed will be buying $85 billion of bonds each month up till the end of the year. *CBS News

China is trying to fight the good economical fight. There has been a lot of speculation whether China will indeed have a hard or soft landing and if one were to go by the commodity price and resource share values, a hard landing seemed to be the order of the day. No matter where one looked, a positive story out of China seemed non existent... that was until China’s National Development and Reform Commission decided to put some weight behind China’s continued growth plans. This was done with the approval of 60 infrastructure projects worth more than $150 billion. “Apart from the large sizes of the projects, the announcements for these new projects were all made in two days, which is very intense” said Zhang Zhiwei, an economist at Nomura in Hong Kong. This I believe indicates the commitment of China to do what needs to be done to improve the world economy as well as maintain faith in themselves. This is also indicative of the once a decade leadership change and their desire to prove to the Chinese people that the red country will continue to prosper. The approved infrastructure spending by China is roughly a quarter of the total size of the massive stimulus package unleashed in response to the global financial crisis in 2008.

Local and international markets


Without any real proof, the markets already started to react in August to what was coming. The Dow opened at 13007 and closed on 13091 a modest gain of 0.61%. So far for September the DOW has rallied 3.84% to 13593. The SP500 opened August on 1374 and closed 1.98% on 1406. The 1400 level once again emerged as a key support level for the SP500 and was eventually used as a foot hold to propel the SP500 to 1465 a 4.21% rise in value for September so far. The Top40 and All Share both closed up over 2% for the month of August and are currently trading at 3.28% and 2.92% up for September so far respectively. August saw the Top40 open on 30384 and the All Share on 34678 and closed on 31173 and 35389.

With the Fed’s announcement of QE3, the promise of the ECB, the infrastructure expenditure out of China, and the probable retaliation of Japan to maintain a weaker currency in the face of these developments it would seem as if global QE effort is not far from where we are now. In short, we might be looking at global currency war that will lead to inflation and a continued search for safe havens. In light of this information we remain gold bulls and are cautiously looking at mid-term sector rotation from industrial stocks to more risky commodity shares

Written by Wihan Erasmus
Edited by   Tertius I Relihan


Market Report July 2012

The last 6 weeks has really left investors feeling like they have been riding on a hot air balloon. It isn’t just the up up and away part as symbolised by the market rallies, but also the little voice inside of our heads reminding us that we are kept afloat because of hot air.

Europe and the world

US TBs and Market rallies

July has proven to be yet another month filled with uncertainty. With the markets trying to stay range bound, we kept seeing volatile directional pushes upwards as seemingly more and more positive comments, events or decisions kept materialising from within the fog of our global/euro economy.

July started off as a slow volatile month with very little indication that we would end the month in positive territory, except that the infamous 30year US TB yields were at levels last seen at the bottom of the 2008 crash. (See attached graph) At levels of 2.55% one could almost feel the different markets’ unspoken need to rally from their respective bottoms. That is if one was paying attention to what the US Treasury yields were doing.  It should be kept in mind that there exist a direct correlation between the US Treasury yields and the various market movements. The 30 year Treasury yield seems to be struggling to break through the 2.8% level, but we believe that with current momentum, we will eventually see this level break and also a powerful rally for the markets.

UK and US GDP

According to Bureau of Economical Analysis US real gross domestic product increased at an annual rate of 1.5 % in the second quarter of 2012. That is to say an increase of 1.5% from the first quarter to the next. The increase in real GDP in the second quarter primarily reflects positive contribution from personal consumption expenditures, exports, non-residential fixed investments, private inventory investment and residential fixed investments. These gains were partly offset by negative contributions from state and local government spending, and an increase in imports.

The Gross Domestic Product in the United Kingdom contracted 0.7% in the second quarter of 2012 over the previous quarter. This seems to be part of a downwards trend of lower and lower GDP figures released by the UK since 2012. If one looks back into history one would hardly see the drop of 0.7 as a significant one. Historically, from 1955 until 2012, the UK GDP rate averaged 0.6 % reaching an all time high of 5.3% in March 1973 and a record low of -2.5 in March 1974.

Is Europe cheap?

General European shares have come under a lot of scrutiny because of all the underlying problems with the various sovereign nations’ debt problems, not to mention the obvious risk of contagion that exist because of interbank investments. These very problems have pushed the financial world into a constant state of uncertainty and worst case scenario valuations. If it isn’t China that’s going to have a hard landing, then it’s the fiscal cliff that America is sitting on that’s going to be the last nail in the coffin. Regardless of what’s going to “bring us down” it would appear as if Europe has been priced to expect the absolute worst outcome.

Ben Inker of highly-respected US value investor GMO noted “euro zone equities (excluding financials) are about 15% cheaper that their fair value.”

One can only assume that if the worst case scenario does in fact not play out, buying now and holding European share for the long run could be a good, wobbly investment for the future.

