GOOD RETURN

Triggered by a hopeful reader, I’ve scribbled down some notes on Jean’s and my High Yield Portfolio.
Chances are that you know nothing about the portfolio and so let me give you some background.

About seven years ago, following a discussion with the Business Day editor, we reckoned that it would be interesting and, perhaps, fruitful for the readers and us if we invested a substantial amount of money into the market into and shared our anguish and possible joy with the audience.
Over some 18 months we selected and bought 10 counters , each about an equal weight and each with an attractive dividend yield. One counter, Stefstocks, was sold early on at a small loss, leaving the Portfolio with nine counters.

The Portfolio was begun with a purchase of Grindrod and the other counters, Hudaco, MMI, Pick ‘n Pay, Reunert, Spar, AVI, Famous Brands and Imperial were added – a total investment of a million rands by June 2013.
Mainly reinvesting dividends, we have added more purchases of Spar, AVI and Famous Brands, the latest in investment being a purchase of R60 000 in Famous Brands last month. In total, the Portfolio has invested R1,35m and its market value to date is R2,35m.

We have been silent on the Portfolio some three or four years but have decided because of the trigger above, and the fact the Portfolio’s vicissitudes are a good real life example of investment, to continue to tell its story.

The Portfolio has done reasonably well over the period. Its internal rate of return to date is 15.26% per year. The return means the Portfolio has more than doubled every 4,6 years since inception.

(Fortunately, Microsoft Excel has a formula for internal rate of return and the accompanying article could help those who are interested.)
The internal rate of return is our performance gauge. In deciding whether to invest in more shares – or selling some- we examine a wide range of investment fundamental and technical factors. The internal rate of return tells how well, or badly, we’ve analysed those factors.

Ben Temkin

I have overlaid the weekly closing price chart of Pick ’n Pay with fan-like speed lines and exponential moving averages. On two occasions the price dropped through the lower speed line during the four-year bleak period for the share. Then, in a strong recovery phase, the price moved quickly upwards into the higher section of the fan.

It then fell but was well supported at around R64. On its point-and-figure chart (not shown) several upwards breaks give us a possible count to around R83.

I have plotted Pick ‘n Pay’s moving average, red short-term, green medium-term and mauve longer-term. Presently stacked in this order, it illustrates a bear trend. However the short-term moving average is rushing upwards and likely to cross the other moving averages very soon. This will switch the stacking order the short-term, above medium term, above long term, confirming a new bull trend.

Jean Temkin


Positive signals for the rand and the stock market

It’s worth another look at a chart that I drew earlier this month which then indicated that the market would dip and the rand gain strength. The rand is still gaining strength, but the market is improving and likely to continue doing so.

The much needed strength in the rand is continuing (fewer rands are needed to buy a dollar) and shown by the plotting heading downwards. To make sure that this encouraging movement is likely to continue, I have overlaid a standard error channel, the green upward sloping lines. The center line is the equilibrium (the level to which the plotting is expected to return) and the two outside lines boundaries, which indicate that the subject (this time the JSE-Overall index), have moved too far in either direction.

A break above the upper line shows that the subject has moved too high to maintain this level, and a break below the lower line, that the subject has moved too low to maintain this level.

A break above the upper line happened in late September, early October – it took too many rands to buy one dollar. The plotting has since fallen to below the center equilibrium showing that it is perhaps moving down a little too fast, but is still far away from the lower error line. This tells me that I can expect this downward move to continue. If this downward move continues for a longer period, the slope will flatten, and begin to tip in the opposite direction. This would be wonderful for the country, but I am not placing any bets on it happening yet.

Over the second plotting (blue candlesticks), I added a moving average convergence/divergence indicator (MACD) and its zero line, also in blue, but have indicated its signal line in red. The MACD is an excellent way of showing a shares current position, overbought or oversold, and indicate buy and sell signals. Anything above the blue vertical line is zero is positive, and anything below negative. The exception is when, the plotting is far above, showing that it is well overbought and likely to turn down, or far below, showing that it is well oversold and likely to turn up. This turning upwards has happened to the extent that it has broken through the red signal line giving a buy signal.

My reading of the present situation is that the rand will continue to gain value against the dollar and the share market will continued upwards. As our shares are quoted in rands, this means that their intrinsic value will increase.

Jean Temkin


A timely switch for more Sasol

Not all of our share picks have proved profitable. Like most investors our portfolio sometimes contains some duds. Therefore, when we see a dud spurt upwards, rather than wait for it to get back to our buying price, we get rid of it and reinvest in one of our dependable stocks. Today that happened.

Once we fancied Nuworld as a spec, but as we’d invested little in it, we let it continue cluttering our portfolio. Then seeing Nuworld shoot up into an overbought position just as Sasol, started to perk up having fallen out of bed into an oversold position, we did the swap. This position, seeing a share we don’t want reaching a high at the same time as one we do want touching a low, doesn’t happen often. Fortunately, as followers of technical analysis we are in good position to spot such happenings.

There is a lot less said and written about technical analysis these days than when Ben and I wrote our columns for Business Day. Then it was widely recognized that timing is the basis of profitable investment. You can buy the bluest blue chip, but unless you buy it at the right time, you may as well put your money on a lame Derby runner. Likewise, you can buy rubbish that brings in stacks of profit as long as you buy it its bottom, and sell it at its top. The timing of the sale is just as important as the timing of the purchase but can only be achieved using technical analysis.

Nevertheless you have to look at the fundamentals. Why has a share fallen to a low, making it an excellent buying opportunity, and why has a share shot into an overbought position which signals a probable fall?

A look at the chart tells us exactly why Sasol’s price has fallen; an oil price drop bringing down the price of petrol. This may of course continue, but in the case of Sasol, demand for its long list of Oil and Synfuel products as well as Polymers, continue whatever the oil price.

Sasol has a problem. As a South African company it sells most of its products in the ever-declining rand. However with its gas-to-liquid facility at Lake Charles, Louisiana, at a cost estimated initially at $20bn, this may be changing. Critics of the company point out that this project seems to be taking precedence over local expansion. They claim that Sasol’s capital expenditure in South Africa is essentially going towards maintenance rather than growth.

Do we shareholders Sasol care? Nah!

Jean Temkin


High volatility suggests big,big changes

The stock market, which has cushioned share market investors from the ravages of a falling rand, has turned against us, but there is a gleam of hope on the horizon.

For around three years, up until September 1, we stock market investors have contented ourselves with a swings and round-about scenario, rand against the share market. As the rand has lost ground, the stock market has risen; one compensating for the other. But since Spring burst forth, while the rand lost almost 4%, the JSE-Overall dropped almost 6%, reducing both the value of shares, and the currency in which they are quoted.

My search for encouraging charting signals with regard to the stock market yielded little but as world markets are all currently heading downwards and our own, most oversold for three years, The JSE Overall index will only alter direction when the rest do. The depressing news comes with the overlay of a Bollinger Band, set at a tight deviation of “1”. The currently extreme width of the band shows high volatility. From September 22 volatility took the plotting downwards outside the band indicating that the downward move is likely to continue.

Rather than the market, it is the rand that has me glued to my computer screen. While the rand’s Bollinger Band plotting is also wide, it is less volatile. The improvement in value seen since October 3, is likely to continue taking the plotting down to the lower edge of the band. But the thing that has me fired with optimism is the point-and-figure chart that shows last week’s broken triple bottom at $1/R11,21. If forecast theories from such a move play out to their full, this will take the rand to below $1/R9. Looking at the fundamentals, the only reason I can imagine would prompt this is the ousting of our currency’s worst enemy, Jacob Zuma.

Just imagine what this currency improvement would do for the country as a whole. There has been a 20% drop in the oil price since its June high, but with the rand’v value falling by 5,4% during this period. petrol and diesel prices have enjoyed limited reduction. But, if the rand significantly improves against the dollar, every item that travels by road, and every bit of agricultural product, grown on our farms, can fall in price. The richest BMW driver and the poorest benefit drawer will have more money to spend.

Jean Temkin


Be cautious in this jittery market

The share market is nervous and two warning signals have been flashing on the market for the past week or so but, as yet, all they are telling us is to exercise caution. The hot spots around the word, Gaza and Syria make us uncomfortable, but to my reckoning it is Russia’s face, growing uglier by the day, that is spooking markets.

The chart, plotted over the last 13 months shows how the MACD has since May, been hesitantly dipping lower and the market itself struggling to keep above the zig-zag slope. The zig-zag is set at 3%, which the amount lost or gained to make it change direction. A 3% loss calls for action.

Much in the market’s favour is that the candlestick plottings have been bouncing in the upper half of the standard error channel, but should they fall through, test or break through the lower edge of the channel, keep a close watch as this signals one of two things - a good buying opportunity, or time to get out of the market.

Jean Temkin


A glimmer of hope for the rand

The value of a country’s currency tells what the rest the world thinks of it. Therefore, according to the ever-increasing number of rands you can get for a US dollar, the rest of the world doesn’t think much of us. However, there is a faint glimmer of hope that the rest of the world will start taking a more positive view of us in the very near future.

Last week’s news carrying shots of expatriates casting their votes overseas that reminded me of a similar queue Ben and I was part of, 20-years ago in Amsterdam, when the exchange rate was around $1/R3,6. Then we knew that change was inevitable; now many voters are beseeching change.

Happy with the results of that first election, full of enthusiasm for the future of South Africa, Ben and I returned the following year. Then the road contained plenty of potholes but many people were optimistic about the future and enthusiastic about the change. Now, rather than having been filled, the potholes have multiplied, pessimism abounds and the vital call for change falls of deaf ears.

South Africa is falling behind much of the rest of the world’s technological progress and the slow service delivery continues. But, as the future of any country rests with its children, and many of our children are robbed of decent educations by poorly run, poorly policed, poorly administered education system, there seems no end in sight. How can Eskom and the like deliver essential services if its workforce lacks the necessary basic skills? Teaching used to be a vocation, what has changed?

Presently we are watching our long-time economic mainstay, mining, crumble before our eyes. As the rest of the world swiftly moves out of a long recession, so needing the kind of raw materials we produce, the infighting continues allowing our rivals gleefully to take over this erstwhile lucrative industry.

Since that first election two major crashes, have contributed to the rand’s 190% loss against the dollar. But, it is the 59% loss over the past three years that reveals the world’s current opinion of us. In May 2011, after three years of gain, the rand changed direction. Since then, as blow after blow struck our country, our currency has slithered. However, the blows hitting us from outside, in particular the downgrading by the rating agencies, were less severe than the blows administered from within.

Raising their hands in horror at Nkandla and the like, thinking South Africans have long lists of justifiable gripes, which set me searching for something to salve our hurts. For we investors there is new stock market high, and for the rest I perceive a faint glimmer of hope for the rand.

Jean Temkin


Some thought might ease petrol pump woes

Irrespective of whether you own a vehicle or not, you are hurting. The vehicle-less watch in horror as food prices rocket, while we drivers suffer the double whammy.

While the figures on the chart may lead you to believe it is the fault of the oil price which is what petrol is made from, but you’d be mistaken. Since the start of 2011 the oil price has risen from $9,40 to $10,08 a rise of 14.9%, but the basic petrol price has risen from R4,49 to R8,51 which is a rise of 89%.

Makes you think, doesn’t it?

During this period, fuel tax has increased 27% and levies, margins etc, by 36,6%. This means that the taxman has been raking it in from the direct tax, which I have shown in red well as from bits and bobs like customs and excise, wholesale and retail margins and the rest that I have shown in green. On top of these figures is the incremental Inland Transport Recovery Cost.

However, rather than blaming the Revenue Department for your discomfort, the real Bogy Man is our government. Their mishandling of just about everything has turned our currency into Monopoly money. They can’t be blamed for the 14.9% rise in the oil, but can be blamed for almost everything else.

There’s no arguing that at the start of 2011, the rand had become overvalued because the South Africa rand had become a currency of choice. Interest rates available elsewhere were pathetic, while ours were ahead of inflation. They are still higher than most, but favourable looks turned jaundiced on news of our chief Honcho spending fortunes on his private residence. Overtaken by greed, large sections of our workforce strike for mega-buck wage packages, and our power utility blames wet coal for shutting off the machines of industry.

The thinking amongst us are aware of the simple answer to our problem, but unfortunately we are in the minority.

Jean Temkin


The Seesaw Tilts Too Far

The rand/share market seesaw continues, but the gaps, low rand value and JSE Overall high are closing together. This has happened twice before since the rand began losing value against the dollar in July 2011, and on those occasions the currency clawed back some of its losses. I am expecting it to do something similar this time, something we desperately need.

On January 31, both the rand and the JSE-Overall index broke upward through their standard error channels, showing that both had reached an unsustainable level – the index too high and the rand too low. If I had been a trader, the chart would have prompted me to swap dollars for rands and cash in some shares.

I am a placid equity investor, not a trader and so do nothing but smile as I watch the market ease slightly, perhaps pulling back to the 43714 equilibrium. I am content as my charts tell me that a correction is overdue, and once over, the gain will continue.

As predicted the next day the market eases a little while the rand gains a US cent or two. Things don’t always happen that quickly, but it does explain why traders rely on charts to help them turn their cash piles into cash mountains.

The pity is that the private stock market investor, those without the ability to read charts for themselves, are no longer easily able to access the kinds of columns that Ben and I used to write for newspapers and financial magazines. The costs of paper, printing and the rest, far outweighs internet costs, hence the near demise of financial publications, forcing them to cut staff levels to the bone. Then there is the immediacy factor of the internet compared with the delay of printing – why buy a newspaper telling you what happened yesterday when your computer screen can tell you what happened five minutes ago? The pity is that none of the financial websites I’ve viewed produce meaningful charts (technical analysis), the kind I produced for newspapers.

What to do? All I can presently suggest is that you learn to read the excellent charts that can be downloaded from the various services available. My personal choice are the programs offered by Progress Data Services (011 622 6767) as the technical books I have written are based on these programs. My last book, Even More Charting for Profit is out of print, but can be accessed on Amazon Kindle which is easily accessed from our website www.temkinbooks.com. However if there is a particular financial subject or piece of technical analysis you would like to discuss, we’ll be happy to write a blog on the subject.

