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Posted: 12 April 2011 - 7 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

As the star in the retail space for some time now, Shoprite has widened margins and shown a stunning shareprice gain.


This was observed some time ago,  ( Cause or Effect? ) and the remaining matter is whether to buy, or to leave well alone, at these levels.


Well it seems that if profit margins can be held at their current (high) levels, then this company must grow each and every year at 17%. That is a big ask.




Alternatively, if it can grow at say 12% then it needs to gouge a 6.1% margin - which I suspect is too far ahead of its current levels.


So I suggest its value is more at  the R80 level - and I won't buy right now.




(full dcf spreadsheet is exclusively in the Model Portfolio Group ) 

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Posted: 4 April 2011 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

It just keeps growing - so what should you do?

Feed the beast?





Where does Financial Services rank in terms of the Financial Services Industry?
Size does matter when it comes to the role of the financial services industry in the SA economy. The following statistics appear in the “Safer Financial Sector” document, published by the national treasury, which outlines a number of changes in the area of market conduct, consumer protection and financial inclusion, including a new approach to dealing with high and opaque bank charges as well as insurance and savings charges.

The statistics make it very clear that this is not an industry to be ignored or taken for granted, given its size, tax contribution and particularly the number of people employed in it.

Snapshot of the financial services sector in South Africa:- 

June 2000
June 2010
Relative size 2010
Share of GDP
10.5 %
R 1 890bn
R 6040bn
Of which:
R 730bn
R 3040bn
Long term insurers**
R 630bn
R 1440bn
Short term insurers
R 50bn
Pension funds (public and private)
R 470bn
R 1480bn
Share of formal employment
356 353
3.9 %
Share of corporate taxes
Tax contribution+
R21 bn

Source: SARB, Stats SA, SARS; Tax contribution is for the 2009/10 tax year.

* Size is gross value added in nominal rand of the financial intermediation and insurance component of the finance, real estate and business services sector. Estimate based on projected growth.
** The long-term insurer assets figure includes assets of pension funds managed by an insurance company
*** Financial intermediation, insurance, pension funding and auxiliary services.
+ Estimate as detailed disaggregated data is not available. The total financial services, business services and real estate and business services sector contributes R39.6bn or 29% of corporate tax. Excludes VAT and other taxes.

Since 2000, the sector has grown at an annual rate of 9.1 per cent, compared to broader economic growth of 3.6 per cent. Growth in employment has also been very strong: over the same period, the number of people employed in the sub-sector increased by 24.5 per cent and the financial sector has become one of the fastest-growing employers in South Africa. The total assets of the sector have also grown significantly, registering nominal compound average growth of 12.3 per cent between 2000 and 2010. Financial sector assets now stand at 252 per cent of gross domestic product (GDP).

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Posted: 6 April 2011 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

There is a curious contradiction in the markets at present. Commodity prices are high - look at all SA's export products, look at oil or the "risk flag" of Gold, or look at the aggregated commodity basket, often indexed as the CRB index. High commodity prices generally would be taken as indicative of buoyant conditions, with industrial converters competing to source raw materials for their industrial processes, and so driving prices upwards.


However, in that situation, one might also expect to see high freight rates - where competition for the actual products was CONFIRMED by high rates to transport the stuff. This is not a new notion, and has been an underpin of the famed Dow Theory for a long time. See a video looking at positive Dow theory inside the US right now here Dow-theory-fans-anxiously-await-all-clear-signal



But our picture is not a cosy fit at all - look at this picture of the CRB commodity index in a high, but transport (the rate for dry bulk shipping) at a low level:-





So how to we treat this forked tongued beast?


Here is another source - Linescape. Although aimed at containers rather than bulk, it finds and collates the intensity with which shippers and forwarders try to get progress updates on the movement of their consignments. This should indicate concern for delivery, and so should flag increased activity.


My view - well exports from both India and China ( which dominate) are on a slide, and imports to Europe (ditto) are also dipping. So unfortunately I ses the commodity price highs as defensive rather than signals of imminent vigour in our investable markets.


Any thoughts?