Gold

Gold critics and gold bears will be quick to point out a slippery slope that the yellow metal has been on since the all time high in September last year ($1900), with a sell into strength the most likely view. Given that the gold spot is still trading below its 200 day and 144 day moving average $1637, $1623 respectively, it is difficult to argue against this logic. If one takes into consideration the prospect of massive inflation caused by more quantitative easing in the US, UK and maybe sooner that we are all thinking also in the Euro zone, add the seasonal demand from India and we could be looking at a much different picture for gold. This could all lead to a break of the 200 and 144 day moving averages and also signal a significant move up in the gold price. Considering the state of the world’s economy I would not feel comfortable being on the short side of gold.

Local and international markets

The month of July saw our local Top40 and All share index closed in positive territory. The Top40 opened on 29639 and closed on 30387, while the All share opened on 33677 and closed on 34597, ending the month with positive gains of 2.53% and 2.64% respectively. Once again our markets followed the larger US markets that also closed in positive territory. The SP500 opened on 1362 and closed on 1370 for a gain of 1.26%. The DOW opened on 12880 and closed on 13009 for a 1%gain for the month of July.
So far the markets have kept the momentum found in July and closed in positive territory by weekend 10 August 2012. The SP500 and the DOW had already showed gains of 1.53% and 1.92% respectively for August and this has pushed our local markets up as well. The Top40 and All share both posting gains so far of over 2%. With the markets being pushed ever higher, one must stop to wonder if a correction or even just a bit of price consolidation is just past the horizon capping the gains for August so far.


Written by    WD Erasmus
Edited by       TI Relihan



Market Report for June 2012

A Month of Ups and Downs

June was a trying month for investors across the world. What first seemed like indecision within the markets later turned into a rally with little if any fundamental information backing it. The SP500 and DOW showed continued strength throughout the month of June with our South African markets lagging and at times indicating strong negative sentiment in contradiction to what was happening abroad. This of course was largely to do with the different meetings and finial the EU summit at month’s end that fuelled speculation. There seemed to be a general mismatching of opinions and expectations from various investors and economists. On the one side you had the belief that some concrete plan/news would come from the EU heads at the summit, and on the other hand there was little if no confidence that anything worthwhile would come from the summit. The latter belief is by no means an unrealistic expectation considering that all the other meetings so far was nothing more than time buying mumbo-jumbo designed to kick the proverbial can further down the road.

Before and After the Summit

"There is not a reason in the world to buy the market this morning, certainly nothing in the overnight that would suggest there is any kind of a good foundational reason to buy the market, even an oversold condition,"
Peter Kenny, managing director at Knight Capital in Jersey City, New Jersey

Spain paid its highest short-term borrowing rates in more than six months when it sold just more than €3bn of three- and six-month Treasury bills. The yield paid on the three-month bills was 2,362%, up from just 0,846% just a month ago. For the six-month paper, the yield leapt to 3,237% from 1,737% in May.

Investors seem to have finally learned something from the European crisis: "Expect nothing good".

"Britain’s economy slipped into its second recession since the start of the crisis around the turn of the year and fears of a longer slump have been rising as companies hold back investment and exports suffer from the euro-zone crisis."

As can be seen from the comments given by economist before the EU summit, it almost felt as if the summit was going to be just another waste of time. Fortunately there was good news for investors. A key decision was made and it definitely changed the summit result for the better. It was a very important choice regarding EU bank recapitalisation. If you can remember, Spain’s banking system had come into the spotlight again in recent weeks.

It was the same sad story of loss of liquidity, potential bankruptcy, large amounts of debt and financial collapse. Now how banking recapitalisation is usually handled is by the respective sovereign nation reaching into its pockets, and more often than not its residents’ pockets, and giving the distressed banks money and credit to use to fix their balance sheets. The problem is when the sovereign nation in question is broke and has to borrow money (in this case from the IMF) to recapitalise its banks. This has a negative effect for investors invested in the aforementioned country’s debts/bonds. The already jittery investors, buyers and holders of government bonds will effectively be placed lower down the debt repayment hierarchy with every Euro that is borrowed from the IMF.

It is a negative situation where investors and sovereign state alike are potentially crippled with fears of a similar situation like in Greece.

And so the carrot of hope was once again dangled in front of investors. The European bailout fund will –eventually- be allowed to bail-out banks directly. If European money does go directly to the banks, effectively you have the whole of Europe standing behind Spanish (or French, or Italian) banks. The world rejoiced and markets rallied. None of this solves the crisis and now all that is left to do is to wait for the next news headline that will steer the world markets.
The other big financial story of the week was the fact that China, the Euro Zone (0.75%) and Britain all combined to loosen monetary policy on Thursday. Head of the European Central Bank (ECB), Mario Draghi, denied that it was a coordinated action, though with the moves coming within an hour of each other it was one heck of a coincidence.

Local and International Markets

The DOW and SP500 showed strength with an impressive rally of 3.93% and 3.96% respectively. The DOW opened at 12392 and closed on 12880 and the SP500 opened on 1309 and closed on 1362. South African markets were slow to follow international markets and rose by much less that other developed markets. The Top40 opened at 29202 and closed up 1.49% at 29638 while the ALLSHARE opened the month at 33143 and closed positively on 33708, a gain of 1.17%
In the face of no new problems coming out of Europe or the US we could see a positive end to July too.