Jean Temkin


Grindrod for growth

I’ve been asked if I would buy more of the shares we now hold in the High Yield Portfolio. The short answer is yes with two caveats.

The first is not necessarily now. And the second, of course, depending if the cash resources are available.

Interestingly, not too long ago we invested more in AVI shares by reinvesting dividend income from our overall portfolio. A significant part of this income came from our holding of Sasol, not a counter in the High Yield portfolio.

We added those shares at a gross share price of R57,31. The shares are now trading around R54 and this means that our return to date on this tranche is negative to date. However, this is probably the effect of Murphy’s Law. You can more or less count that the price falls after we buy.

It would be interesting, I feel, to look at each of the counters in the High Yield portfolio and ask if would buy them now – or defer.

Grindrod was the first counter invested in the portfolio. We bought the shares at a gross share price of R17,48 in November 2009. Not a brilliant buy at all. At the end of July 2012, its shares were traded down to less than R13. The company was not performing and, in particular, it had been affected by its shipping division. Several times we asked ourselves if we should sell.

However, we held because it seemed to us that management was a strong investment fundamental and we should be patient while management sweated the assets, especially the new ones. The market would tell us when the market recognised the company’s performance was on track.
Over 2013, Grindrod’s share price moved up R28. Consequently, as I wrote, in my last blog, the cash-out to cash-in internal annualised rate of return of the portfolio’s Grindrod’s holding at the end of 2013 was 13,6%. This is a bountiful return.

But I’m forced to ask if the market is expected too much for forward earnings growth. After all, the JSE database tells me that at a share price of R28, the historic price-earnings (based on a 12-month period) ratio was 21,46 and the dividend yield was a paltry 1,1%. Not Jean and I would buy share for dividend income.

Yes, I know the dividend was covered by more than four times earnings and the directors expect future earnings growth. Strong growth in return on assets managed seems highly probable.

Okay. So assume that in the financial year ended December 31 2013, earnings are reported at a very challenging 25% higher year-on-year from 141c a share to 176c. Dividends should then be about 41c. The forward price-earnings ratio, on these assumptions, is 16 and the projected dividend yield is 1,5%.

At the invested share price of R17,48, the portfolio’s projected dividend yield is 2,24%, far lower than the portfolio’s yield criterion.

Have to accept, therefore, that the share is a ‘growth’ share. That, I guess is why Remgro holds about 25% of the shares. Grindrod may, therefore, be a poor fit in a high-income portfolio. However, shares are attractive for long-term growth investors. And we’re not selling our holding.

Ben Temkin


Who’s afraid of the share market? Not I.

Back in 2012, they possibly laughed at me when I projected that the rand would fall to R10,768 against the dollar, R13.92 against the Euro and R17,68 against the pound. In the last few days, the rand has hit R10,82 against the dollar, after pausing at R10,78; R14,76 against the Euro after pausing for a while in November at R13,72, and R17,66 against the pound. By ‘They’ I may be talking about Business Day which, a year before, had dropped my column and Moneyweb which had previously published some of my projections but wanted no more. However, the warnings did appear on the Temkinbooks website (still vibrant) and RASKI (Retired And Spending the Kid’s Inheritance). (RASKI’s website is, unfortunately, deceased).

It was also about that time that a highly qualified ‘Financial Adviser’ about whom I was writing a profile for Women in Business, raised her hands in horror when I said that Ben and my investments were in the share market rather than in one of the insurances she marketed. “Such a risk”, she shrieked, “what about the 2008 crash”. I admitted that market crashes were a pitfall, but only if you sold your shares before the market had had time to recover. In the case of the JSE, that took less than 1 000 working days or a bit over two years, and then only if you had invested in the less-solid end of the market. Even if you had, you’d still have collected your dividend income.

The portfolios of those of us who did not sell in panic are now enjoying 43% gain above their May 2008 high. Better still, rather than watching the rand’s devaluation eating 37% of the value of insurance or similar investment products, we share investors have not only beaten the devaluation but also gained an extra 6%, and some handy dividend income.

As a chartist, I’m bound to prefer visuals to figures, and I am sure that the few readers I have left agree with me, hence today’s comparison chart that I’ve plotted monthly.

The red bar plotting shows how many rands you need to buy one dollar, hence its steep rise from $1/R6,4 in July 2011 to $1/10,8 on 14 January. I have overlaid this plotting with a standard error channel showing by breaks through the upper edge that, on two occasions, late 2012 and mid-2013, the rand’s losses were so great that time-wise they were unsustainable. The centre-line of the channel is the equilibrium, the level to which the plotting returns. Currently the plotting is slightly above the equilibrium making me expect a slight correction. Should this trend continue, my next count (my projection calculated using point-and-figure charting) is that the rand will probably fall to $1/R12,90 before a major correction takes place.

The black candle plotting is the JSE Overall index, which I used for my earlier calculations. It too is moving steeply upwards along with world markets, but at a more rapid rate perhaps because of the rand’s loss. The vertical line in the center of the chart shows that the JSE Overall had reached its pre-crash level in early 2012, but the Dow Jones industrial index reached its pre-crash level only in March 2013. From the 2009 market bottom, the JSE Overall has gained 141,06% while the Dow has put on 143,72%.

The projections are probabilities not predictions. Our equities in the stock market have been doing pretty well - on probabilities.

Jean Temkin


High Yield Portfolio is on target

At the end of July in 2011 Jean and I ceased writing our columns for Business Day. In my last column I reviewed the history of the High Yield Portfolio.

From time to time readers of Business Day ask me how the High Yield portfolio is progressing. As you probably realise, I have had something of a sabbatical and have written very little on our own website. So, as something of a change, I’ve decided to write a little more about the progress of the portfolio.

The High Yield portfolio is an important part of Jean’s and my investments. The assets have been acquired since November 2009 invested from cash received from dividend income from the rest of our assets. Two of the counters, Imperial and Pick ‘n Pay, were made by a book-over at market value at the time and the price was added to the transaction cost.

We relied on technical buy signals in buying each counter.

The portfolio has no inception date. Its return is gauged entirely on a cash-flow basis. Each purchase is a cash-outflow. Each dividend or sale of shares is a cash-inflow. The realisable value of the investments (less transaction costs) – the actual market value to date – is the latest cash-inflow.

The objective of the portfolio is to earn a growing dividend return higher than the after-tax income available from cash investments. We aimed to invest in companies whose historic dividend yields were higher than 4% and, on fundamentals, would, we hope, over two to three years, rise to over 5% or better. We were flexible on historic dividend yield in some cases. The argument in these cases was that investment fundamentals supported the belief that their earnings growth were accelerating. Consequently, the dividend yield criterion would be achieved over a short time-span.

The measure of the performance of the portfolio is the- cash-out to cash-in, the internal annualised compound annual return of the portfolio. (I use the Excel formula, XIRR).

Studiously since then, I have updated the cash-flows for each of the counters, the portfolio as a whole and also, those for the most of the equity investments that we hold but are not in the portfolio.

Clearly, the internal rate of return changes from day to day as the time-span increases, dividends are received and the realisable market value changes.

When I last wrote in Business Day at the end of July 2011 the annualised compound annual return of the portfolio was 9%. I observed that at various times the return had been close to 12%.

The internal rate of return of the portfolio has improved significantly since column was published and at the end of 2013, its return was 19,4%. Over 2013 it has been higher than 20% and has edged down to 18%.

Interestingly the actual dividend after-tax income has been a compound annualised return of 5,4%.

The internal rate of return of each the counters since acquisition until the end of 2013 were: AVI 22%, Pick ‘n Pay 9,4%, Spar 26%, Grindrod 13,6%, Imperial 27%, Hudaco 17,4%, MMI 25%, Fambrands 45% and Reunert 10,8%.

Of course, this is all past performance but it gives us a sense of comfort.

Ben Temkin


Woe betide the rand

Collectively against major currencies, the rand is in a far worse state than it was in the 2002 fallout, and the 2008 meltdown. I have reached this conclusion by comparing it to the dollar, pound and euro, but it could be even worse against some other currencies.

The chart plots the rand’s exchange rate against two major currencies over a 17-year period with the euro making a third when it came into being. Europe is historically our major trading partner, with our agricultural produce high on the list of our exports but also featuring high on our list of finished goods that are imported. So as not to confuse chart readings, I have left out the linear regression slopes to trace the extent of the rand’s losses. Alarming is the significant 2,9 in the Euro, compared with the 1,3 slope against the pound and 0,58 against the US dollar.

In 2002, the rand fell to ₤1/R19,86, which is 14% lower than its current value. In 2008 it fell to ₤1/R18.9 or 11% lower that today. The slight strengthening over the past day or two, taking the point-and-figure plotting downwards from the most recent support level of ₤1/R17, is a relief. But this support has been twice tested and a third fall taking it below that support, would give us a forward count to around ₤1/R21.

Since the 2002 meltdown, the exchange rate against the then fledgling currency, the Euro, was €1/R12.22 since which the rand has lost 30%. In 2008, when share markets crashed, regarded as a high-risk currency, the rand fell to €1/R15,2, which is only 7% lower than the current rate. Here the point-and-figure chart shows the rand breaking through a spread triple-top and so we already have a forward count to €1/R17.

In 2002 the rand fell to $1/R13.9, 15% lower than today and in 2008 to $1/R11,8 only some 3% lower than its current rate. The support level for the rand/dollar exchange is just above $1/R10,42 which again has been reach twice before. Here, if another fall takes it further down we’ll have a count to $1/R12.8.

Our major blow in relation to the dollar/rand exchange rate is that while the oil we import is not produced in the US, the oil is priced in US dollars. Therefore, local exporters may read my projections with glee as, if they realize, their order books will fatten further by selling at highly competitive prices. By contrast importers will cry like babies. The most wildly damaging import is oil which is now 24% lower that its price of $146 a barrel in July 2008, but then the exchange rate was much less scary at $1/R7,73.

Jean Temkin


Market Jitters

As I emerge from the non-writing corner in which I have been hiding for the past few months, unease over the present state of the market compels me to issue a warning. Apart from the generally unpopular shenanigans of our government, he real threat of widespread civil disobedience over E-tolling urged me to me studying my charts. I number amongst those who hope that E-tolling will result in the downfall of the present government, in a similar way as the poll tax led to Maggie Thatcher’s departure. However, such an upset may adversely upset the blissful state of the market that we have enjoyed for the past few months.

This year’s high was reached in early November and charts lead me to expect a downward drift or even a plunge. The current support level of the JSE Overall index is around a twice-tested 44 000. If on the third testing it does not hold, we will receive an alarming down-count on its point-and-figure chart (not shown) to a hair-raising level of around 33 880.

You can see from the chart that such a fall would take the market below this year’s two lows reached in April and June. While I am not an avid believer in head and shoulders formations, assuming the April to June rise and fall is the left shoulder and the November high the head, the formation is two-thirds of its way through. To complete the formation we might expect a fall to around 37 800, which is the level of the neck, a rise and then a further drop. This is the pessimistic reading. Less so is to regard the August to September rise and fall as the left shoulder and the November high as the head. That would bring the neckline to a more acceptable level of around 42 700. I have drawn the two possible necklines in green.

Typically head and shoulders formations take time to complete, and so taking a shorter-term look at things, I have added a moving average convergence-divergence (MACD) plotting in red. MACD’s are an excellent method of timing the buying and selling of shares, indices and the rest. Buy signals come when the solid MACD crosses upwards through the dotted signal line, and vice-versa for sell signals. The latest sell single came on November 11 and the lines have since swiftly headed downwards. I have plotted the MACD’s dashed 0 line to show that both the solid and dotted lines have now dropped below the zero level into negative territory.

Other charts of the JSE-Overall index are also discouraging. On its price chart, the short-term moving average has just fallen through its medium-term moving average, and if it continues falling, a new bear trend will be indicated. Its stochastic indicator is fast approaching 40; its relative strength indicators at below 45; and it is fast approaching -2 on its overbought/oversold indicator.

Not for one moment am I suggesting that you liquidate your portfolio, but if you are heading to the beach for Christmas, I suggest you study your portfolio and consider liquidating those shorter-term holdings that you bought for speculation.

Jean Temkin






I’m still tipping gold

When I first told you about made my ghastly counts to 10,78, 13,92 and 17,68 respectively to the dollar, euro and pound, hoped that I would be proved wrong. Not that I like to be proved wrong but the prospect of happenings in our economy if the rand really did slump to such levels, were too ghastly to contemplate. My bit of good news is that we are not at these levels - yet. The bad news is that, as I allow my counts a 3% margin of error, the rand is a mere 33c from the bottom of the $/R error band, 57c away for the euro band and a mere whisker away from the pound band.

We have been in these kinds of situations before, but the last time, 2008, was unusual as the entire world market was in utter chaos. Other occasions have sometimes been because the rest of the world was critical of South Africa and therefore its currency. This time the market has every right to be critical.

For three years after the 2008 banking-dilemma, which did not include our banks, we were smugly smiling. While the economies of our trading partners were troubled, our only problem was their inability to buy our goods. Not only did they need less but, with the rand strengthening against their currencies, we were uncompetitive. These goods included our metals and minerals. Our trading partners still need South African mined goods, which because of the drastic fall in the rand must appear cheap. But, as those who pull the stuff out of the ground spend a good deal of their time downing tools, how much they can produce for export is questionable.

To add salt to the wounds, the gold price is at the two-and-a-half year low and at last dropped to below the platinum price, which is where you’d expect it to be. But, as in rand terms it is heading back towards its last year’s record high, as a rand hedge it is it is working in our favour.

I have drawn a chart showing the rise and fall of the dollar gold price and almost continued rise of the rand gold price. For the past couple of years, losses in the rand/dollar exchange rate and losses in the dollar gold price have happened almost simultaneously. In 2011 gold reached $1896 shortly after the rand had touched $1/R6,4. After downward adjustments in early 2012 gold move back to $1770 and the rand moved back to $1/R7,4. There was one more up-flip in gold but for the past eight months, the dollar gold price has sunk.

