Opportunities in our amazing industrial market

The stock market never fails to amaze me. We South Africans along with the population of many other countries have plenty to moan about yet our stock market reached yet another new high on Friday. Certainly most markets kicked upwards at the end of last week, but as far as I can see, only the JSE reached record high.

The high was reached despite all the things that influence our economy, joblessness, inflation, the value of our currency and the like, being as bad as, or even worse than ever. To my mind the only plus-point we have is that President Zuma’s days at the top appear to be numbered. Many of us will give a loud whoopee when that does happen, but it won’t end the corruption with which our country is riddled. However, as morals tend to filter down from the top, perhaps with a proper role model at the top, the lack of ethics that has become the norm, will dampen down.

What amazes me is how well industrial companies are doing. The JSE industrial index has risen 22% this year, the JSE-ind25 36% and the *Satrix INDI 34% compared with a 15% rise in the JSE Overall index.

Meanwhile I would imagine that it is amongst industrials as a whole, the economically the worst hit companies are to be found. Until the rand started to weaken, many overseas markets were closed to our exporters because their goods were uncompetitively priced. Now that the rand has weakened, and their prices acceptable, erstwhile but newly flat pocketed overseas buyers, have disappeared. At home, swingeing petrol and electric prices have reduced men-in-the-street disposable incomes to a fraction of what they used to be.

Many industrial companies lack skilled labour and, with our education system in chaos, many skilled youngsters are people of the past. Industrial companies can borrow at attractive rates of interest, but lending institutions are tight-fisted particularly in the small business sector where the most jobs can be created. Then there is millstone-like unfavourable labour legislation that impedes progress. Despite legislation in their favour, employees, lucky enough to have jobs, strike.

Nevertheless, our industrial index looks fine, so fine that presently it may be overbought. For the chart I have used the Satrix INDI which, poking through the upper edge of the blue standard error channel, shows it to be overbought. However, we have a conflict of technical indicators, as the MACD plotting (red) has broken upward though its green signal line giving a buy signal.

The centre line of the standard deviation channel is the equilibrium, the level to which the plotting constantly returns. When the plotting rises above the outer edge of the channel, it is overbought and when it falls below the lower edge, it is oversold. You can see that in June and July it poked though the lower edge – it was oversold which made it an excellent time to buy. It is now poking through the upper edge, which means it is likely to ease back.

The MACD is an excellent buying or selling indicator. A break upward through the signal line is a buying opportunity and down through the signal line a selling opportunity. However, many of these signals are extremely short term, and if you obeyed every one, the only person to become rich would be your broker. The major signals come high in the upper half or the chart or low in the bottom half. Major sell signals came in March and September and buy signals in June and October.

Therefore, in the current conflict situation, I would tend to believe the standard error channel as positioned two-thirds up the chart, and having already received two buy signals in its latest up-move, the MACD may be tiring. I could of course be wrong, and as the owner of several industrial shares, hope that I am.

Jean Temkin

Postscript: I deliberately chose a Satrix plotting for the chart as I believe this is an ETF (exchange traded fund) that gives ordinary investors an investment opportunity to those not schooled in the workings of the stock market. Also, like unit trusts, they allow rand-cost-averaging. By investing a fixed amount every month, when the index falls, your investment buys more units and when it rises, you buy fewer.

Satrix INDI accurately replicates the FTSE/JSE INDI 25 index, by holding the shares in this index in exactly the weighted and number they constitute the index. Dividends paid by the underlying companies, less expenses incurred by managing the portfolio, are paid out to Satrix INDI shareholders on a quarterly basis.

Further information on all Satrix funds contact its call centre on 086 100 0670.

The rand’s prognosis remains dismal

Ouch!! The rand has fallen to a level last seen three-and-a half years ago when it was recovering from the 2008 crash. The immediate sufferer will be the fuel-price with the ripple effect fast hitting every item that takes petrol or diesel to produce or deliver to the end user. This means that those of you who can still afford to drive to the supermarket are likely to flinch at the leaping price of the goods on display.

Apart from a government that has become a comic act trusted only by the dwindling number of ANC supporters our troubles are imported. The EU has slipped into recession, with even one of the tough guys, the Netherlands with a minus 1,1% rate of growth. In addition, with the Obama victory, Uncle Sam is tottering on a fiscal cliff.

Nevertheless, there is lots of money out there looking for a safe haven. My thinking is that minus the political shenanigans that money could rest easy in South Africa. We have strikes to contend with, but so does half of Europe. The main difference is that our inadequately trained police force uses live ammunition, which causes frowns of disapproval by would-be foreign investors. Certainly emerging markets are dubbed risky but flipping through my limited number of currency charts, only Botswana’s pula seems to be suffering along with the rand.

To illustrate why I remain with my shock/horror forecast (October 5 newsletter) of the rand falling to R17,68 against the pound R13,92 against the euro and R10,73 against the dollar, I have placed a Fibonacci* Arc over the rand/dollar plotting. The plotting of the rand is back in the outer circle of the Arc where it began in the crash. While it is heading towards the edge, should it mirror 2008/2009 slope, we are in serious trouble.

Presently the slope of the standard error channel is far less severe, but the plotting is fast heading towards the upper edge, and break-through would confirm my worst fears.

Jean Temkin

*Leonard Fibonacci was an important mathematician who was born in Italy around 1170. It is said that he discovered the relationship of what are now known as Fibonacci numbers while studying the pyramid of Giza in Egypt.

Still good for gold

A reader has asked me to update my thinking in gold. I continue to be a gold bull as are plenty of great financial minds worldwide.