Written by Wihan Erasmus
Edited by Tertius I Relihan

Market Report May 2012

Caveat Investments Market Report for May 2012


With the European sovereign debt crisis still an active concern, and the continued promises that seem to lead nowhere, it appears as if the respective countries and leaders have lost the faith of the investors. This can be seen in the graphs below, the only index to have made a higher high is that of the SP500. The DAX, CAC40, FTSEMIB, IBEX and ASE have all started to move lower from their respective top patterns. If one takes into consideration that 11 EZ countries are currently in a recession, China’s slowing growth, and the trade between China and the EZ, it seems to place serious doubt on whether America will continue to keep the stock market’s head above water or if it will be dragged down to the depths of an ever diminishing asset value cycle

 

UK

Last week saw the first fall in house prices in London for over 30 months Industrial production is falling and the confederation of British Industry (CBI) trends survey revealed that the firm anticipates things are likely to get worse before they get better. To cap it all the International Monetary Fund (IMF) is also worried about Britain and there is still more bad news coming from the Office for National Statistics (ONS) which is closer to the problem, revealed that the UK’s recession is deeper than they previously thought. Things aren’t looking to good for Britain. “It used be that the top priority was cutting the deficit, but the latest figures made for pretty poor reading – the deficit has jumped from £ 9.1bn in April 2011 to £ 11.5 bn. But the IMF is now more worried about the lack of growth. Which in a nutshell means, that the IMF thinks Britain will need to print more money” A common theme throughout the world.

A Resource to keep an eye on

With the current uncertainty in the markets and multiple views on where we are going next, it can be hard for investors to make decisions about where to put their money and in what asset classes
One way of telling where the world economy is heading, is to keep an eye on the price of ‘hard’ commodities: those that come out of the ground. Before factories can make more finished products, they need extra supplies of raw material. Thus if we see ‘hard commodities prices are rising, it is a reliable indicator that the global demand for goods is growing too. With that said, one specific raw material traders and asset managers watch very closely for this purpose is copper. Copper has long been dubbed the smartest metal in the world exactly for its ability to be used as a forward indicator of future economical growth. Considering the wide range of uses for copper, it should come as no surprise that it is so loved, hated and watched.

Market review for May

May ended negative for almost all major Indices’. The DOW and SP500 were both down 6.21 and 6.27 % respectively. Our own markets showed some resilience in the face of very negative price movement from the US. Our AllShare opened at 34399 and closed on 33143 to give a decline of 3.65% for the month. The Top40 showed similar losses, opening on 30365 and closing down 3.83% for May on 29200. The hardest hit index in South Africa was the RESI25, an index that tracks our resource sector, fell by 7.25%. Confirming a general market move to more defensive share, the FINDI (financial and industrial sector) drop by only 2% for the same period

Author by Wihan Erasmus
Edited Tertius Relihan

 

 

 

Market Report April 2012

Caveat Investments an authorised FSP 24777

The gains and pains of Platinum


Few, if any, who call themselves investors have forgotten about the rise and falls of Platinum, the sweet and sour of this versatile and seemingly invaluable metal. The last seven years have left investors with mixed feeling regarding PGMs. Some investors came out of the platinum sector with smiles from ear to ear, others were left wishing they got into the action earlier, some have take huge knocks on their portfolio as a result of selling stocks at a loss and then there are those who are still on the platinum share Titanic.

In South Africa, the most prominent producers of PGMs are Anglo Platinum (- 65%), Impala Platinum (-57.7%), Lonmin (-78.6%), Aquarius Platinum (-93%), Northam (58.3%), Wesizwe (- 91.4%) and Eastern Platinum (-89.75%) have all taken significant share price hits as measured from their respective 2008 highs. The reason, regardless of current economical circumstances for such huge losses since the 2008 highs has to do with the dramatic doubling of the platinum price from 2007 $1109 to $2200 early in 2008. The largest contributor to this excessive rise in platinum price had to do with the artificial fears that South Africa producers would not be able to afford the electricity needed to get platinum out of the ground as well as the speculative nature of investors around the world. In short, money was drawn to platinum like moths to a flame, and of course, then came the crash.

Platinmu & Palladium
*graph by Platinum today*

The question today is not whether to sell platinum shares to go short or to sell to cover your losses, but rather if a true and lasting demand for the precious metal still exist and if that demand will result in profits. If one looks at the graph above, one can easily ascertain that the platinum price didn’t follow suit with its share counterparts in the platinum sector after 2008. In fact the robust nature of the metal’s price recovery and the new found stability should be a clear indication that in the long run platinum is a keeper. It is important to bear in mind that the platinum price after 2008 reflects the demand and supply for this precious metal that is used in both industrial applications and as an investment commodity stored in vaults for long term by individual investors or by platinum ETFs. While the much better known precious metal gold has relatively few uses in industry, platinum has a number of chemical properties that make it ideal for many major industries. Because of that, the platinum price isn’t fuelled almost entirely by speculation, in the same way as gold; but mainly depends on demand from industry.