I’ve been quizzed a couple of times on the gold-linked recommendations that I’ve made over the past goodness knows how long.

I’ve not changed my mind. Gold is still a good investment for South Africans, especially in times when the rand is in the process of being rubbished. The only legal gold investments we can make are in gold coins, typically Krugerrands, gold shares and Newgold ETF. Gold shares were never a recommendation even before the mining problems but physical gold in the form of coins and the EFT, remain near the top of my list. A glance at the chart tells you why.

Jean Temkin


We’re thinking of adding more MMI

At one time, Ben and I were heavily invested in financials via Liberty Holdings. One reason for buying was that Ben had once worked with Donny Gordon and had come to respect the man. Later Donny patted my ego by flirting with me in the nicest way possible, a sure way to win a woman’s favour.

We have always believed that knowing the person in charge is a major plus when coming to an investment decision. As financial journalists, we regularly had the opportunity to meet and question the person running the company. Getting to know Raymond Ackerman saw us investing in Pick ‘n Pay, and impressed with Bill Lynch, we bought Imperial. However, in the case of Liberty Holdings, we were less keen on the now Sir Donny’s successors, and have long moved out of the share.

Not at all keen on banks, our portfolio remained light on financials until we bought Momentum for its attractive yield for our High Income portfolio. The share, we felt was undervalued relative to its embedded value and other investment fundamentals. This was before the merger with Metropolitan and Momentum Group that made MMI South Africa’s third largest life insurance group.

We are delighted with MMI. We bought the shares just over three years ago and its annual compound internal rate of return (cash-out to cash-in) has been over 25%. As the share has just given a new buy signal and as its dividend yield is at an attractive 4,4% (earning yield 7,84%) we’re looking an opportunity to add some more.

MMI’s new buy signal is shown on the chart with the upward break of its moving average convergence/divergence (MACD) indicator (the red line), through the green signal line. Another positive indicator is that the cross-over took place below the thin horizontal zero line of the MACD. Adding even more appeal is the string of rising white candles on the far right of the chart. The white string has now been halted by a few blacks as MMI followed the rest of the market.

I have added a blue standard error band, which began exactly a year ago. You can see that in the middle of April the candlestick plotting broke downwards through the lower edge of the band putting it into a well-oversold position. It briefly entered the channel, only to flip back into an oversold position. With the share lots of catching up to do, I am expecting that within a week or two, it will have moved up to the centre equilibrium line.


Jean Temkin


I’d bide time before buying Capitec but…

Bumping into Mike in Pick ‘n Pay, he asked my opinion of Capitec. Bank. My immediate reply was ‘super’. I am not considering an investment in the banking sector at present, but, if I was, Capitec, with its no no-frill methods of banking, would head the list.

We’ve heard the mutterings about the dangers of unsecured lending, and are aware that some of the present outstanding loans may never be repaid, but that is not new. We know that non-repayment of debt may apply to the ultimate losers in labour disputes, but redundancies and retrenchments have been with us for ages and apply to all lenders. In my opinion it’s just that Capitec deals with the lower end of the market that makes people overly suspicious.

Promising I’d take another look at Capitec after I’d unpacked my shopping, I received a surprise from the chart which shows a near 17% price gain in the past 29 days shooting it from an oversold onto an overbought position. This has pushed its dividend yield down to 2,25% and its P/E ratio up to 14,14. This compares with a dividend yield of 3,83% and a P/E 12,48 for the JSE Banking index. However, relative to the sector, Capitec’s P/E tends to be on the high side, and its dividend yield is hardly ever tempting enough for income seekers.

So what should Mike do? In his shoes, given the highly volatile nature of the share, I’d bide my time until the price moves out of an overbought position and draws closer to its equilibrium, which is currently at R190,23.

Of course, I could be completely wrong, and the latest price surge may be the start of the share’s climb back towards the high of R232 reached almost a year ago. As Capitec badly lagged the sector for five months before this latest surge, a complete trend change is a possibility. Certainly, the super build-up of white candles on the far right of the chart, which takes the plotting well above the upper level of the standard deviation channel, makes this scenario seem even more possible.

Jean Temkin




Combat the rand’s fall

Things are not yet as bad as my dire predictions of $1/R10,78, €1/R13,92 and L1/R17,68, but the rand is getting too close to them for comfort.

Closing at $1/R9,3 it is against the US dollar that initially the rand appears to be most vulnerable. This is because petrol is the first price rise felt by most people. It’s only later that the shopper draws a sharp breath at price rises in the supermarket, where the cost of goods, is affected by the oil price.

The advantage of a weak rand to European exports, does not always apply to US exports. For example, the kinds of fresh food products we sell to England and Germany, are unwanted in the US. SA exporters who love a weak rand are metal and mineral producers but, as many resources prices have fallen, even they are not smiling.

As the gold price slid by almost 12% from October until the start of this month, gold’s appeal waned as the dollar strengthened against major currencies. The good news is that the dollar gold price has just given a new buy signal. However, as the cause is attributable to Cypriot bank problems, I am not betting on a sustained recovery. Better to watch the rand gold price that slipped 10% from October to March as it has now grabbed back 6% of the loss resulting in a new buy signal. Again, it is time to look at Newgold and Krugerrands.

Not that I have ever invested in hedge funds, or is ever likely to, many hedge funds came a cropper following the 2008 crash. Yet hedging against currency risks, as many hedge funds do, makes perfect sense. Many of our large companies, including gold producers practise hedging, but you don’t have to be a corporation or be rich to guard your money against currency and inflation risks. You do this by wisely investing in the share market. Some deem the share market to be risky, but doing nothing to protect your assets against the ravages of its spending-power erosion, ceases to be a risk and become a certainty. In these money-pinching times, those who are hurting less than the rest are those who invest in shares or share-linked securities.

Regular readers of my columns won’t be surprised that I am repeating my punt for Sasol as a way to ease the motorists burden. The price of Sasol reached a five-year high on March 15 and currently has an acceptable 3,63% dividend yield.

My suggestion for easing the supermarket shopper s burden is buying shares in food producers, many of whom export some produce to Europe. The JSE Food producers and processors index has risen 156% since its darkest 2008 days, and 19% in the past year.

Not that anyone I know feels at all good at the supermarket checkout, there is a little bit of a feel-good factor when entering an outlet of one whose shares you own because there is a chance that some of the rands you’ll spend will reflect on the share price and dividend. The JSE Food and Drug Retailers index is moving swiftly up from an oversold position and has given a new buy signal. Dividend yields are currently 3,19% for Spar (which is currently the healthiest looking) 2,45% for Pick ‘n Pay and 1,51% for Shoprite.

Animal food producers are particularly important as a large component of the soaring meat prices is animal feeds, which if locally produced, must surely result in a cost saving. Until two weeks ago surrounded by mealie fields, and then seeing the whole crop, leaves and all chopped up to feed dairy cows, I’ve been taught me something about growing crops of animal feed.

As it is America and China that appear to pulling up bootstraps better than the rest, I’m waiting for a revival in resources. However, apart from it being oversold and dipping through the bottom of a standard error channel, there is no sign of this yet.

When I first gave my dire predictions for the rand, they were pooh-poohed by some but the chart clearly shows how badly the rand was rubbished on two occasions since the start of the new millennium.

As well as three major currencies, I have included a green zig-zag line, which alters direction each time the rand’s value changed by 10% against the pound. You will notice that on the first two occasions, the zig-zags formed two peaks and may well do so again.

The chart shows that at the start of the 2000s, the rand was already losing substantially when in 2002 it plummeted to the record lows. There is little doubt the politics of the time exacerbated the fall. The rand, along with values of commodities, share and property prices plummeted in 2008 when the world was rocked by the US property bust. The primary cause was the manipulation of mortgage instruments. Not our fault, but, as we are dubbed an emerging economy, our currency is regarded as risky.

What is the cause this time? Fragile world economics play a role, but our wobbly government can be blamed for our several downgrades and has pushed us high on the list of countries with a murky outlook.

Jean Temkin


Ouch from Hudaco

I didn’t enjoy yesterday’s (February 13) SENS on Hudaco when I read that SARS wanted a vast amount from the company. Reading the report (several times), I’m reasonably confident the matter will be settled but who knows?

Investment in equities always carries some risk, and often, as in the case of Hudaco’s, sometimes alarming and unexpected. Yes, I did know there was a dispute with the SARS (it was reported in detail in the report of the financial year’s results) but the company’s management was, and still is, confident that it its tax structure valid.

The amount SARS (excluding penalties and interest) is R500m. This is more than the company’s operating profit in the last financial year.

The share price was trading around R108 before the news. Not surprisingly, the share price tumbled down to R98 at Tuesday’s market close and has lifted to R100 as I write.

I reckon the management will resolve the dispute without too much blood being shed, but there’s a probability Jean’s and my holding may need a transfusion. The latest dividend of R3,10 will be cum dividend until Friday March 1. This will relieve anaemia as we continue to hold.

I expect contrarian investors will buy, accumulate or hold the shares. Seems to me a reasonable bet.

Ben Temkin


Hudaco’s yield is tempting

Yesterday Hudaco published its annual results for the year ended November 30 2012. For some weeks the share had been trading around R117, but, following the results, the share price fell out of bed and Friday’s market closing price was R110, a loss on the day of about 6%.

Those readers who used to read Jean and my columns in Business Day will recall that part of the continuing narrative in those columns was about two (still existing) portfolios, the Private Investor and High Yield portfolios.

The Private investor portfolio initially invested R100 000 August 2007, and, with the exception of the shares in one company, the investments were made by the end of the year.

The exception was Hudaco, in which we invested just over R9 000, the proceeds of the sale of Tiger Brands, with which we were disenchanted.

There are 10 counters in this portfolio, and five of them are still suffering shell shock following the 2008 market crash. Hudaco, with a capital gain of over 50% has been the second best performer (the winner is NewGold by far). Of course, the portfolio has also enjoyed dividends from Hudaco, and this has helped to assist its internal rate of return.

The Private Investor portfolio has not been a good performer. Its capital gain over the period has been 15,3% and its internal rate of return at less than 5% annually compounded has just about countered the rate of inflation.

This takes me to the High Yield portfolio, in which a substantially larger investment was made, and in which Hudaco features again.

The investments in this portfolio were made between September 2009 and December 2011. Since Friday’s market close, the portfolio has enjoyed an internal rate of return of well over 20% a year.

The Hudaco holding was made at R66,04 just over three years ago. The internal rate of return on this investment, which takes into account the share price’s belly-flop on Friday, was 23,3% a year.

Hudaco’s performance over the year was good. It was badly affected by mining labour problems. Its woes were compounded by the rand’s volatility. When the rand is strong it gains on its price of imports. When the rand is weak it enjoys the good fortune of export-driven miners and manufacturers – provided these customers are not strike-bound. In an especially negative environment, therefore, pushing headline earnings per share by 5% to R10,71c per share and lifting total dividends per year by 6% to R4,65c was pretty good in my eyes.

Still, it remains in similar problems ahead – rand volatility, labour woes and, of course, the Eskom tariff sting. Thus: no positive or negative forecast from the directors.

From Jean’s and my perspectives, Hudaco remains a hold even if in the 2013 financial year, earnings don’t improve. At our cost price, the forward dividend yield should be 7% after withholding tax.

At the current cost of R110 per share, the forward dividend yield (based on no earnings growth) is more than 4%. If we were cash-flush, we would add some more.

Ben Temkin


A double hedge with Sasol

Dear, oh dear, with the exception of the share market that regularly hits new highs, the rest of the news is bad. To make matters worse, next week the petrol price will do another leap. But as the rand has lost 7% against the dollar since the start of the New Year and the oil price risen by 2,7%, higher prices at the pumps was a foregone conclusion.

South Africa is classed amongst the emerging economies where, because their financial structures have not been around for centuries, are not expected to be as stable of those of the first world. Not, that is, that the big boys can claim much stability in the past five years, but currently ours is the only emerging market currency that is losing fast against major currencies. I don’t have to list all of the reasons why, just the first one, labour unrest.

It is Sod’s Law that just as a glimmer of light signalling the end of the world economic woes is ignited, we suffer widespread and often violent strikes. If only mines and farms were in full production with the rand’s weakness, exporters would be shipping boatloads to counties that have let stocks run low.

The Commodity Research Bureau spot index which measures all commodity prices worldwide has risen 2,43% since a November low and so signalling better things may be ahead. Most metal prices, including platinum have been rising, and likely to continue. But we can’t take full advantage of the situation when our labour force is either staying at home or rioting.

At time like this when the value of our currency is on the slide, I’d recommend rand-hedging; that is investing in shares of companies whose earnings are in foreign currencies. Traditionally top of the list come mining companies, but even before the strikes, mining shares were soured by nationalisation threats. Other good rand hedges are typically food producers that export a goodly portion of their output. Then there are the shipping companies that transport the goods, but with fewer metals, minerals and agricultural products to ship, outgoing cargoes may be limited. There are companies like Richemont selling oodles of luxury goods to far eastern tourists, and industrial companies exporting finished goods. However, the one I am most happy to stay with is Sasol, which operates abroad and earns in a range of currencies. Added to this when the oil price is high, it doubles its rand-hedge value.

The chart shows how the plotting of Sasol (bar) follows the price of Brent Crude (blue line). Also following the two is a moving average convergence/divergence (MACD) plottings in red and green. When the oil price goes up or down, so does the price of Sasol while the cross-over of the two MACD plottings tell you when to buy and sell.

Jean Temkin


The Balgowan witch says it’s time to get serious about investment

The silly season, when uppermost in most minds was the weather and the biggest decision was what pizza topping to choose, has ended. Along with our return to work comes a return to reality. After having been starved of it for weeks on end, we are greeted with a plethora of news about more can-kicking further down the road in the case of America, continued European messes and our own strikebound economy.