Gold is regarded by many as one of the finest wealth-preserving asset. However, like other commodities, gold’s price fluctuates along with demand and supply. With the financial world in its current state of disarray, and currencies proving to be untrustworthy, demand is outstripping supply. While no end of that that state of affairs to be in sight, I am expecting demand to continue. While the dollar gold price has been nudging back for the past month, my point-and-figures charts lead me to expect a rise to around $2 059 an ounce. I can’t tell you when but, with so many potential influences, busy pushing and pulling at world economics, it’s just a matter if time.

I have drawn a chart showing how gold has behaved since the ghastly 2008 all-fall-down. The dollar gold price also fell down, but the rand gold price shot to a then record high of R10 001. That was a fine example of when instruments, denominated in the rand gold price, proved their worth as rand-hedges. The chart also illustrates the dollar gold and the dollar/rand exchange rate when then the rand gold price next parted company during 2010. That was when the value of the rand against the dollar rose to reach a five-year high. It all came tumbling own again in late 2011. Judging by the standard error channel, I have plotted over the two gold prices, as it is down below the centre equilibrium line, the dollar gold price is oversold, while the rand gold price is where it should be. This tells me that the dollar gold price is likely to move higher on continued demand.

As mentioned, gold’s price is dictated by supply and demand. While gold is almost indestructible and not consumed by industry and the like as other metals are, it is almost constantly in demand for its wealth preservation qualities. However, I have a niggling worry at the back of my mind; with Europe’s financial troubles no closer to a final solution, will the IMF be tempted to throw out a gold-encrusted life-line?

Gold came into supply in the late 1970s and early 1980s, when the IMF sold about one-third (50 million ounces) of its then holding. Half was sold in restitution to member countries at the then official price of SDFR 35 an ounce. The IMF auctioned the other half to the market to finance the Trust Fund, which supported concessional lending to low-income countries. Then in 1999 it sold some 14-million ounces to finance the IMF’s participation in the Heavily Indebted Poor countries (HIPC) initiative.

Judging by the current booming business in gold coins, it is gold’s transportability that is its main attraction to these investors. Collectors aim for attractive and rare coins, but investors care little about the look of it, or the form in which it comes. For convenience, Exchange Traded Funds (ETFs), which hold physical gold on your behalf and whose units can with ease be bought and sold, have become the popular method of investing in gold.

Many South African investors, who can only hold physical gold in its minted form, have been drawn to Absa Capital’s ETF, NewGold which tracks the rand gold price, so as well as providing and easy way to invest in gold, is a rand hedge. NewGold debentures rise and fall in accordance with the fluctuations in the dollar gold price, and the value of the rand against the dollar. Each debenture is backed by physical gold equal to 1/100 ounce of gold bullion. The gold is held in a secure depository for an annual fee of 0,4% of its value. NewGold, which was launched in 2004, now holds more than 1,4m ounces of gold. This sound like a heck of a lot of gold, but small-fry against the 2 062,6 tonnes that physically-backed international ETFs held on June 25 2010.

The dollar gold price closed at $1 576 on Tuesday, the rand exchange rate $1/R864 the rand gold price R14 598 and Newgold R142,50.

Jean Temkin

Forewarned is forearmed

I have been quiet for the past week or so, or at least quieter than usual. It’s because I’ve has lots on my mind, things that have mired my usually optimistic self. We’ve had Halloween, but rather than the ghouls and ghosts, it’s my own October 5 projection that the rand is falling out of bed, that had given me the horrors. My then forecasts were that the rand may fall to R17,68 against the pound R13,92 against the euro and R10,73 against the dollar.

Thanks to the pause in the rand’s decline, we are still a long way from those ghastly figures, but we still have a heck of a long way to go before we can be confident that we are not dipping into an official recession. I say ‘official’, as in our personal lives, most of us feel that we have not moved out of the last one. Rather than GDP figures, men-in-the-street look at the reduced discretionary spending they have left with after settling their ever-rising debts.

Looking on the positive side it seems that the economies of the US and the UK are perking up, and in US clearing up and refurbishing after hurricane Sandy, will help their joblessness and building industry. While they have not gone away, Europe’s troubles appear less newsworthy of late. Unfortunately, it is South Africa, and its internal problems that have grabbed the bad-news spots.

What not agreeing with everything in The Economist’s ‘Cry the Beloved Country’ piece, it contained far too many truths for comfort. If I were an American, I would skip my opportunity to vote this time as I admire neither candidate, but at least they do not belong in a circus ring wearing a red nose. If I’m right about the US, UK and possibly Europe showing signs of improvement while South Africa continues to bumble along, our currency will continue to lose value against the rest; just how much remains to be seen.

History does not exactly repeat itself, but by looking back at what has happened, can forewarn about what could happen. I have taken the monthly chart plotting back 12 years to show just how bad things have been, and at very worst, could be again.

The 2008 collapse resulted from the unveiling of the shenanigans in the US mortgage market. Risk aversion was rife leading to the dumping emerging market currencies.

The 2002 collapse was intriguing, so much so that a commission was set up to find out why it had happened. Disturbing is that some of the commissions finding were too dissimilar to the current situation. For example, then our budget deficit declined to a percentage of GDP to below 2% while other emerging markets, especially Latin America were fine. Well over the democratization euphoria, the rest of the world was particularly critical of Thabo Mbeki’s support of Health Minister Manto Tshabalala-Msimang. Foreigners are no doubt laughing at some of our current political antics, as they laughed at Msimang’s insane theories regarding the handling of AIDS; beetroots instead of nevirapine.

The rubbishing of particular currencies by traders aiming to make huge profit on the way down and then on the way up again, was fairly common practice in the early 2000s, as well as asset swaps and other currency upsetting financial do-dads. I wonder what financial manipulations are currently in vogue?

Jean Temkin



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Ben & Jean share their thoughts on the Investment World & its opportunites, plus anything else that they think will be interesting