Where do we find platinum

Platinum can be found occurring naturally, accompanied by small quantities of iridium, osmium, palladium, ruthenium and rodium, all of which belong to the same group of metals (PGM). The main source of alluvial deposits is in the Ural Mountains of Siberia and in certain Western American States. A large suite of platinum containing chalcogenide minerals are found associated with sulphide mineralisation in ultramafic ores in South Africa and elsewhere. Sperrylite (platinum arsenide) is found with nickel-bearing sulphide ore deposits at Sudbury, Ontario. These produce a large amount of platinum metal (and palladium) as a by-product. The nickel production helps to offset the cost of recovering the very low levels of platinum present (0.5ppm) in the ore
Currently the largest producer of platinum in the world is South Africa, it accounts for approximately 75 - 85% of global production (depending on which sources you believe) with Russia coming in second. South Africa is also home to 90% of the world’s proven reserves, leaving the fate of platinum hinging on yet another emerging market.

Industrial uses of Platinum

Because platinum is an excellent catalyst in many chemical processes, it is extensively used in catalytic converters in cars. These are devices placed in the exhaust system that reduces the harmful emissions from combustion engines and convert them to less damaging substances. The automobile industry absorbs more than half of all the platinum that’s produced each year. That demand is predicted to rise as the auto industry recovers from the recent crises’. Automakers will spend around $7 billion on platinum in 2012 which is 17% more than in 2011, and thus the most used since 2007. This estimate is made in spite of some automakers buying recycled platinum and substituting more palladium for some purposes.

Research has shown that platinum could have a key role to play in the development of fuel cells for energy. Fuel cells use hydrogen and the hydrogen must be stored: platinum group metals (PGM) are good at doing this job effectively. This means that the growth of the green economy will have a positive spinoff for the PGM sector. A market for fuel cell powered cars is expected to develop over the next decade
In addition, platinum is utilized in electrodes, batteries, disk drives, monitors and many other pieces of electrical equipment. The chemical industry and petroleum industry also buys platinum. If you’re looking for an indication of where the platinum price will go to in the future, look to where the majority demand for platinum will come from, the industrial use of platinum
Platinum jewellery.

As a precious metal, platinum is increasingly in demand in the form of jewellery. In Asia especially, platinum jewellery is popular. Statistics show that about a third of the demand for the metal is fuelled by the demand from the jewellery industry and 75% of that demand comes from Chinese consumers while India is taking up around 8% of total platinum demand.

The expected rise in gold investment for the second half of 2012 could possibly result in a spill-over effect on the platinum price. However the ongoing Euro zone crises presents a major downside risk, with the constraints of platinum auto catalyst demand in Europe and considering that in the past the rise in platinum price and platinum share prices followed suit with real economical growth, something we haven’t been seeing much of.

Author by Wihan Erasmus
Edited Tertius Relihan

 

 

 

Market Report 1-16 March 2012

Caveat Investment’s Market report for 1st-16th March 2012

US and the rest of the world


Last week we saw more positive data from the US on retail sales, though the latest consumer confidence readings weren’t so good. Markets in the US and UK remained in their slow upwards grind, and is continuing to show persistent strength with the SP500 recently closing above the psychological level of 1400. Sentiments in Asian markets have been weighed down by trade data from China released last week. China reported a trade deficit of $31.5b in February which was the largest recorded deficit since 1989 and also much worse than market expectations. It is important to remember that the sum of China’s deficit for January and February was at $4.2b which is notably higher than the figure of $0.89b recorded for January and February 2011. China’s overall Export and import figures for the first two months of 2012, compared to 2011’s first improved year on year. A negative aspect of China’s exports was with their largest trading partner, the EU, with a drop of -1.1%yoy. For those of you still debating China’s “hard or soft landing”, China has finally admitted that economical growth is starting to slow. Premier Wen Jiabao has set a lower-than-usual 7.5% growth target for his final year in office.
* Action Forex

In the US we saw the DOW and SP500 open on 12952 and 1365 respectively for the month of March. The DOW moved 281 points upwards closing last Friday on 13233, a 2.16% gain. The SP500 moved 39 points upwards closing Friday on 1404, a 2.81% gain. We saw more positive movement from the US30Y Treasury yield during last week, causing what looks like a break out of the range between 2.86 and 3.18 as detailed before. The US30Y Treasury Yield made a 0.27 point move from 3.15 to 3.42, a 8.57% move. Although we at Caveat normally see a upwards movement in the treasury yields as bullish for equities, considering the upwards movement of the US markets since the start of the year and the range bound pattern we have seen on the treasury yields over the same time. We are of the opinion that this could we be just the yields playing catch up with the equities. The SP500 will need to stay above the 1400 mark for us to maintain our bullish sentiment.