At the latest news from Anglo, the closure of platinum mines, pushing the workforce in the already long jobless queue, hands are raised in horror. It’s reminiscent of when the British miners killed that country’s mining industry. The difference is that Britain wasn’t as dependent upon mining as South Africa is on both mining and agriculture. Currently both of these industries look doomed. Britain’s alternative was to turn itself into a service centre, but only people with brains can operate services and particularly financial services. We have just as many brains in South Africa, but with many left unchallenged by inadequate schooling, they are not of much use in the service industry.

Those of us who have been lucky enough to have had our brains sharpened by a decent education better understand the difficulties experienced by the mining bosses and farmers. At the same time, we have sympathy for workers facing redundancy. However, while they certainly don’t enjoy the kind of nanny state described by RASKI writer Paul Perton in his Nanny Society - fish may contain small bones story, some, and, I must repeat, only some workers and their families are treated well by their employers. However, lacking a proper education, many are unable to understand the consequences of their actions. Added to those are the ones who have been intimidated into joining the disgruntled.

But what does all this mean to the rest of us and our pockets? Coming after the others, the Fitch downgrade has extended the poor opinion that foreigners have of our country. Nevertheless, I understand from an isolated report, that they may have begun nibbling at our investments again. Is this because they perceive hope for the future in the guise of our new business-orientated deputy president?

Meanwhile, heading back into oversold territory, the rand looks sick and has begun heading down again after its welcome 5% recovery at year-end. It has given a warning of a possible fall to around $1/R11, E1/14,6 and L18. However, bear in mind that the currency market is the most fickle of all the markets, and can change on a tickey. Thinking positively the tickey could be the perception that at last our government looks as if it knows what it is doing.

Nevertheless things are not all that gloomy especially for those who had a reasonably good 2012. Good or bad depended on where they kept their money and how they spend it. Last year, thanks to its 11th hour boost, the rand lost only 5 % against the dollar, while the share market gained 25%. As the intrinsic value of a share is the currency in which it is denominated, the rand’s loss was almost negated in the case of share values. There was also a 5,5% loss in the spending power of our capital through inflation, which chewed away a bit more, but still left us with a worthwhile gain. Also on the plus side, there was the dividend income collected throughout the year.

Dare we hope that if the government runs it house in a more orderly fashion, and South Africa again becomes a country of merit, and this year’s market performs even better? However, as international stock markets are influenced by each other, even if things go right in our own country, our market could be clobbered by overseas happenings as was the case in 2008.

To illustrate what happened to the share market last year, I have used a simple candlestick chart overlaid by a standard error band. It shows how, during the middle of the year, the chart plotting fell to the lower edge of the band. This told us that the market was oversold and therefore it was a good time to buy. Those who correctly read the chart and acted on it, made a gain of around 20% before year-end.

Currently the plotting has broken through the top of the band showing that the market is overbought. Unless something spectacular is in the cards, so spectacular that all share markets head skywards, (which is unlikely), the market will ease back. The chart is telling us that apart from special situations, this is not the right time to buy shares. Rather wait until the plotting falls back, possibly to the equilibrium (centre line) currently around 38 222. The worst short-term case scenario would be a slump right back to the lower edge of the band, currently at 36 378, but I think this highly unlikely. Rather, after the fall, I would expect the humps and dips in the plotting to make it up gradually towards 48 906.

Jean Temkin


The Balgowan witch’s ‘what if’ so far

OK, my ‘what if’, the ousting of President Zuma to be did not come true in exactly the way I suggested. Nevertheless a combination of my crystal ball (computer charts) and black dog rather than cat by my side, my ‘what if’ predication came almost true with the appointment of Cyril Rhamaphosa as deputy. What’s more, should anything happen to Zuma, I suppose Rhamaphosa would immediately step into his shoes. Later I guess, if he keeps out of trouble, he’ll possibly be our next president.

As I’ve said before, I avoid politics and political figures and the one I don’t avoid, Mangosuthu Buthelezi, I regard as a friend, rather than a politician. However I do know something about Rhamaphosa, but as a businessman rather than a politician. He is the son of a policeman and his vast wealth came about by his success in business, which must surely illustrate how good a businessman he is. Perhaps as important is that as an already wealthy man, he is immune to the kind of bribery that has been the downfall of South African politics for goodness knows how long. As for a conflict of interest, rather like Ben and I, who write about but also own shares, by declaring our interests, his slate is sparking clean.

My eyes have been glued to the charts since Rhamaphosa’s appointment. As a result, I have cancelled my shock/horror predictions for the rand, but need to gather a few more statistics before I can confidently replace them. The rand had been gathering strength since it almost tipped over the $1/R9 towards the end of November but as the Rhamaphosa news hit the headlines, it leaped 3%. It is now recovering from a seriously oversold position and according to its moving averages, is in the process of shifting from a bear trend, but it’s much too soon to call it the start of a bull trend. It has broken down through a support on its point-and-figure chart and a spread triple bottom which hint s at a recovery to about $1/R6,4, but don’t yet hold your breath.

The share market, that for ages has thumbed its nose at our downgrading and the foreign perception of our chaotic politics, has continued in an ever-strengthening bull trend that began in June, and continues to frequently reach new highs. At the top of a standard error channel, it is a little overbought and is likely to settle back a little over the Christmas/New Year period. This will give serious investors an opportunity to look at their portfolios and perhaps make a few adjustments and consider some new nibbling here and there.

Remembering that the US is on the edge of a fiscal cliff, that I am sure will be averted at the eleventh hour, I’m taking a close look at gold. Assuming a new bear trend, it doesn’t look too healthy at the moment. As far as we are concerned the strengthening of the rand and the lower gold price, has dulled the glitter of Krugerrands and almost pushed Newgold into a bear trend. Ben and I have a modest interest in Newgold, but will not be cashing in.

Jean Temkin


My Christmas ‘what ifs’, predictions and moans

At this time of the year, I am typically rushing around fulfilling my ‘things-to-do’ list ahead of a family Christmas, but this year my kith and kin will be the lucky to get a mouldy orange in their stocking. Nevertheless, with my witchlike reputation, as in most other past years,’ I will dust off my crystal ball and make a prediction or two. First I ask you to bear with my moans.

Politics is not my forte and in my long newspaper career, I have avoided writing on politics the plague. However, when I see politics creating havoc with the economy, my blood boils. The way I see it is that much of the economic mess we are in can be put at the door of government.

In an attempt to cheer myself up I am pondering a ‘what if’ that would not only pick me up but also put smiles back on the faces of the thinking people of this country. What if at the upcoming ANC Mangaung conference, President Zuma was ousted and replaced by someone who is happy to live with his only wife in an ordinary home. Better still, someone with intelligence, a solid business background with no desire to enrich himself at the expense of others. Most important of all, someone not regarded as a joke by the rest of the world so frightening off foreign investors seeking a stable environment in which to lodge their accumulated piles of cash that are desperately seeking a home.

Despite a drastic fall in foreign investment, the one thing I am not at all despondent about is the performance of the share market. Despite the political chaos, it frequently reaches new highs. For this we must be thankful that, rather happenings in our own country, we follow the major markets. Nevertheless, there is some confusion here, as our share market is doing better than many leading markets. The JSE Overall is 18% above its pre-crash high while the Dow Jones Industrial is 5% lower, the FT 100 12% lower the DAX 6% lower and the HangSeng 28% lower.

With the stranglehold, the labour laws imposed on South African business, the success of our share market is amazing. It must surely be telling us something about competence of our business leaders and shows up the incompetence of our present government.

Now is the time for a prediction or two. Regular readers know my dire predictions for the rand, which over the past thirty months has been knocked 30% lower in value. As things stand at the moment, I am holding on to my downward counts of R17,68 against the pound R13,92 against the euro and R10,73 against the dollar. However, should my ‘what if’ materialise, I will no longer back them as renewed faith in our country will immediately commence.

Using the point and figure chart, my prediction for the JSE Overall index is positive, and, if my ‘what if’ comes about, it would be even more so. My positive feeling about the share market comes for the three triple tops that have appeared on the chart. These I have identified with TT.

A triple top formation occurs when a price or index has reached a resistance level and fallen back. It again moves up and tests the resistance, only to fall again. However, on its third attempt, it breaks through showing that resistance has been broken.

Jean Temkin


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




Pick ‘n Pay’s fighting for margin

Between my writing on Pick ‘ Pay on October 4 and now, the company published a trading update for the half-year ended August 31 2012.

According to the update, the group expects the results for the six months ended 31 August 2012 to fall into the following ranges compared to the previous period:
EBITDA from continuing operations will decrease by between 10% and 20%;
EPS and diluted EPS from total operations will decrease by up to 10%;
HEPS and diluted HEPS from total operations will decrease by between 10% and 20%;
EPS and diluted EPS from continuing operations will decrease by between 25% and 35%;
HEPS and diluted HEPS from continuing operations will decrease by between 30% and 40%.

And, of course, the share price dipped.

I had expected that the company would have continued to battle as improve its turnover especially while it was still fighting to improve its logistics. In the commentary in the update, there are glimmers of light (you can read the update on the company’s website). But it would be foolhardy to expect the bottom-line earnings from continuing operations for the full 2013 financial year will improve dramatically.

The half-year report is planned to be published on October 24 but the results and expectations for the full year have already been discounted into the share price.

I looked again at the five-year financial review in the annual report for the 2012 financial year.

According to the report, back in 2008 the company’s return on total assets managed was 10,2%. In 2012 it had slid down to a dismal 5,9%.

Year-on-year turnover growth in 2008 was 15,4% in 2008 and just 8,1% in 2012. This moderate growth in 2012 was not poor relative to the macro-economic environment and the ratio of turnover (from continuing operations) to total assets was 4,7. In 2008, the ratio was 4,1.

The one driver of return on assets managed had improved significantly.

The other driver of return – the operating margin had, however, declined sharply. While gross profit had barely changed from 18,1% to 18%, the operating margin had fallen from 4% to 2,3%.

The operating margin has been the core investment fundamental I’ve used on assessing the strength of the company, and 3% has been a reliable measure of its health. For two successive years this return has been under 3% and I will be – pleasantly – surprised if it achieves 3% in 2013. I’ll be worse that disappointed if the company doesn’t get back to that return, or better, in the 2014 financial year.

Ben Temkin


Apart from October to December last year, doomsters have been right about Pick‘n Pay, but it looks as if there may be an about-turn. I have placed a green zig-zag plotting over Pick’n Pay’s bar chart, set to reverse when the price changes direction by 5%. Following a sharp price loss in the first half of the month, a 5% upward reversal has now been seen. A far more important indicator, is the stochastic oscillator which foretells what’s likely to happen in the short term . Shown on the far right of the chart, there has been upward break by the %K line (red) through the %D line (black dotted). This is a short-term buy signal. What makes this signal important that it has happened below the horizonal red 20 line. A share is in a buying position when the oscillator is below the 20 line and in a selling position when above the 80 line. Share prices can stay above or below these lines for fairly long periods, but this has rarely happened to Pick’n Pay of late.

Jean Temkin


Blame ourselves for the ailing rand

The worst is still to come.

In the investment newsletter a few days ago my rand down-counts - pound to R17,60, euro to R13,92 and dollar to R10,73 - are scary, but in present climate, by no means impossible.

Until recently South Africa has had others to blame for our woes but from where I sit, it seems that we have brought the current set down upon ourselves. Looking ahead, if mines and other employers give in, strikes will end, but to pay the higher wages, they’ll have no alternative but to close their businesses or drastically reduce their work forces. Many more people will be unemployed resulting in bad debts piling up, and many unsecured loans will default.

We weren’t to blame when greedy US institutions bundled hoards of unsecured property loans into derivatives and sold them off to people in institutions who hoped they’d fatten their bonuses even more. Without bothering to investigate the underlying value these conjured-up financial instruments banks around the world piled into them. South Africa was an exception. While damned by some, our tough Exchange Control regulations prevented these near worthless bits of paper sinking our banking system. Nevertheless, as a major exporter to the countries which had been duped, South Africa suffered badly from the backlash. Empty-pocketed, our traditional overseas customers slashed orders for our goods. As their industries slowed, they no longer needed our metals and minerals.

The countries which, for years, had pampered their populations with welfare states, suddenly found that they could no longer afford birth to death featherbeds for their nationals and others who’d come to those counties for just such hand-outs. Much to the horror of welfare receivers, their benefits for this, that and the other were no longer as bulky. Like two-year-olds deprived of even more ice-cream, as the free gifts dried up, some took to the streets complaining of the unfairness of it all.

Of course not all foreigners are penniless. Those with piles of money, used to earning buckets of money on their investments, found that interest rates in their countries were cut to the bone, and then cut again. With inflation higher than interest received, their rates had become negative. They looked around the world and found that in South Africa, where almost all people must pay for everything they get what they get, rates of interest rates were still positive. So they shifted their money into South African investments so boosting the value of the rand, and pushing up the prices of our exported goods. With fierce competition in a fast dwindling market, exporting companies were forced to trim work forces and then trim again. With more and more people thrown out of work, South African rates also had to be trimmed, but still remained positive.

While many of our trading partners hopped in and out of official recession, apart from one dip, South Africa’s growth has remained positive; but for how much longer?

Although they sometimes regarded goings- on within the government with jaundiced eyes, up until March this year, many foreign investors stayed put. But as the ANC’s infighting grew nastier, more and more investors pulled their money out of South African investments.

Marikana was, of course, the blow that inflicted the major damage, but it was London-based Lonrho’s wage settlement that caused the contagion to other mines and businesses. As strikes spread and our reputation dwindles rating agencies had no alternative other than downgrade us.

Jean Temkin


The rand is falling out of bed

Knocked sideways by petrol stations running dry and supermarket shelves to empty as truck drivers refuse to drive, South Africans have reason to feel sorry for themselves. But add this to the shock of the Marikana massacre, and strikers forcing the closure of mines, you can’t blame foreign investors for grabbing their loot and fleeing our country. The result has been a substantial loss in the value of the rand. But if you look at the chart, you’ll see that while the real deluge has taken place in the last week or so. Despite our bond rates looking delicious compared with their own countries’, foreigners have been cashing in since March.

