STANLIB's Weekly Focus 29 Spetember 2008

EXECUTIVE SUMMARY OF STANLIB’s WEEKLY FOCUS

ARE WE AT THE POINT WHERE MAXIMUM PESSIMISM MEETS MAXIMUM OPPORTUNITY?

• Only the future knows, but the crescendo of negative events has been building up, with Warren Buffett warning US legislators of “the biggest financial meltdown in American history” if they fail to act on the $700bn bailout plan.
• Buffett has shown his confidence in the plan by investing $5 billion in Goldman Sachs preference shares, yielding a juicy 10%.
• US equity mutual funds (unit trusts) are currently holding close to their highest cash positions (5.4% of assets), illustrating the bearishness out there.
• Meanwhile forecasts continue of a financial meltdown in the US, despite the potential restoration of confidence from the bailout plan. One can say that forecasts are based on speculation that hedge funds and private equity deals will unravel over the next couple of years.

SOME HOPE?

• US quantitative analyst, Elaine Garzarelli, who has used a comprehensive quantitative system quite successfully to analyze the stock market for the past 25 years, believes the correction or bear market in the US stock market could be over.
• The S&P 500 Index is currently 7% up on its intraday low of the 17^th/18^th September. She thinks it could be up 20% over the next six months.
• While we are cheered to see this, we remain cautious because there is no-one in the world who has a fool-proof forecasting system.

SA BOND MARKET BREAK THE MORE AGGRESSIVE BEAR TREND

• Despite some weakness today on the back of a stronger dollar/weaker rand, the SA government bond market appears to have broken its major uptrend (in bond yields), or downtrend (in bond prices/values), thereby signaling that the bad inflation numbers are yesterday’s news.
• This good news for both holders of bond unit trusts and property unit trusts, because property dividend yields tend to follow bond yields; also for bank share prices. Of course, rand weakness could be a threat.

SNIPPETS OF INFO

• Commodity shares continue to get hammered today. Anglo American is down 50% from its June record and Billiton is down 41%. Anglo is on an historic PE ratio of eight, it’s lowest/cheapest since the dark days of both 2003 (Iraq War) and 1998 (Asian crisis).

ECONOMIC WEEKLY REVIEW

• Foreigners continued to sell SA shares in September (R7.4bn net) and have now sold R20.9bn so far in 2008.
• August CPIX inflation hit 13.6% in August, with food and electricity hikes the main culprits. The rate for very low income earners is 17% because food alone accounts for 51% of their inflation basket.
• CPIX food inflation reached 19.2% in August.
• Looking forward, CPIX inflation is forecast to have peaked by now and should ease-off by year-end. In 2009 the re-weighting of the CPI basket combined with the high base effect should create a more favourable outlook for inflation. However, forecast risk is high.
  

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