South Africa


South Africa’s Government stepped up to the plate and asked our electricity supplier Eskom to ease  up on private and industrial consumers, which have been strapped with exuberant electricity price increases in recent years, to reduce their next price hike. The energy regulator said it has cut the increase in electricity rates for power utility Eskom to 16% for the 2012/2013 financial year from a previously approved hike of 25.9%. It is said by the regulator that the reduced price increase will result in revenue loss of R11.15b. But somehow I doubt that consumers will care much about the reduction in future revenue of Eskom considering how much they have already taken from us.
*BusinessReport

We saw a different picture in South African markets than that of the US so far this month. The Top40 opened March on 30547 and the All Share on 34296. We have been capped and supported in the range bound channel in both the Top40 and The All Share. This sideways channel movement we are seeing started the 18th of January this year with the Top 40 and the All Share both breaking up into the channel. We see the bottom of this channel at 30000 and 33400 respectively for the Top40 and the All Share. With resistance at 30500 for the Top40 and 34400 for the All Share. The Top40 closed on Friday 149 points down or -0.48 for the month so far and the All Share closed Friday down 74 points or -0.21% so far this month. A break out of the ranges mentioned is required for the next leg of the bull run to continue. We at Caveat Investments optimistically waiting for the break up out of these channels.

 

Written by Wihan Erasmus
Edited by Tertius Relihan

Market Report 13-29 Feb 2012

The Presidential Election Cycle Theory


Many different investors believe in many different cycles, theories and schools of thought regarding investments, when to buy and what to buy. Today we present to you the US Presidential Election Cycle Theory and practical applications on how to implement in your portfolios.


The Presidential Election Cycle is a theory first developed by a stock market historian named Yale Hirsch and was later moulded to be used as a market timing mechanism for stock investors
In brief, The Presidential Election Cycle Theory states that some years of a US President’s term in office are better than others for stock markets. This can possibly be explained by the type of work being done and the correlating effort applied to achieving certain Presidential goals. One could argue that the first two years of a president’s election time is spent on passing legislation and fulfilling presidential promises made to the populace, where as the third and fourth year of a candidate’s presidency is geared to economical reform, growth and passing of economic policies. A general increase in wealth of the populace could easily or at least on the face of it give a perception that a positive move forward has been made by the current President, thus strengthening his chances for re-election.


The second half of the average presidential term has been historically stronger than the first half and if investors were to stay out of the markets for the first two years of each presidential term, and then buy and hold for the last two years, they would substantially outperform the market over the long-term. However, as the last four years have shown, there are sometimes exceptions in the short term. The 2007-2009 bear market began in the third year of the Bush administration and continued down through the fourth year, and the markets have been up quite strongly for the first two years of the Obama administration.


As with any market timing strategy, the overall pattern of investment performance related to the presidential Election Cycle may be convincing but the pattern is based upon averages and averages do not guarantee consistent results. In addition, it can be misleading to only look at the market’s year-end levels to determine risk, as doing so does not take into account the corrections that could take place within a year. A wise investor will consider the Presidential Election Cycle Theory as only one aspect of his overall investment strategy for any given year. As with most if not all financial indicators and stock market theories, the Presidential Election Theory should be seen and used as a tool to improve one’s investment strategy over time and not the strategy itself.

US and South African Markets

February drew to a slow and uneventful close for most indexes. What started as unspectacular range trading slowly but persistently started to push the world markets down from the highs it made in early February.
The US 30 Year Treasury opened on 2.94 % yield and managed to close above the 3% mark on 3.08% a change of 0.15% for the month. The DOW and SP500 opened February on 12633 and 1312 respectively and showed good gains of 2.53% for the DOW closing on 12952 and the SP500 showed gains of 4.06% closing on 1365. In our local markets gains weren’t as spectacular as we saw abroad, our Top40 and ALL Share index both showed modest gains of 1.02% and 1.25% respectively. The Top 40 opened on 30176 and closed on 30484. The ALL Share opened February on 33792 and closed on 34215.


With the strong start to the year, we believe we will see sort term weakness within the South African and world markets, but remain longer term bulls. On a side note: with the current decline in resources and cash pilling into more “stable” banking and industrial shares, it seems that the hedging and protective function of gold has diminished of late.

Written by Wihan Erasmus
Edited by Tertius Relihan

Market Report 1st-10th February 2012

Market report for 1st-10th February 2012

The Baltic Dry Index has plummeted


The BDI is a key barometer of global freight activity. It’s published by London’s Baltic Exchange, the world’s leading market for buying and selling shipping contracts.

The BDI covers 26 major shipping routes. It measures the cost of transport space (shipping rates) on dry bulk carriers. These cargo ships carry cargoes of raw materials such as coal, grain, timber, steel and iron ore. If the BDI rises, it indicates that shipping rates are rising due to increased demand for transport space for raw materials. If more materials are being shipped, it suggests that factories are seeing more demand for their finished goods and so are planning to make more. The school of thought regarding the BDI differs somewhat, there are those that believe that this is a leading indicator for the markets and others believe that the BDI is more accurate as a lagging indicator. Regardless of school of thought that you choose to believe in this is the biggest and most steep drop in the BDI, exceeding even the drop seen in 2008 before the crash.