With visits to the petrol pumps, we’ve been feeling the pain of the rand’s loss against the US dollar for several months, and we Anglophiles, seeking HP sauce and Coleman’s mustard have also been shocked at the extent of price rises. But this is only the tip of the iceberg. We import far more foodstuffs and ingredients than the average shopper is aware of. The more the rand slips, the emptier our pockets will become.

Littered with potholes, forecasting currencies is left to the foolhardy or for the crystal-ball gazer. Subaru rather than broomstick and a black dog rather than a cat, I am known to be rash on occasions and fall somewhere between witch and a jester. Therefore, using point-and-figure technical analysis, I’m sticking my neck out by foretelling something similar to what happened at the end of 2001.

Eleven years ago the rand plummeted to the extent that, on the worst day of all, the rand dropped to R19,86 against the pound, to R13,72 against the US dollar and to R12,22 against the euro.

The current counts on the point-and-figures charts warn on a possible fall in the rand to R17,68 against the pound, R13,92 against the euro and R10,73 against the US dollar.

Jean Temkin


Pick ‘n Pay’s in good shape for recovery

The market was waiting for a long time for Pick ‘n Pay to appoint a new CEO. The choice of Richard Brasher gave a fillip to the company’s share price on Wednesday. The price opened at R44,50 and the closing price was R46,48, a rise of 4%. Trading volume was high and, as I write on Thursday, the share is trading at R46,47.

The market, on the basis of the share price gain, seems to have given thumbs up for appointment which will be effective at the beginning of February next year.

Way back in 1996 Raymond Ackerman relinquished his post as chief executive and Sean Summers took over. In February 2007, Summers was succeeded by Nick Badminton who sought new pastures in February last year.

Back in 1996, when Summers took over, Pick ‘n Pay’s share price was around R4,80. This means that since Ackerman retired as CEO, the share price has gained an annual compound increase of about 15%.

Over the same period, the share price of Shoprite was moved from R4,70 to R170, an annual compound increase of about 25%.

Had Jean and I sold our holding in Pick ‘n Pay shares on the basis that we had invested in Ackerman’s management, and instead wanted to invest in Whitey Basson’s management of Shoprite, we would be much better off.

We, however, stuck to Pick ‘n Pay and Summers’ management, and discussed selling when Badminton was appointed. We had then already noted that Pick ‘n Pay was less streamlined than it used to be. In particular we already knew the company was grappling its new administrative software and its massive change in distribution. If we had sold Badminton’s management of Pick ‘n Pay, the share price was around R34 and we could have bought Basson’s management of Shoprite at R26.

Knowing Badminton’s journey would be bumpier would than Summers’, Jean and I suffered from investor inertia. Between February 2007 and now Pick ‘n Pay’s share price has had an annual compound increase of around 20% and Shoprite has enjoyed an annual increase of 40%.

On the face of it, we were right to bet on Summers and wrong on Badminton. But all this arithmetic is superficial. Shoprite seems to have done things right at the right time. Pick ‘n Pay seems to have been tardy in putting its assets into shape. In particular, its second venture into Australia was about as pear-shaped as the first.

The bottom-line is that we’re still holding the shares and we’re still enjoying a creditable internal rate of annual return well in excess of 20% - for nearly 25 years.

The historic price-earnings ratio is over 30, but we’re not considering selling. This time driver and the road seem in good shape for recovery.

Ben Temkin


At the start of the week Pick’n Pay was 7% below its 2012 opening price; on Wednesday the loss had reduced to 1.44%, pushing the price plotting well above the year’s standard error channel plotted in blue. This and other charting indicators told us that the share had become overbought and was likely to ease. However, the red moving average convergence/divergence (MACD) indicator pushed upwards through its green signal line giving us a buy signal on a huge increase in volume. Pick’n Pay’s point-and-figure chart (not shown) broke upwards which leads us to expect the price to move to around R59 in the medium term.

This mix of indicators leads me to believe that the price may well ease, but the more it does so the better a good time to buy the share for longer-term recovery.

Jean Temkin


Famous Brands is appetising

When writing on Famous Brands (Fambrands) in May, I resolved to be more pro-active in writing newsletters on this website. I apologise for not doing this but the resolution remains extant.

Yesterday, Fambrands issued a trading update for the six-month period ended August 31 2012. The company expects to report diluted headline earnings and earnings per share of between 143 cents per share and 148 cents per share, an improvement half-year on half-year of between 19% and 23%.

I had expected that there would be an improvement but I’m surprised at the growth rate considering the adverse economic environment. Fast food is not a staple and things are tough for most consumers. As a shareholder I would have felt 15% growth to have been about as much as could have been expected. Management is creditable. You can refer to my May blog for my view on its strong investment fundamentals, in particular its record of its return on assets managed (ROAM).

Between then and now, share price has moved from R52 to the current price of R72. Jean’s and my internal rate of return on the investment of Fambrands was 62% at yesterday’s market close. Fambrands’ dividends and share price growth has been an important driver of the internal rate of return of the High Yield portfolio which is well above 20% a year.

Possibly the share price has moved too quickly relative to earnings growth. Assuming dividends in the financial year improve by 20% this year, at a share price of R72, the net dividend yield after withholding tax could be about 3%. On this basis, the share is fully-priced – justifies though for patient long-term investors.

From our own perspective, if the company’s management investment fundamental continues to combat macro-economic pressures successfully, in the 2013 financial year we could expect a 5% dividend yield from the investment. And we bought our shares at an historic dividend yield of around 3%, precisely because we expected the investment would become a high yielder for us.

Ben Temkin


No reason to get excited about the share price trend. The chart shows the price is closely keeping its market equilibrium, the channel between the top and bottom blue lines. The share price is, therefore, correct from this perspective and should, over time, continue to correlate with its earnings trend.

Jean Temkin


Resources look a good bet

The economically damaging troubles in our mining industry cast a black cloud over the sector, yet the JSE Resources 20 index has leaped 14% in the past nine working days. The final surge came on news of the US Fed’s intention to buy $40bn mortgage bonds a month. But, as could be expected, the non-precious miners have scored the most.

The chart shows the index surging upwards though a standard deviation channel that’s been in place almost all of this year. A buy signal has been given with an upward break through the single line of its moving average convergence/divergence (MACD) indicator. This puts the indicator back in positive territory above the dashed zero line.

However, the upward rush has placed the index in a short-term overbought position, 13% above its equilibrium, which leads me to expect a pull-back. However, for the longer term, it has broken upwards though a triple top and we have a longer-term count from its current 513 to around 619.

Major index constituent Billiton has risen 15% in the past ten days and next largest constituent, Anglo, by 24%. Third largest, Sasol, dogging the oil price, has risen 17% since early July. Collectively the three account for 70% of the index.

Gold and platinum prices are surging both in dollar and rand terms, but while miners remain on strike, less is produced which means less can be sold. This, coming at a time when the low rand/dollar exchange rate could boost exports, is a double whammy to producers. Therefore gains in precious metal producers, Anglogold-Ashanti, Implats, Goldfields, Angloplats and Harmony, which collectively account for about 25% of the index, have been limited.

While mining strikes overhang the market, a headlong dive into resources might be speculative. When the time to buy does come, a Satrix Resources ETF might be the best route. Rather than gold shares, already mined gold, via the Newgold ETF, seems a safer bet. However, assuming these troubles do not spread to other mines, a near-term nibble at non-precious metal producers could prove to be sweet.

Jean Temkin



Value in AVI

We bought AVI’s shares for our High Yield portfolio in February 2011. The gross price per share was just under R30 and the price at Thursday’s closing price was a shade under R60. At Thursday’s closing price the investment in AVI had generated an annual compound internal rate (cash outflow to cash inflow) of 32%.

The latest report on the preliminary results for the year ended June 2012 published on Monday and was in line with its earlier trading update. Salient figures were: Revenue from continuing operations up 11% to R8,29bn; operating profit from continuing operations up 23% to R1,37bn; headline earnings per share from continuing operations up 30% to 320c and increased operating profit margin up to 16,6% from 14,9%.

The directors also reported that, over the year, additional expenditure of R541m was made to cover major capacity and efficiency projects that the Green Cross acquisition (forming part of its fashion brands division) was concluded.

Especially heart-warming for us income yielders was the declaration of two dividends, a final gross dividend of 120c per share (102c net) and a special gross dividend of 180c (153c net). The total ordinary gross dividends per share for the year were, therefore, 203c (net 185c). For those who, like us, have to pay withholding tax, the cash from total dividends for the year will, when the dividends are paid next month, have been 338c per share.

The current dividend policy, based on diluted headline earnings per share from continuing earnings per share, was changed in March this year to a ratio of 1,5 from 2 previously.

I’ve digested the report and looked in particular at the company’s return on assets managed and cash flow. I’ve also read the directors’ outlook and this is positive despite the continuing pressure on consumer spending and the rising cost of inputs.

When we invested in AVI, my expectation was that headline earnings per share in the financial year would be about 242c. The forward market ratings were a price-earnings ratio of between 12,5 an earnings yield 8% and dividend yield of 4%. These ratings told me the shares were under-valued.

The market felt the shares were fully-priced for quite some time and by June last year, when I last wrote on AVI in Business Day, I had begun to believe the market was right – earnings growth would probably be less than in the 2012 financial year.

The market now believes the current share price of around R60 is justifiable on an historic price earnings ratio of 19. This suggests expected above-average earnings growth again in 2013- possibly, say 20% to 379c, a forward-price-earnings ratio of 15,8. The market is probably right and the gross forward dividend yield of 4% is appetising.

The macro trading environment is full of imponderables but given AVI’s management strength in tough past times, there has to be value in its price now.

Ben Temkin


Imperial is priced for modest growth

Jean’s and my portfolio has a weighty interest in Imperial Holdings. We bought our first tranche way back in 2000, mainly an investment in the late Bill Lynch’s management. When Lynch died, we were tempted to sell and wait for a while how management continued to perform before we bought again. But we suffered from long-term investment inertia and held on while new CEO Hubert Brody’s team restructured the company. While this was being done, the company’s performance slowed before moving back into gear.

The internal rate of return (the annual compound return cash-out to cash-in) on our investment is a shade under 20%. The internal rate of return on Imperial as a counter in our High Yield portfolio is 60% as the timing in its purchase was more opportune.

In mid-September last year (a few months after the High Yield Portfolio acquired its stake) I wrote that the share price of Imperial Holdings, then at R96, was undervalued. You wouldn’t have been able to read this because the newspaper that offered the story decided, for space reasons, not to publish it. I wasn’t trying to push the share price up. I rather hoped that some readers would agree with my view and share in this value.

In June 2011, when market sentiment was warm, Imperial’s share had traded at over R125 following a positive trading update for its latest financial year ended June 30 2011. As expected, when the results were published late in August, headline earnings per share were reported in the upper range of expectation - a year-on-year improvement of 38% to 1 370c from 992c.

I wrote: ‘The share price is something of a conundrum. Why could, even given the weak overall market sentiment, the share price be valued at 24% less than it had been valued back in June? The company had, after all, delivered what had been expected. The somewhat feeble market comment excuse was that the weight of Imperial’s earnings growth had been derived from vehicle sales. In the 2012 financial year, revenue growth from this business operation is probable to be much lower. The Eurozone is under serious debt pressure. The forward view on earnings growth for the group is not optimistic.

‘However, consider this: The share price now has fallen to R96, R2,60 of this fall because a dividend was paid in September. The market rating at this share price is historically a price-earnings ratio of 7, the earnings yield is 14,2% and the dividend yield is 5%. The directors reckon the volatile economic environment will challenge earnings growth in 2012. However, even if Imperial only maintains earnings in 2012, the share seems to me to be undervalued.’

The share price has since then more than doubled to R205 (at Friday’s market close), and I feel it appropriate make another stab at its value.

Headline earnings per share in the financial year 2012 were up 14% to 1 566c. The historical market ratings are a price-earnings ratio of 13, an earnings yield of 7,6% and a dividend yield (gross, i.e. before withholding tax) of 3,3%.

On these ratings, the market probably expects a modest improvement in bottom-line earnings per share in the 2013 financial year and the share is priced for just this. In contrast to last year, in spite of all the current global economic cracks, the market likes Imperial now.

Ben Temkin

(Click on the chart to see it more clearly)

Gaining 86% in the past 12 months (111% from its October low) plus the four-year record of increased dividends, Imperial might be considered a longer-term investment. This is indicated by its price movements, since its low, remaining almost entirely in the upper section of blue speed resistance lines. Presently there is no indication that this steeply upward trend will not continue for the foreseeable future. However, with the addition of the red moving average convergence/divergence indicator - which has just pushed upwards its dotted signal line - a new short-term buying opportunity. has been indicated.

Jean Temkin


Expect the unexpected

Charts are warning that something may be afoot in the share market. The sudden leap in volatility early in the month and the widening of the JSE-Overall’s Bollinger Band in the first half of August are warning of a possible change.

Volatility, when markets or share prices bob up and down in an erratic fashion, indicate uncertainty. During such uncertainty, there is disagreement regarding what a price or index level should be causing an ever-widening gap between buying and selling levels. Disagreement and mind-changing among the buyers and sellers increases market anxiety. I have used a red Chaikin’s indicator to plot a 10-day volatility moving average and rate of change.

Traditionally in August, the silly season in the US and Europe when investors, fund managers and the like head off on holiday, share market volatility is low. But as the chart shows last year was a dramatic exception and this years’ spurt at the start of the month had chart-watchers wondering. Theories regarding volatility often disagree. One theory, that high volatility is seen at the bottom of a major cycle was proved correct last year, but it remains to be seen if this theory, that volatility falls at the top of a major cycle, proves to be correct.

The second indicator, the Bollinger Band also illustrates volatility. The green enveloping lines are plotted at standard deviation levels above and below the blue 20-day moving average. In periods of high volatility the band widens and when volatility is low, it tightens. This time last year the extreme volatility widened the band considerably, but between February and May it was tight.