The "Linescape Predictive Shipping Index"
Linescape is a search engine for container shipping schedules, for which many tens of thousands of searches are carried out each month by shippers and freight forwarders all over the world. Linescape was launched in May 2009 and has been gathering search statistics ever since. By September 2009, user traffic reached a critical mass from which meaningful statistics could be analysed.
Shippers and forwarders perform searches on average one month prior to actual sailings, and therefore the archive of Linescape search data is indicative of trends in real bookings.
Because the Linescape Predictive Shipping Index anticipates sailings, it can provide insight in advance, and is therefore another useful tool for predicting future trends. Both an export and import index is calculated for each of the main trading regions: China, Europe, India and North America. Figures are given as a percent change in search volume from the previous month.
Export Searches
Export Searches from North America and Europe during 2010 show a continuing slide through most of the year, with an upturn starting in October and continuing to present, probably signalling the start of economic recovery. Export Searches from China and India peaked in the summer, reflecting the high season, then declined in the autumn. However, Export Searches from China fell significantly in February, coinciding with their first reported monthly trade deficit in over a year..
Import Searches
Import Searches to North America were flat during 2010. Import Searches to Europe were also flat, then increased dramatically in the fourth quarter, then leveled off in the first quarter. Import Searches to China remained flat over the year while those to India increased during the summer only to decline in the autumn.
Case Study: China returns to trade deficit in February 2011
According to Yahoo News (Thursday 10 March 2011), "China said Thursday it had returned to a trade deficit in February for the first time in nearly a year". Respectively, the Linescape Index shows a sharp dip in China export searches in February.
Case Study: Asia-Europe growth slowed in August 2010
According to Lloyd's List (Monday 04 October 2010), "Growth in the Asia to Europe container trades slowed in August but freight rates remained steady, according to latest figures from Container Trades Statistics.". Respectively, the Linescape Index shows a dip in both China export and Europe import searches in July, one month ahead of the actual slowdown.







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Posted: 7 April 2011 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

(Alt title - how central is a central bank?)



We get offered a lot of coverage of the proclivities of our central bank. Why do we follow their words so slavishly?


Here is a picture of SA rates (set by the central bank), inflation, and money supply - you tell me whether inflation is fanned and leashed by the central bank, or just a response to money supply - a market measure. I mean, if there are 25% more rands in the system a year later, and the same population of goods, services and assets, what other outcome can there be than price spikes?




And it isn't only a RSA thing - here is a recent take from the US of A


Bernanke Created Inflation — and He’ll Fix It
He's just 13 months into his second four-year term as chairman of the Federal Reserve, and by all accounts it is still too early to say whether Dr. Ben Shalom Bernanke will be appointed to a third term. While the legacy of his long-running and legendary successor, Alan Greenspan, has undergone some revision lately (to put it kindly), Bernanke's career as the nation's central banker will undoubtedly be remembered as one of crisis and response.
In a recent chat, Jeffrey Hirsch, author of Super Boom and the editor and publisher of the Stock Trader's Almanac , said that he thinks this student of the great depression is determined not to make the same mistakes of his predecessors from the 1930's (e.g., tightening credit too early and choking the recovery). In fact, Hirsch says that, if anything, Bernanke will go down in history for his controversial efforts to "create normal inflation" that will help inflate the market.
Of course, the assumption there is that Bernanke will be able to kill the beast he has unleashed, which presumably would require that he acknowledge that inflation even exists in the first place. To those who argue Bernanke has it all wrong on inflation, and maybe even dangerously so, the entire legacy question itself is a tad presumptive. But right or wrong, Hirsch says he thinks the Fed chief will not only change his tune on inflation but is already dropping hints on what he says will be a well-telegraphed transition to a tightening cycle.
"He's gonna tighten, he's gonna turn the screws a little bit," says Hirsch. "He's going to do it patiently, he's going to announce it, he's going to telegraph it."
Hirsch says inflation has begun to pick up, it will pick up more over the next seven years or so, and then once it starts to taper off, the stock market's traction will start to pick up. What to do from now until then? Hirsch says he doesn't think things will be as difficult as they were in the latter part of the 1970s and early 1980s, but he concedes that things will be tough for the buy-and-hold crowd for the next several years. Things could be more interesting for those inclined to trade it, loading up the truck under Dow 10,000 (where he thinks we're headed for the shorter term) and then selling high.

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Posted: 11 April 2011 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

This is one - but there are more - question posed in the redroom. Get in there at RedRoom Group and lets take this and the other debates forward...






Is this our first real election - where the outcome may have a fairly immediate effect?


I ask because:-


- Pravin Gordhan has given a pass to only one province ( Western Cape) in budgetary terms. Eight have fails - and all eight fails are under ANC stewardship.


- and several local administrations are teetering or have collapsed under ANC care. (See Residents-take-over-three-ANC-run-towns )


- the DA candidate for Joburg mayor seems as good as the hot young bright MIdvaal mayor


- the ANC seems to be gerrymandering (playing with boundaries of voting areas to cling to victory) in several areas



So maybe our cynically described "one-party democracy" has run its course...


Lets see how much apathy can dissolve by the 18th of May


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Posted: 13 April 2011 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

Investment guru Aswath Damadoran from New York University ( see lots at Damadoran Online ) agrees with me in my courses ( Advanced Fundamentals Course Group   and Share Selection Course Group ) that Value and Price are different animals.


Here are his recent notes on the topic...