 

*Bloomberg*

SP500 and US 10Year Bond Yield


Since November 2010 the US 10year Bond yield has been trading within a fairly tight range of between 3.15% highs and 2.82% lows. A positive aspect of the US 10Year yield is that it has been making successful higher lows since mid December. We see this as bullish for the 10Year bond Yield and believe that if the momentum continues to grow in strength we will definitely see a break through the 3.15% yield mark which started acting as minor resistance late in 2008. Should the resistance be broken we will view this as a bullish indicator for the world markets as well as our own All Share and Top40 index
So far we have seen a positive move for both the SP500 and the DJIA over the first 2 weeks of February. DJIA opened on 12633 and closed on Friday at 12801 a 1.33% move up, while the SP500 opened at 1312 and closed Friday on 1342 a move of 2.3% for the 2 weeks.

SA Markets


This year we have seen our All Share index break above its all time high of 33233 that was reached in May of  2008, but we have not seen the same happening on our Top40 index which is still struggling to follow suit. Other sectors that our performing extremely well compared to the markets are the JSE Banking Index which is trading at another all time high of 45195. We have seen big moves up in the share price of most South African banks, this and the strong performance we have seen in the Mid Caps is considered the main contributors to the current strength in our markets
South Africa’s official jobless rates declined to 23.9% of the labour force in the fourth quarter of 2011. This was a 1.1% drop from the previous quarter’s jobless rates that was at 25%. In its latest quarterly Labour Force Survey, Statistics South Africa said the total number of unemployed people stood at 4.244 million in the three months to December from 4.442 million in the third quarter. The expanded definition of unemployment, which includes people who have stopped looking for work, decreased by 0.6% to 35.4%
The Finance Minister Pravin Gordhan has said the economy needs to grow by 7% a year on a sustainable basis to make a dent on unemployment, more than double the current 3.1% seen for 2011 – Reuters

GOLD


After the huge 2011 gold rally reaching a high of $ 1922, we saw a systematically loss of value in the gold/Dollar price and even some huge drops in the gold price. Gold eventually made a bottom for the year at $1519 on the 29th of December 2011. Since then gold has managed to regain some of its lost strength and has been moving back up to retest previous medium term resistance at $1760. The gold price has produced two significant technical signals so far this year that causes us to maintain our bullish long term bet on gold. The first is the break above the down trend resistance provided by the September 2011 top and preceding lower highs that gold price made on its way down. This was broken on the 25th of January 2012. The second bullish indicator was when the gold price broke above the 144 day moving average again which has acted as support for the gold price since early 2009. We are near term gold neutral and remain long term gold bulls

Written by Wihan Erasmus

Edited by Tertius Relihan

Market Report 16-31 January 2012

Market Report 16-31 January 2012

Turmoil in the EZ

France and Austria both lost their top credit ratings in a string of downgrades that left Germany with the euro zone’s only stable AAA grade as Standard & Poor’s warned on Friday (13 Jan 2012) that crisis fighting efforts were still falling short. Spain and Italy were among the nine nations downgraded
France and Austria were cut one level to AA++ from AAA rating and faced the risk of further reductions, the ratings company said. While Finland, the Netherlands and Luxemburg kept their AAA ratings, they were put on negative watch.
With the downgrade of France, the euro region’s bailout fund may find it harder to raise money in the financial markets; the immediate impact on the France and Italian bond yields were muted thou

European leaders are still struggling to tame the financial crisis and convince investors they can restore budget order. On Friday (20 Jan 2012) Greece’s creditors suspended talks with its government, having failed to agree about how much investors will lose by swapping the nation’s bonds, increasing the risk of euro zone’s first sovereign default.
*business report*

China & South Africa

China’s economy expanded by 9.2% last year, slowing from 2010, official statistics showed. It is believed that global turbulence and efforts to tame high inflation were to blame for putting the brakes on the economy’s growth. “The still healthy annual growth suggests that China’s economy would most probably avoid a hard landing despite slumping demand from key export markets in the US and Europe”, analyst said
South Africa’s purchasing managers’ index (PMI) dropped 2.2 index points to 49.4 points in December. As detailed before, a figure above 50 indicates expansion and a figure below 50 indicates contraction. Further the PMI (Purchasing Managers Index), a reliable health gauge for the manufacturing sector, had pushed higher between August and November, suggesting modest growth in factory production. The PMI input cost indicator remained elevated with the price index gaining 1.2 points to reach 83.3, the highest level since March 2011. The expected business conditions index, however, increased by 6.3 points to 61.3
“While the increase in the expected business conditions index was encouraging and suggests better times ahead, it was not corroborated by the PMI leading indicator that remained below 1”.
*BussinessDay*

Caveat’s Mid Term Outlook

Based on the Top down approach we apply on the local and world markets: that is, we look at the performance of the different economies, what sectors are performing and what sectors will continue outperforming into the future. This information is based on analysis of markets such as the SP 500, DOW, and FTSE. We then proceed to apply this information to our local markets to identify the sectors that we think will outperform the index. According to our analysis, we believe that the star performers will come from the MIDCAP shares and more specifically from the financials and industrials with the recourses lagging the index.
With the world wide money printing epidemic and South Africa barely staying within its inflation target, we believe that a good bet for the future will be food producers in South Africa.