Currently, the band had widened, almost like an open mouth with the tongue-like moving average and candlestick index plotting moving swiftly upwards. However, in the last few days it has pulled slightly downwards. As the JSE-Overall index had become overbought, this slight easing is not significant. However, my gut feel is that at best we will see another sideways market for a period, but more likely a swift decline in the index level.

Jean Temkin

(Click on the chart to see it more clearly)

Greenlight for Newgold?

It’s just a gut feel at this stage, but along with other chartists, I’m keeping my eye peeled for a lift in the dollar gold price. The gut feel grows stronger each time I take a look at Europe, and see the mess it’s in getting stickier by the day. The worst case scenario would be a total collapse of the euro, which I don’t think could happen (my crystal ball is murky on the subject) but currency upsets automatically send people scurrying into gold. There are a few bits of good news coming out of the US, but while, at the moment, the dollar looks strong, the economy is still fragile. History doesn’t repeat itself but gold-bug spirits lift as we near the first anniversary of gold almost hitting $1 900.

Chartists are watching the mid-May to date sideways pattern in gold. Point-and-figure chartists are keenly watching for an upward break through the solid resistance that has built at $1 600 plus. If the break is strong enough, it may produce forward counts in excess of $2 000. But the three white candles seen on the far right of the chart excite me. This formation is known as ‘Three White Soldiers’ which signals a bottom reversal.

However, even more exciting is that Newgold has given a new buy signal with an upward break through its moving average convergence/divergence (MACD) potting. Newgold, which like the Krugerrand, mimics the rand gold price, is attempting to nudge back into a bull trend. It has just broken a double top on its point-and-figure chart that gives a possible count to R167,00. As the rand gold price depends upon two components, the dollar gold price and the value of the rand against the dollar, the fortunes of both dictate its value.

Why Newgold rather than gold shares or Krugerrands? Some gold shares distribute dividends, but, at this point of time, that appears to be their only advantage. Nationalisation scare-stories detract from investment while costs for the still-to-be-mined gold, are in a upward spiral. Gold, fashioned into Krugerrands are highly attractive objects, but only a brave investor would keep them on hand to be constantly admired. The investor can well keep his physical gold, rarely seen, tucked away in a safety deposit box, along with the 1,3-million fine troy ounces of gold bullion held in Newgold’s depository storage in London.

Newgold ETF continually tracks the price of gold bullion on international markets by holding physical gold bullion equivalent to the value of the securities in issue. At last week’s close the rand gold price was R13 217,06 an ounce, which left Newgold (about one percent lower) at R128,50.

Jean Temkin

(Click on the chart to see it more clearly)

Ellies is a glint in our eyes

I first wrote in Business Day on Ellies Holdings two years ago when the company had moved from the JSE Altx to be listed on the main board. I remarked that I liked company’s investment fundamentals for the long term. The company did not, however, meet the criteria for the either the High Yield or Private Investor portfolio whose tale I was telling in the newspaper.

But, at a share price then of R1,60, the shares were a glint in Jean’s and my eyes. The glint was sparkled by our personal experience of a few of its products.

Ellies describes itself, in part, as the largest manufacturer, wholesaler, importer and distributor in Southern Africa of television reception-related products, such as satellite equipment and antennae, as well as domestic electronic and industrial audio products.

A year ago, Ellies published a trading update on expectation of headline earnings per share for the financial year ended April 30 2011, and I reckoned it was time to revisit the company.
On June 29 2011, Ellies had published a positive trading update.

In my column I wrote: ‘The company expects headline earnings per share for the 2011 financial year to be between 18% and 23% higher those in 2010. The expected range is, therefore, between 30c and 32c.
‘The share is now trading a shade under R2. Based on this price, and taking median earnings of 31c, the market ratings are a price-earnings ratio of 6,5 and the earnings yield is 15,5%. If it declares a dividend of 20% of earnings, the projected dividend yield is 3,1%. These ratings are about the same as the historic ratings last August. The difference is that it’s been delivering growth at the bottom-line and the share price has moved by 25%. Looks like a sound long-term growth investment.’

About three weeks ago, Ellies published a revised trading update for the financial year ended April 30 2012. The directors wrote: ‘Ellies is now in a position to advise that it expects EPS and HEPS to be between 68% and 78% higher for the year ended 30 April 2012, compared to EPS and HEPS for the year ended 30 April 2011.’

(The year’s results are due to be published on July 23.)

In an earlier update towards the end of March, the expectation was a 40% year-on-year improvement, and that update moved the share price up from around R3 to close to R4. The revised update accelerated the share price and, as I write, it is trading around R5,30.

Ellies didn’t declare a dividend in the 2011 financial year but its HEPS were 31,42c a share. If this year HEPS were, say, 70% higher year-on-year, they will be around 54c. At a share price of R5,30, the guesstimated historic market ratings are a price-earnings ratio of about 10 and an earnings yield of 10%.

There may be a dividend sweetener this year but as the company is sweating its assets, it needs cash to meet market demand. The share price looks challenging but I feel Ellies should be able to maintain earnings growth of at least between 15% and 20% for the medium term. It’s still a glint in our eyes.

Ben Temkin


GO DUTCH

My hope that the lowering of interest rates by the European Central Bank to 0,75% would create the desperately needed economic stimulus, were almost immediately dashed when markets treated the news as yet another non-event. I guess we have already seen so many confidence-building squibs fizzle out that the cut was treated with indifference.

Yet, if you lived in Ben’s and my former home, the Netherlands, whose consumer price index currently stands at around 2,3%, and received a tiny 0,75% rate of return on your savings, you’d surely become agitated. Knowing the prudent Dutch investor, I imagine his hackles rising at the thought that the spending power of his money disappearing at a rate of 1,45% a year. The extent of gain or erosion of an investment is the difference between the rate of inflation and how much the investment yields. Even though 10-year Dutch bonds yield 2,04%, your money is being whittled away at a rate of 0,26% a year.

Before the damp squib dashed my expectations, I’d imagined the Netherland investor’s fiercely growing scowl, prompting him to do that he did a couple of years ago; swap his euros for rand-denominated investments. That was when keen foreign investment pushed the rand’s value to uncomfortably high levels. This did great harm to our exporters, but held the petrol price at a more reasonable level. That is where the ‘which side of the fence’ comes into play - import or export - simply translated into jobs vs cheaper foreign goods. Pity we can’t have both!

Was it a glimmer of hope at the end of the Europe-problem tunnel, that made our Netherlander begin switching out of rand, so dipping its value 26% against the dollar from August to December last year? Then after an 11% recovery did his further switches dip it by 10% from March to early June this year? Then again, perhaps rather than lights at the end of tunnels it was shenanigans within our government that frightened investors away.

Nevertheless, despite our wobbly, sometimes laughing-stock government, Foreign Direct Investment (FDR), a la Walmart’s purchase of a 51% stake in Massmart, in South Africa is attractive for several reasons. Problems in North African countries have detracted new foreign investment there. Unveiled dirty deeds at the crossroad by some Barclays bank execs in Europe’s erstwhile financial capital, has put an ink-blot over sterling. That’s why I think our Netherlander might take another look at rands. He knows that the one area that SA appears to excel is that those running the country’s finances are level-headed and well respected. It was after all tough banking laws which saved us from the 2008 banking shindig.

My suggestion is that the Netherlander takes a closer look at the South Africa share market, and if he does, so should you. This would especially apply if, as rumour suggest, our rates are cut next time around. Local rate cuts boost share markets while foreign demand pushes up share prices at the same time as providing a reasonable return. These days with a plethora of unit trusts and in my opinion even better options, ETFs, you don’t have to be a share-market guru to successfully invest.

Looking at the market as a whole, the JSE AlS40, is comprised of a collection of the top 40 shares that make up about 60% of trading. That index currently has an earning yield of 8,23%, a dividend yield of 2,99% and a p/e ratio of 12,15. Amongst ETFs, the Satrix Dividend Plus (Satrixdiv) has gained 121% since March 2009. Over the three years ended June the ETF had an annual compound return of 21,73% and now has an historical dividend yield 3,09%. The object of this exercise is investment yields, hence my choice of this ETF over the others.

As a loyal citizen, our Netherlander might rather be drawn towards his own share market. But as the Amsterdam index is currently 44% below its 2007 record high, compared with the JSE-Overall at 3,8% above its 2008 high, his choice is made easier. Instead he might look at Wall Street where the DJ-Industrial is 9% below its high, or Australia’s Sydney all share at a negative 38%. In fact the JSE has the only overall index that is above record highs.

In the accompanying chart I have used a candlestick plotting for the Satrixdiv and a bar plotting for the JSE Als40. Moving much in unison, differences occur with the Satrixdiv pick of high yielding dividend payers. I have overlaid three blue speed resistance lines that mostly encompass both plottings and head steadily upwards. To the Satrixdiv plotting, I have added a red zigzag which turned upwards on July 3. Not shown is the moving average convergence/divergence plotting which had just given a buy signal with an upward break through its signal line.

Jean Temkin


(Click on the chart to see it more clearly)

Steady growth expected from Hudaco

I closely monitor the progress of Hudaco, a counter Jean and I hold in both the Private Investor and High Yield portfolios about which I used to write in Business Day. About a year ago, after Hudaco published its results for the six months ended May 31 2012, I reckoned that its then share price of R82 was attractive.

I figure that the much smaller number of readers of our newsletter could be interested why I made that conclusion and, more importantly, what I feel about the share at its Friday’s closing price of R114,05.

A year ago, I wrote: ‘Half-year on half-year Hudaco’s sales improved by 26% to R1,41bn from R1,12bn, and operating profit rose by 24% to R149m from R120m. This performance translated into 11% growth in headline earnings per share to 377c from 341c, while bottom-line diluted headline earnings per share were 10,4% up to 371c from 336c.

‘In the whole previous financial year, diluted headline earnings per share were 784c. Second-half earnings per share were, therefore, 448c. I reckon that the company can grow its second-half earnings by at least 10% in the second half of this current year, to say, 493c. My guesstimate for the whole year, is, therefore, the sum of first-half earnings of 371c and second-half conjectural 493c, a total of 864c. Dividends over the year (an interim of 130c per share has just been declared) could be about 364c.

‘At the current share price of R82, the forward ratings on my guesstimate is a price-earnings ratio of 9,5, the earnings yield is 10,5% and the dividend yield is 4,4%.’

My forward view was over-conservative. In the financial year, diluted headline earnings per share were 1010c compared with my guesstimate of 864c and dividends for the year were 440c a share, compared with my guesstimate 364c.

In that latest half-year period, diluted headline earnings per share were 434c a share, 17% better half-year on half-year. As we know the economy is having a tough time, and its mining sector, platinum in particular, is having a bumpy ride. But despite this Hudaco’s directors are confident in growth in earnings. It has already made a promising investment.

My feeling is that year-on-year bottom-line earnings per share could improve by at least 10% to 1 111c. Dividends per share, after withholding tax of 15%, could be around 480c for the year.

At a share price of R114, the forward price-earnings ratio on earnings of 1 111c a share is 10,26, the earnings yield is 9,7% and the net dividend yield is 4,2%.

These ratings are much similar to those a year ago, and, to my mind they are attractive for long-term investors.

Incidentally, our High Yield portfolio invested just over three years ago and its annual compound internal rate of return was just over 30% until Friday’s market close.


Oil price fall nearing its end

The oil price is horribly oversold; it is most oversold since the end of 2008. My guess is that someone, perhaps OPEC, will step in and do something to prop it up quite soon. As a firm believer in technical analysis, I am willing to stick my neck out with this prediction as the chart of Brent Crude has fulfilled its down-count on the point-and-figure chart. While point-and-figure charting is considered old-fashioned by some, in my long-time experience it is one of the most valuable charting techniques available. For clarity rather than Xs, I’ve used upward pointing red arrows for up-moves and instead of Os, downward pointing blue arrows for down-moves.

Using the AW Cohen three-point reversal method, the chart shows the fall through a triple bottom starting in April, continuing in May and the start of June. The break came as the price fell below $122, which signals an average fall of 23% - this level was passed on Wednesday. The AW Cohen method of point-and-figure charting is fully covered in my book, Even More Charting for Profit.

The rand has lost almost all it is likely to in the short term, and is, therefore, likely to strengthen slightly in the short term. This is indicated by a break through the signal line of its moving average convergence/divergence plotting. The exchange rate has already tested the $1/R8,5 support and fallen back. On fundamentals, given that while foreign investors remain risk-averse, even if our interest rates are cut, as they are likely to be, our rates are still higher than many other countries whose rates alarmingly lag their rates of inflation.

As the JSE- Overall index, the only major index to have recently recorded a new high, is out of step it may therefore mark time or ease a little in the short term. However, if astute longer-term foreign investors consider that our banks are sound and our economy doing better than some, they may be attracted by the dividend yields of our better-class shares. At home, a rate cut will enhance the appeal of shares directing more private investors towards the share market.

The drastic fall in the oil price, down 26% since April, made nonsense of my April 12 newsletter where I suggested that the petrol price agony would continue. Certainly at the pumps we must still pay the +-R5 that covers the eleven other items tagged on to the basic fuel price, but come early next month, we should be paying some R1,29 a litre less than we did in May. We could of course be saving even more had the rand not lost 8,6% against the U S dollar since May.

In theory the lower petrol price pulls down other prices, particularly those that use fuel in their production and are delivered by road. For the man-in-the-street, this mainly applies to food prices. However, although we are told that inflation had slowed, so far it’s is difficult to identify this using supermarket till slips.

Of course, out of everything good comes something bad. Then ‘bad’ is in fact what has brought the oil price down. The price of commodities, including those we produce here and hope to export are coming down because manufacturing production in many countries has slowed to the extent that commodities are no longer needed. South Africa’s platinum mining industry is an example where things have become really bad. The slowdown in the world’s car manufacturing industry, that used platinum group metals for auto-catalysts, has resulted in an oversupply of the metal. This has reduced its price by 23% since August. At the same time, costs including electricity and labour have risen making it no longer viable to produce platinum. Mines are, therefore, closing and throwing many people out of work. At the current rate of manufacturing inactivity, other resource producers may suffer a similar fate.