" I must confess that I was a skeptic on behavioral finance until a few years ago. At that point, the amount of information that had been accumulated on the "irrational" behavior of investors became so overwhelming that I faced one of two choices. I could ignore reality and live in the clean, rational world of classical economics or I could face up to facts and think about how investment and corporate finance decisions should be made in the messy world that we live in. After struggling with the conflict, I think I am making some progress. In an earlier post  on the third edition of my corporate finance book, I noted my attempts to incorporate the findings from behavioral finance into every aspect of corporate finance from how to create effective boards of directors to capital budgeting and capital structure decisions.

Reconciling behavioral finance with my view of the world has been tougher in my other area of interest: valuation. Every semester that I teach the valuation class, using the tools of the trade (discounted cash flow models, relative valuation), I am asked how I would incorporate the findings from behavioral finance into valuation. Here is my reaction. I don't think intrinsic valuation approaches will change much, if at all, as a result of behavioral economics. The expected cash flows are still the expected cash flows and  the required return still has to reflect the perceived risk in the investment.

So, what does change? Remember that to make money of your valuations, not only do you have to be able to value assets but the price has to move towards that value. Behavioral economics provides us with interesting insights on three dimensions:

a. Why do different analysts arrive at different estimates of value for the same company?  When you value a company, you are one of many doing so, often drawing on the same information as other investors, and often using the same models. So why do different analysts arrive at different estimates of value?  By looking at the interaction between psychology and valuation, behavioral economics yields interesting insights into why the values that we arrive at are different (and by extension, why some of us are buyers and others are sellers) and the systematic errors (over valuation or under valuation) that we make as a consequence.

b. Why does price differs from value? In the classical world, the price can deviate from value because investors make mistakes or because the price may reflect information that the analyst may not have or vice versa. With behavioral economics, we are learning that even if investors may behave in ways (refusing to sell losers, wanting to be part of the crowd, being over confident and misassessing probabilities) that cause prices to diverge from value by significant amounts.

c. When will they converge? Behavioral economics may provide us with clues about how quickly convergence between price and value will happen and why the speed may vary across assets. That would be incredibly useful to an investor. Thus, we may be able to answer a question that has historically eluded us: If I buy a cheap stock today (and I am right about it being cheap), how long do I have to wait before my bet pays off?

As investors, it behooves us to not only become conversant with the findings in behavioral finance but to also recognize when following instinct can damage portfolios. Meir Statman, one of my favorite behavioral economists, has written a great book on how investors can overcome their base urges and make better decisions:
I hope you get a chance to read it. There is much work to be done, but the foundations are being laid." Cheers, Aswath

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Posted: 21 April 2011 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Off-beat


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Posted: 29 April 2011 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Research

At prep school, our soccer master always referred to a dependable player as being as "safe as Banks of England" - referring to goalkeeper Gordon Banks. But it was easy to conflate the idea of ultimate safety with the old lady of Threadneedle Street (the Bank of England) or for that matter with any solid, old-school, British Bank.


And there was a time when trust in such institutions was high, after all, wasn't it simpler to trust the the savings repositories of the country on whose empire the sun never set?


But times change. And this is clarified by Aswath Damadoran in a recent pearl on his blog, where he sets out (without limiting his thinking to any country):-


 "Until the banking crisis of 2008, investors had made a Faustian bargain, when it came to valuing and investing in banks. Banks were opaque in their public disclosures and investors often had little information on either the risk of the securities held or the default probabilities of loan portfolios. However, investors were willing to accept this opacity and view banks as "safe" investments for two reasons:

- Banks were regulated in their risk taking: In effect, we were assuming that bank regulators would bring enough scrutiny to the process to prevent banks from taking "rash" risks. (We also assumed that the regulatory authorities had access to far more information that we did and would act accordingly.)
- Assets (and equity capital) were marked to market: The notion of marking to market was adopted much more quickly in financial service firms than at other sectors. Our distrust of accounting notwithstanding, we assumed that the book values for banks actually were good reflections of market value. "
and later in the same posting
" So, what's changed? First, our faith in both bankers and regulators has been shaken, perhaps to a point of no return. We can no longer assume that having regulatory rules on risk taking will result in sensible risk taking at individual banks. There can be, as there are in other sectors, very risky banks, risky banks, safe banks and very safe banks, as a consequence. Second, the erratic and often ill-thought out dividend policies adopted by banks since the crisis indicates that bank managers, at many banks, use dividends as a blunt weapon. How else can you explain banks with precarious capital ratios that continue to pay and increase dividends, while raising fresh capital in preferred stock at the same time? In fact, it is a sign of the times that the Fed stepped in to stop a major money center bank from paying dividends, as it did with Bank of America a couple of weeks ago."



The bold is added by me - to get more of Aswath's thoughts see the whole article at Aswath Damodaran blogspot Breach-of-trust-bank-valuation-after


And to get simpler clarity on the wisdom of blind faith in a bank, see  Bird & Fortune on Sub-prime




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