U.S. & South African Bonds

U.S. government bonds rallied in Europe on Thursday (26 Jan 2012), outperforming German Bonds, after the Fed pledged to keep rates low for longer than expected and said it may buy more bonds to stimulate the economy. Fed Chairman Ben Bernanke said the U.S. central bank was likely to keep interest rates near zero until at least late 2014, some 18 months later than expected.
*Reuters*
Considering the strength we are currently seeing in the markets and the rotation from bonds into equities we believe that a short term target for the U.S. 10 year Treasury bill yield could be 3.3%. This will also mean positive bond yield movements for our own bonds the R157 (6.65%) and R186 (8.26%) as we see no decoupling between our markets and that of the developed markets yet.
Our midterm target for the SP500 is 1360 and the TOP40 is 31400, which is also the Top40 all time high.

 

Author: W D Erasmus
Edited: T I Relihan

Market Report Dec 11/Jan 12

SA and the world

AS the year of 2011 drew to a close and the festive season came into play, it was expected that the volumes in the markets would dry up ad so it did. In spite of the small rally we saw in the US markets SP500 (opened December on 1246 and closed 1257) up 0.88% for the month and the DOW closing positive by 1.38% at 12215, our markets were unable to follow suit. The All Share and the Top40 both closed in negative territory for December down 2.52% at 31986 and 3.26 at 28470 respectively.

There was also a lot of positive data released during December that helped push indices higher. The US ISM manufacturing index rose by more than expected, up to 53.9 in December 0.7 points up from the expected numbers.  UK manufacturing PMI rose from revised 47.7 to 49.6 in December, well above expectation of a drop to 47.3. the CIPS chef executive commented that "it is encouraging to see output remain steady last month after the declines of recent months". Looking at the details, new exports orders rose for the first time in five months, suggesting pickup of demand from global clients despite uncertainty in the financial markets. Germany unemployment rate unexpectedly dropped to 6.8in December while unemployment dropped more than expected by -22k

The Australian manufacturing PMI also expanded for the first time in six months in December, up from November's 47.8 to 50.2. Impressive jump was seen in supplier deliveries, which rose 6.9 pts to 52.8. Production sub-index rose 1.4 pts to 51.0 while new orders rose 1.8 pts and was at 49.9. The only sub-index that recorded a fall was exports which dropped -6pts to 47.4. The data points to resilience of the Australian manufacturers against global headwinds.
*Action Forex*


The official China Manufacturing PMI released climbed back to expansion level of 50.3 in December. The dip to contraction region below 50, at 49 in November seemed to be brief so far and the manufacturing industry seems to be moving steadily ahead. Details suggested that the slowdown in domestic demand has stabilized with new orders gaining 0.9 points to 49.5 and new export orders rising to 49.4 from 47.1 in November. Meanwhile, the 'overstock order' gained modestly to 46.0 in December from 45.7 in November. It must be noted that these three figures are still in the contracting zone but the rise might well be signs of domestic stability within China. Further China's non-manufacturing PMI also rose notably from 49.7 to 56.0 in December from contracting to expansion territory.

According to the report by HSBC and Markit, India's PMI added 3.2 points to 54.2 in December. The improvement indicated that the country's economic outlook should not be as weak as GDP and IP data had suggested. As stated in the HSBC report, the data brought 'some relief with regards to growth' as 'domestic demand is providing solid support for activity on the ground.

With most markets opening and maintaining a positive opening for the first week of January we look set for a positive close this month, not only for the local Top40 and All Share but also for the SP500 and DOW

Market report 11/11/11

Market report 11/11/11

Italy and the EZ in the news again


The EZ is back in the spot light again this week, this should come as no surprise to anyone who has been keeping an eye on Europe’s sovereign debt crisis and the 10 year bond yields of the infamous PIIGS. If you are not sure why the 10 year government bond yields of the PIIGS are important, then lets explain

According to Bloomberg, the real point of no return for Greece, Portugal and Ireland came when the yield on the ten-year bond went above around 6.5%. “After that, it took an average of 16 days for yields to pass the unsustainable 7% level.”

Italy 10 year Bond Yield

Italy-10_Year

 

 

 

 

 

 

 

 

 

 

 

 

 

So what does this mean? Italy has recently breached the 6.5% level on its 10 year government bond and traded above the 7% on Wednesday 09/11/11. In short, Italy is now in serious trouble. In the beginning of the EZ sovereign debt crisis the way to tell which country was going to need a bailout next was to keep an eye on their bond yields. Once the cost of borrowing hit a certain level, it became only a matter of time before a bail-out was required.