Jean Temkin

(Click on the chart to see it more clearly)

What about Satrixdiv for the long term?

A question I’m often asked is: ‘I want to buy some shares in a company but which one should I buy?’

My habitual answer is to suggest that the potential investor would be safer by, say, investing in an exchange traded fund (ETF) such as the Satrix DIVI Plus Portfolio (Satrixdiv). This collective fund tracks the FTSE/JSE Dividend Plus Index and pay all the dividends received from the companies in the index to investors quarterly, net of costs.

‘Why speculate,’ I ask, ‘on the shares of one company when this ETF selects a spread of companies that are heavyweights and have proven good dividend payers?’

This is meant to be a rhetorical question but I also back the answer with the latest historical performance of the fund. For example, had you invested R1 000 in Satrixdiv at the end of May three years ago, your return would have been 21,6% at the end of last month and , if you had cashed in, your realisable value of your investment would have been R1 797.

Some readers of this newsletter know that Jean and I set up a High Yield portfolio between November 2009 and June 2011, booking over two counters already held in our main portfolio and, over the period, adding seven counters from dividends received from the main portfolio. We also sold one counter.

The internal rate of return from the portfolio at yesterday’s market close was 17,4%. This is not comparable with that of the Satrixdiv return, For one thing, our portfolio didn’t exist three years ago, and it was built periodically, as our cash pile grew.

The two returns do, however, suggest that it takes a lot of work and monitoring to provide a return as good, or better, than that of the ETF. Why bother to do the hard work of buying your own basket of shares, or, much more speculatively, buying shares of just one company?

Portfolio spread reduces risk, especially cyclical risk. The Satrixdiv’s asset allocation at the end of March was 19,91% in basic materials, 38,94% in financials, 12,2% in telecommunications, 12,38% in industrials, 12,91% in consumer services, 2,67% in consumer goods and 1,04% in liquid assets.

Personally, I think the weight on financials is a bit on the heavy side but I can hardly fault the Top Ten Holdings at the same date: Palamin (basic materials) 8,58%, Coronat (financials) 6,39%, Kumba (basic materials) 4,94%, Vodacom (telecommunications (3,93%), JSE (financials) 3,84%, Altech (telecommunications) 3,67%, Libhold (financials) 3,62%, MMI Holdings (financials) 3,60%, Abil (financials) 3,52% and PPC (industrials) 3,42%.

This is, of course, an historical snapshot but I can bet that Telkom won’t have moved into the Top Ten at the end of this month.

And, so, after all this I can assure you that the potential investor still wants to buy shares in one company. He or she wants spectacular performance and wants a pat on the back. My suggestion will, as in the past be, disregarded. As I’ve often said, advice seekers don’t look for advice; they look for reassurance.

Ben Temkin


Time to unzip the wallets?

Were you aware that the JSE Overall index hit a record high yesterday (June 18)? This is despite the goings on in Europe, which as an exporting bloc is dealing South Africa severe body blows. Were you also aware that our overall index is the only international all-share market index one that has reached new high? With everyone, apparently save stock market investors, quivering in the side-lines holding onto their cash like grim death, perhaps it’s time for a general wallet unzipping.

The share market again lived up to its reputation as a barometer as well before the results of the Greek election were known, the better market vibes had been apparent for more than a week. On June 6 the JSE Overall index bounced sharply upwards following its challenge to the lower edge of a standard error channel. In place since last year’s July dive, despite bedevilment by the European financial crisis, the channel has headed upwards as the index gained 20%.

The world is currently in an odd state of affairs whereby there’s a serious dearth of money on one hand and a ballooning glut on the other. Those with too much, current risk-averse money hoarders, are companies scared to expand, and private individuals unwilling to invest. The world is awash with bargains, but the moneyed will continue treading water until their confidence is boosted. We’re already seeing some quoted companies increasing their distributions to shareholder rather than growing their businesses in uncertain times. Private investors are eroding the value of their cash by keeping it in financial instruments yielding less than the rate of inflation.

Nevertheless, as a barometer, the chart of the JSE Overall index is beckoning companies and investors to dip their toes into new investments. Apart from the rise in the index plotting, the moving averages convergence/divergence (MACD) plotting (red solid line) gave a buy signal as it penetrated upwards through its signal line (dotted red line). There were other jittery penetrations between March and May, but this one that began well below the horizontal zero line of the MACD continues strongly upwards.

Currently still below the centre equilibrium of 34 800, there is plenty of scope for further improvement in the index. However it would be expecting too much to hope that it will reach the top of the channel, currently at 36 400, any time soon. Too much because using the phrase that everyone from the road sweeper to Barrack Obama throws around, all the Greek election has achieved is ‘kicking the can further down the street’. The can has already been kicked so often that, like our hope for a final resolution, it has become severely dented.

It remains to be seen whether the Greeks knuckle down under the current austerity programme or a redesigned one, but until stimulation is injected into the all markets, things are not going to get much better. Hopefully the G20 talks in Mexico, where I understand President Zuma pledged US$2-billion to the IMF to help Europe out of its debt hole, may beat the dented can back into shape via a stimulation of some sort.

Jean Temkin


“####(Click on the chart to see it more clearly)”


Don’t climb the Telkom post yet

Last Thursday, June 8, Telkom released its expected poor results for the financial year ended March 30 2012. On the basis of its half-year results, only optimists would have been buying or holding the shares on its investment fundamentals. In particular, they could hardly have expected a final dividend to be declared relative to its huge planned capital expenditure.

When the half-year results were reported the share was trading around R29, and its historic price-earnings ratio (based on 12-months’ headline earnings per share) was 11. With a high probability that bottom-line earnings per share would be well down over the full year – a probability that has been realised – I figured that the p:e was challenging.

Surprisingly, perhaps, the share price didn’t begin to crumple until February this year, after which it did indeed begin to collapse.

At the end of May it was trading around R24. Savvy investors, I guess, had followed the adage to go away in May because at the end of the month, they came back in droves. On May 31, trading volume on in Telkom shares boomed – more than 40m shares were traded on a single day – double the previous record over the past five years.

And, following the publication of the latest results the share is now trading around R20. Savvy month-end sellers; not so savvy buyers.

I didn’t buy Telkom shares when they were listed. Even then I was uncertain about management mainly because of customer dissatisfaction, a symptom of poor management. Then Telkom disposed of its stake in Vodacom, a flawed decision at a time when the mobile market was in a strong growth phase. Now, when the mobile market is more mature and much more competitive, Telkom is back in. Well, its much changed management may know more about what is good or bad strategy.

I don’t know if customer satisfaction has improved. I was forced to write to chairman Lazarus Zim to stop the company from charging for lines which had been stolen six months earlier. The lines, a year later do not yet exist, but I’m more than happy using a cellphone and a broadband connection on wireless via Internet Uncapped.

As you will have read, seen and heard Telkom’s management has defined its strategies and how it plan to implement these strategies. All this will cost a bundle of money – hence no dividends to shareholders for some years perhaps.

And hovering behind is the ominous shadow in note 15 of the report which summarises the contingencies. Imagine, if, as is possible the Competition Tribunal imposes an administrative penalty of 10% of its annual turnover? This maximum probably won’t happen and we also don’t know how the company will fare in its long list of litigation actions against it.

The reality in my view: Telkom is trying to travel a pot-holed road, lined with dangling telephone lines. At a share price of around R20, based on the latest headline earnings per share of 324,7c (basic earnings were only 10,4c), the p:e of 6 tells me the share is over-priced. If the price indeed reflects its value, I still wouldn’t touch the shares until the company has proved it can implement its costly plans.

Ben Temkin


Rand gold price attracts

Gold’s erstwhile safety-net status, a store of wealth when everything else goes wrong, has significantly dimmed in the past eight months despite the growing intensity of the Greek tragedy. As the dollar gold price dipped, the greenback climbed onto the throne, subjugating other currencies, particularly those of countries sharing our emerging market status. In the past 4 months both the rand and the dollar gold price have dipped 8% against the dollar which, as its value depends on this combination, have lifted the rand gold price by almost 4%.

Assisted by calls for the nationalisation of mines reducing to a whisper, the gold share index has risen by 15% in the past six-weeks but has a good way to go before it moves back into its long-lost bull trend. However, Krugerrands and Newgold, which accurately dog the rand gold price, are both a whisker away from new bull trends. Both have given buy signals with strong upward breaks through signal lines by their moving average convergence/divergence MACD plotting. There have been three similar upward breaks so for this year but lacked the thrust of this latest one.

In the right circumstances, mining shares can be good to investors, but what they are buying is gold that has yet to be mined. Mining is a risky and costly business with expenses rocketing as the energy needed for extraction zooms in price. Alternatively investors can buy Krugerrands fabricated in already mined gold, or Newgold EFTs each one equalling one-hundredth of an ounce of mined gold.

For the chart I have used candlesticks to indicate the dollar gold price’s movements over the past year. It shows that the price is back to where it was a year ago. However, because of the rand’s declining value the rand gold price, the red solid line plotting, has gained 29%. For all if this year, the third plotting, the MACD, has been moving upwards as it attempts to move back into positive territory above the horizontal line.

Technicals indicate that the rand gold price is likely to continue hardening, as the rand loses further ground and gold regains its hedging role as currencies other than the dollar, are undermined by a possible Greek departure from the Eurozone.

Jean Temkin

(Click on the chart to see it more clearly)

Comfortable with Famous Brands

This morning Famous Brands, the fast-foods restaurant group reported its results for the financial year ended February 29 2012. The company reported year-on-year improvement of 15% in bottom-line diluted headline earnings per share to 272c per share from 237c.

This result was no surprise as a fortnight ago the company issued a positive trading update in line with today’s report, and, had I not been diverted from other activities, I would have written on the update on this website. I’ve resolved to be more pro-active in future.

Jean and I bought our holding in Fambrands between June and December last year in a share price between R42 and R44 last year. This holding was part of a portfolio selected for our High Yield portfolio which formed part of the narrative for the now defunct Private Investor Portfolio in Business Day. Readers of that column may recall the share was on our wish-list for several years before we finally invested, but, sometimes we dither. Had we not dithered we could, perhaps, have bought the around R30 a share two years ago. But then the cash kitty was then only large enough for entry into Spar, which was higher on the wish-list.

With our website still in infancy its readership is miniscule. Gradually, therefore, I’ll try to highlight the essentials we use in selecting shares for our portfolio.

The main investment fundamental is how well a company managed its return on the assets it manages – its return on assets managed. The drivers of ROAM is asset turn (the ratio of turnover to assets) and operating margin (the percentage return operating margin). The product of these two drivers is the ROAM.

In the latest 2012 financial year, for example, Fambrands’ turnover was R2,15bn and its assets at year-end amounted to R1,22bn. The asset turn was 1,76. The operating profit was R413m and, on turnover of R2,15bn, the operating margin was, therefore, 19,2%. Multiplying asset turn to margin, the ROAM was 34%. The ROAM in 2011 was 31%.

Consequently Fambrands has managed its assets better year-on-year and, the report tells us, one of the reasons was what it calls a ‘stellar’ performance in its logistics division in which the operating margin was a record of 3,5% (3,1% in 2011). This is small beer relative to the overall supply chain division as a whole which had a margin improvement to 21% from 17% the previous year, but logistics forms a big lump of revenue (R1,52bn) and is a costly exercise.

Eating out is not a necessity for most people and Fambrands has to get customers in to supply franchisees and its own outlets, the latter of which have been making losses. The company has also not been doing well in Wimpey in Britain. Here and elsewhere the market will be tough for a while yet, but Fambrands’ ROAM record underlines management strength.

Our holding of Fambrands has, based on Friday’s closing price, had an annual compound internal rate of return of 25% over the investment. The company has reduced the dividend cover, and the increased 120c final dividend (2011: 85c) will after withholding tax, be 102c. Total dividends, net, for 2012 were, therefore, 182c, a yield of 3,43% at the current share price of around R52 and 4,1% on our own investment. We’re not complaining.

Ben Temkin

(Click on the chart to see it more clearly)

Chart Comment: Charts of Fambrands warn that the price could come lower in the short term, which is good news for longer-term investors aiming to or top-up current holdings. Based on technicals, my faith in the share is illustrated by this simple two-and-a-bit year weekly chart. Using moving averages, red for short-term, green for medium-term and blue for long-term you can see the 237% price increase it has experienced since the start of 2009.

It was in May 2009 that Fambrands confirmed its bull trend as the share recovered from the 2008 crash. A bull trend is identified when the stacking order of moving averages is short-term above medium term above long-term. On this chart the stacking order remained intact until the start of 2011, when the short-term moving average (red) dipped through the medium term (green) and actually nudged at the long term (blue) moving averages, warning that a bear trend may be in the making. In March the price dropped to R35. However, with a burst of volume as buyers snapped up shares at bargain prices, the recovery back into a bull trend was swift.

Fambrands’ price then rose steadily until March this year before it became highly volatile, with keen buyers well outnumbering sellers and willing to bid ever higher for the stock. This can be seen by the extended length of the bar plottings and the shorter length of the upright volume plottings at the foot of the chart. An ever-increasing price hike is what’s called a ‘blow-off’ (well overbought) phase similar to the one seen at the end of 2010 before that price fall. We are now experiencing a similar price fall during which short-term holders will likely cash in, so allowing serious investors to gather stock.

I would advise chart watchers to place a moving average convergence/divergence (MACD) plotting over their Fambrand chart and wait for the plotting to penetrate upwards through the signal line. Also watch volumes as in Fambrands’ case they accurately reflect accumulation and distribution.

Jean Temkin


Time to hedge the rand

The currency market is again in turmoil and lacking a miracle will remain so until a solution to Europe’s debt problems is finally found. Could that solution be the demise of the euro and a reversion back into the old currencies? Rumour has it that even Germany, the most stable country in the Eurozone, has printed deutschmarks ahead of that possible event. This, unlikely as it is, would be thrown all markets into chaos and the rumour adds to acute nervousness in the currency market.