“The acceleration in Italy’s bond yields is very, very frightening”, Gary Jenkins of Evolution Securities told Bloomberg. “It’s surprising how quickly a difficult situation can become an impossible one. Politicians always think they have lots of time, but when the market decides to withdraw support, it can do so very suddenly.”

Too big to bail out if its borrowing costs get out of control, Italy has a mix of sluggish growth, a divided and ineffective government and public debt equivalent of 120% of gross domestic product that poses a growing threat to the survival of the euro.

Italy’s ability to refinance its debt is critical to French financial institutions who own the largest part of Italy’s debt compared to other countries’ financial institutions. They currently hold $106 Bn of government debt and $309 Bn of private borrowings at the end of June, according to data provided by the Bank for International Settlements.

The 1.9 trillion euro of debt that Italy holds is the 4th largest in the world after the U.S., Japan and Germany and more than that of Greece, Spain Portugal and Ireland combined. In GDP terms it is the second highest after Greece in the EZ.

“Italy has always been the gorilla in the room for French banks,” said Julian Chillingworth, who helps manage 15 billion pounds ($24 billion) at London’s Rathbone Brothers Plc (RAT) and holds BNP shares. The French lenders’ holdings threaten to channel risk toward France, whose own AAA rating is threatened as the European crisis deepens.   Bloombergs

ALSI40 and SP500


So far our Top 40 index has not shown any clear trend for the month of November, ending down 0.45 % from 29029 at the start of the month to 28885 on Friday 11 November. The SP500 has shown similar indecision with a slight positive return for the month to date, it is up 0.89 % from 1254 at the start of the month to 1262.

Bi-monthly market report 28 October 2011

Bi-monthly market report 28 October 2011

Historically the last three months of the year (October, November and December) are good rally months and it seems that this faithful October has indicated that history will continue to repeat itself. With rallies across the board and a new sense of optimism in the markets, we could possibly still make new highs for 2011.

EZ and its debt

On 19 October a double-notch downgrade of Spain’s credit rating piled pressure on the European leaders to make convincing progress on solving the region’s debt crisis. With the EZ summit behind us and the reaction the markets showed on the information released, it is clear that this was what investors were looking for, strong actions from the EZ countries to quell the debt crisis.

It seemed that expectations were low as the summit got underway and a delightful surprise was the result of a more comprehensive plan agreed to by the EZ leaders.

The raising of bank capital requirement and explicit deadline of June was well received. EU also agreed with Institute of International Finance on a deal that imposes 50% losses on Greek debt. Also, EU leaders have agreed to leverage the EFSF fund by four to five times to around EUR 1T. Including Last night’s rally in risky assets, the dollar index dropped to as low as 74.72 so far and is set to extend the recent decline from 79.838.

European banks are now required to have a 9% core tier 1 capital ratio by the deadline of June 30, 2012. The ratio was significantly higher than the passing mark of 5% of the stress tests in summer. Moreover, the capital levels now needed to be calculated after marking down government bond holdings as of September 30. The capital target is seen as an effective way to create a "temporary buffer" to insulate banks from further turmoil. National governments are required to provide support to the recapitalization. Loan from EFSF would be provided in case Eurozone governments are unable to provide the support needed. *Action Forex*

SP ratings agency did however warn that France, Spain, Italy, Ireland and Portugal could be downgraded by one to two notches if the region slips into recession and if the government debt increases

SP 500 & SA Top40 Indices


After the deep sell-off in September, the SP 500, the FTSE, All Share and the Top40 have found support and rebounded to show massive gains. The SP 500 found support on the 1100 level and continued to move up to a level of 1284 a huge gain of 16.5% for the month so far. This is in spite the biggest Wall Street firms posted their worst quarter in trading and investment banking since the depth of the March 2009 turndown. JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley posted $13.5 billion (R108bn) in trading revenue less third-quarter gain, down 35% from a year earlier. Revenue from investment banking plunged 41 % from second quarter to $4.5bn *Business Report*

The Top 40 found support at 25900 and has since moved to the 28436, a gain of 9.82%. This week signalled the second week of inflows into emerging markets after the largest outflows recorded since the 2008 crash. We expect consolidation and possibly a correction before further gains will push us higher this year

REMGRO

REM


September and October saw Remgro change its holdings with Grindrod and Tracker. South African shipping and freight firm Grindrod’s investors approved the sell of a 22% stake to the investment firm Remgro for R2bn to help it pay off debt and support a capital intensive expansion plan. Remgro said in a statement that investing in Grindrod will give Remgro exposure to industries with solid growth prospects Remgro also sold its stake in the vehicle tracking company Tracker to a group of investors for R3.9bn . The markets have reacted well to the changes within Remgro and this lead to a price movement above the long standing R115.44 resistance that have been capping gains for the year so far. Based on the recent price movement above resistance and our longstanding believe in the fundamentals behind Remgro, this has given a new technical buy signal for Remgro. We expect further gains both in the short term and long term outlook of the share ---- See REM chart above