While South Africa is not involved in overseas debt problem and still has better interest rates than most, foreigners are no longer piling into rands as they did in 2010 and early 201l. This has resulted in the falling value of the rand. In the second half of 2011, the rand lost almost 28% against the US dollar. There was a recovery start the start of this year, but since the start of March the rand has lost 8,47% against the dollar, 9,19% against the pound and almost incredible, given its dire circumstances, 5,29% against the euro.

A falling rand is inflationary as we’ve already seen at the petrol pumps where the 11% fall in the price of oil in the past six weeks, has so far not been reflected. Already prices of imported foodstuffs, like coffee, have rocketed, and other imports will follow. While the lower value of the rand and is good for exporters, a shock drop in manufacturing and falling metal prices, may have negated the advantage.

In the 1990s and early 2000s rand hedging became highly profitable. From 1990 to 1999 the rand lost 140% against the dollar and another 117% in the following two years the rand eventually hit a low of $1/R13,75. From 1990 to the end of 2001, the rand lost 379% to almost touched R20 against the pound.

Currency hedging is undertaken to minimise exposure to unfavourable shifts in the money market. Back in the 1990s and early 2000s, tight exchange control regulations made it difficult hold foreign currencies, but investors got around this by holding mining stocks. Today, exchange controls have been substantially relaxed, which gives the holder of rands far more opportunity to convert to alternative currencies.

For several years after its inception, my preferred investment currency was the euro, but I now see it as high risk. When my head rules, I see the US dollar as the currency that seems always to eventually float back to the top, come what may. Of course in this changing world, the brave investor may prefer one or more of the Asian currencies, or the hitherto reliable Swiss franc, but even that is now losing against the US dollar. While the UK’s problems seem no nearer a solution, as the country of my birth, I still have a fondness for pounds.

However, my greatest fondness is for shares, but rather than the erstwhile rand hedges, mining, and particularly gold shares, I prefer those that have dual listings, or earn in foreign currencies. Our sugar companies, for example, trade in a mix of currencies and as well as sugar export its by-products and other commodities. Tongaat’s six divisions, earning in dollars and euros offer starch, sugar glucose, aluminium, property, building materials and textiles. Illovo’s by products include bio-fuel while Crookes is involved in animal husbandry.

My most favourite rand-hedge as well as oil-hedge stock is Sasol, the share that recently left egg on my face after drawing attention to its buy signal which was scuppered by results of Greek and French elections. The good news on Sasol is that it has now repeated that buy signal.

For those investors who prefer a currency, I’ve drawn a chart that shows what has happened to the rand over the past 12-months during which the rand lost 15% against the pound and almost 17% against the dollar. I have used candlesticks for the pound and a red solid line for the US dollar. The lines running diagonally over the plotting are linear regressions, the upper of the pound and the lower of the dollar.

The rand began weakening again six days ago and against the pound it is now only 2,5% stronger than in November and 5,4% stronger than the dollar. The MACD (moving average convergence/divergence) plotting had broken through it signal line indicating that it will continue weakening.

(Click on the chart to see it more clearly)

Jean temkin


Measuring the rate of return

It’s nice to know that our new website (still being improved) is being read. One reader was puzzled by my column on Sasol in which I measured its performance on Sasol by measuring its return on investment.

Let me, therefore, clarify.

When you make an investment, you make a cash outflow, the gross cost of the shares. As you do this your investment has a cash realisable amount – the market value of the shares less transaction costs. If the share price hasn’t changed, your cash outflow (the realisable value) will be less than the cash outflow. Currently you will have a capital loss of close to 2%.

The realisable cash inflow changes each time the share price changes. It’s a moving target. This cash inflow should, if you have bought wisely, grow. Its gain should be measured by its annual compound return.

Over a period of time you will receive cash inflows via net dividends received. Each of these dividends should also be measured by its annual compound return.

You will appreciate that measuring each of these inflows on return is an arduous arithmetical exercise. However, a formula is easily accessible from Microsoft Excel, XIRR, which I wrote about in the column on Sasol.

To input the formula you type =XIRR. If the function isn’t available, you’ll receive an error message #NAME?

This means you’ll have to load in the Analysis ToolPak addin. Go to the Tools Menu. In the Addins available list, select the Analysis Toolpak box and then click OK. You may then have to follow the instructions in the setup programme.

As I already use some of the formulae in the toolpak. I simply typed =XIRR.

Before I could use the formula, however, I had to set up the data in two columns, one for values and the other for dates. The date is when the cash-flow changed and the value is the amount by which the cash-flow is changed.

Be careful that you choose an acceptable Excel format for the dates field. I used cccc/mm/dd (century/month/day).

For my example I have used the investment Jean and I made for Pick ‘n Pay for the Private Investor portfolio. This real portfolio’s history formed part of the narrative for my Private Investor column in Business Day. The portfolio is still alive, if somewhat feeble.

The first date was when the Pick ‘n Pay shares were bought by the Private Investor portfolio, September 5 2007. R9 916,95 was invested. This was a cash outflow, and, therefore, the input value was -9916.95 and the date was 2007/09/05. The next action was on December 14 2007, when a dividend of R90,19 was received. This was a cash inflow and the value was 90.19 at 2007/12/14.

Eight further cash inflows via dividends have been received so far and the inputs have been made.

At last Friday’s market close, the value of Pick ‘n Pay’s shares, after deducting transaction costs, was R12 959.52. In the values field the input was 12959.12.and the date was 2012/05/04

On the next row I entered the XIRR formula. You do this typing =XIRR followed by the range of values, the range of dates, 0.1). Select the range of the amounts with your mouse, and then the dates. Don’t use the column headings as part of the ranges. Make sure the commas follow the ranges followed by 0.1. When you’ve typed the closing bracket, press enter and the answer should be 0.10397 As a percentage this is 10,4%.

This is what my spreadsheet looks like:

This 10,4% is the actual return – cash out less cash in – the Private Investor would have enjoyed had it cashed its Pick’ n Pay shares in on Friday.

Ben Temkin


Time to buy Sasol

This is an exhilarating experience, my first contribution to Jean’s and my newsletter on our own new website. Accepted the circulation is small but …

The focus today is on Sasol, in my view, one of the best shares in which to invest and the heaviest weight in our portfolio.

The company featured regularly in the columns I used to write in Business Day and previously in the Financial Mail, as the focus of those columns was to share readers our view of equity investments – opportunities, dead ducks and how our own holdings were experiencing.

Despite our personal rising costs, we’re still re-investing our dividend income. We recently received dividends from Sasol, and are seriously thinking of accumulating some more although this investment will make it even heavier relative to the other counters we hold.

In a broad sense, Sasol’s share price is an oil-price/dollar-rand hedge. Thus its share price will tend to correlate with the rand price of oil. Sasol is, however, a power base of more than just oil and the company is continuously building its asset base exploiting its leading edge international technology.

We have been buying Sasol shares over the past ten years at prices between around R100 and close to R240 a share. While the value of the shares we hold are currently more than double the cost, the return we measure is the internal rate of return. This is the cash-out to cash-in compound annual rate of return on the investments realised and realisable over the period. Investments made are cash outflows and dividends received are cash inflows. The current market value of the shares now, less transaction costs, is the latest cash outflow. I use a Microsoft Excel formula – XIRR – to calculate the return. This return is a moving target as the share price moves every day and the period of investment increases daily.

Over the period we have invested in Sasol shares, we have enjoyed an annual compound return of 18,3%. It has been a good investment by any standards.

In considering some more Sasol shares, one of the most important investment fundamentals is the potential dividend yield. Making this guesstimate requires a fair amount of analysis. I begin this exercising by modelling with using the company’s return on assets managed. This model tells us how well the assets have been employed and provides a future perspective of bottom-line earnings growth.

If earnings growth is probable over the long term, the dividend yield should correspondingly grow. Of course, I accept that year-to-year, earnings could be volatile.
Let’s short-cut the exercise today.

Sasol’s financial year ends on June 30. In the 2011 financial year bottom-line diluted earnings per share were R32,85. Over most of the financial year so far the oil price has been strong and the rand versus the dollar far from strong. In the first half of the financial year bottom-line diluted earnings per share were R22,91. But this was an exceptional financial period. Suppose that earnings are only R18 a share in this current half, a total of about R41 for the whole year.

On this cautious view, the final dividend would be around R6,60 a share, a total of R16 for the whole year and at a share price of R370, a forward dividend yield of 4,3%. This yield is more than acceptable – would make the share fit in well with our own High Income Yield portfolio.

The technical factors (see chart) are positive in a buying trend.

(Click on the chart to see it more clearly)

Chart Comment: Sasol gave a buy signal on April 18 when the moving average convergence/divergence (MACD) plotting (red solid line) pushed upwards through its signal line (dashed plotting). The signal is particularly strong in as it came at -6 pm the MACD scale, (the left axis). As the chart shown, this was the lowest level reached during the period of the chart.

Sasol, the candlestick plotting, moved sideways for most of April in a particularly non-volatile manner. This lack of volatility is shown by the shortness of the candlesticks. Compare these with the highly volatile plottings experienced in November and December last year. The upward movement in the last candlesticks on the right, illustrates how Sasol is moving up from an oversold position.

Jean Temkin


Little hope of a worthwhile fuel price fall.

Get ready to pay another 28c per litre (pl) for your petrol in on Wednesday. As we are only in the fifth month of the year, we shudder at the thought of what we’ll be paying by December. That of course mainly depends on the oil price and the value of the rand against the dollar, but it also depends on added extras. We’ve recently seen a 20c pl fuel levy rise and 8c pl for the Road Accident Fund; are there more to come?

Rather than a weak rand and a high oil price, it is the extras, currently accounting for 40% of the petrol price, which appear to be haunting our transport system.

Added to the basic fuel price, which include shipping and storage costs, there are eleven items which include the transport paid by inland motorists that are. These include refining, duties, levies, fuel tax, wholesale and retail margins; together these add up to a total of +- R5 pl. Therefore assuming the basic fuel price is to R7 pl, the pump price works out at R12 pl. This is the price set by the Government for the under/over recovery from the previous month, adjusted on the first Wednesday of every month.

On the chart plotting the price of Brent Crude and the dollar/rand exchange rate, using horizontal lines I’ve added the average petrol price per litre for five years. The sloping trendline shows the increases so far this year. On the far right of the chart, you can see that the current oil price of $119 per barrel and the current dollar/rand exchange rate of $1/R7,8 are not too different to how they were in August 2008. That was when the petrol price eased back to R10,40 pl from R10,70 pl. However it rapidly fell giving a year’s average of R7,47 pl. It started the following year at R6,01pl but rising to R7,93 pl the 2009 average was R7,35pl.

Dare we motorists hope for something similar to ease our current burden? Absolutely not! Four years ago it was the rapid gain in the value of the rand, and a plummeting oil price that saved the motorist. Obviously 2008 and 2009 petrol prices included the additional costs, but unable to locate this data, I can’t put a figure on them. My guess is that they must have been considerably lower than now. Therefore even if the oil price drops and the value of the rand improve reducing the basic fuel price to, say, R5 pl, we must still pay and additional R5 pl at the pumps.

(Click on the chart to see it more clearly)

Jean Temkin


Sell In May & Go Away

Had you sold in May last year and gone away, according to the JSE Overall index plotting, you could have bought again in August at around a 10% discount. Had you sold again in February you’d have gained around 20%, but if you had delayed until now that gain would have reduced to 17%. We are almost back to May, but will this age-old stock market adage ‘sell in May and go away’ hold true this year?

It’s very easy to be right in retrospect as the above example shows, but much harder to peer into the future. Nevertheless, with the help of chart plottings, I’ll attempt a forecast.

The plotting chart of the JSE-Overall index’s moving average convergence/divergence (MACD) plotting has mostly been below it signal line since February. However the far right hand plotting shows it nudging upwards at its single line at just below its zero line. A clear upward break would give us a short-term buy signal. The index currently has a strong support at around 33 570 which has already been tested three times. Currently in a downward sloping standard error channel I suggest that, at worst, it will continue following this path for a while.

The market’s current wobble was caused by European problem raised its head again, this time with Spain at its centre. At one stage it was thought that Spanish bonds might reach 7%, but yesterday they tipped downward breaking through the 6% floor. Spain’s debt problems won’t go away any time soon, but a proud country it may pull itself together in a similar fashion to Ireland. On the positive side, recent German figures are encouraging. Consumer spending is again positive and the country has got over its recent hiccup in manufacturing. Several significant US companies are due to report and current expectations favour positive reports. As the JSE and others continue to dog the Dow, positive US news is good for all markets.

The oil market is more settled than of late, partially on earlier fears of a Chinese cutbacks. Brent Crude’s overbought/oversold chart shows it in oversold territory for the first time this year. While good for motorist, the nasty slip in the rand/dollar exchange rate may negate some of the oil price fall for local motorists.

It is only 13-days before Johannesburgers face e-tolling. With some threatening to use alternative routes, big business is calling for a delay in its implementation. Toll-charges will eat into company earnings and therefore dividends paid to shareholders. Whether in two weeks or later, many commuters will also use different routes causing chaos in some suburbs. As e-tolling fee payments are likely to spark civil disobedience at a time when government ranks are developing cracks my gut feel is that we may be in for changes of some kind.

(Click on the chart to see it more clearly)

To illustrate how the 2011 market followed the ‘sell in in May’ adage I have encased the plotting of the JSE Overall index in a series of standard error channels. The first downward-sloping channel, which began in May, was widely spaced, illustrating extreme volatility in the market. After some bumps and dips, in late July the MACD crashed through its signal line plummeting past its zero level. Then shrieking ‘oversold’ the index plotting plunged sharply through the lower edge of its standard error channel. Its oversold plotting fell to - 9.77. The upward break of the MACD through its signal line took place on 26 August when it was - 4,8 oversold. The upward standard error channel continued until February 6, reaching +7,66 overbought. While less so, that channel was still fairly wide, showing that some volatility continued. A sell signal came on February 9 when the MACD pushed downward though is signal line.

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