Daniel Steinmann
31 October 2008
analysis
Windhoek — When a big animal like a buffalo or an eland dies, it usually goes into convulsions with spasms rippling through the body, and then the head and neck extend in an upward arch.
A long low bellow follows, mostly with blood spattering from the nose, and in that instant, more often than not, the hind legs lash out in a last release of energy before the whole animal settles into a relaxed heap of dead meat.
And for the unwary person, this lashing of the hind legs has often caused serious injury.
This sad but vivid picture is what goes through my mind when I watch the unprecedented volatility of financial markets. And I find myself wondering, who are the unsuspecting traders standing behind the animal who will be floored by those two massive hoofed legs.
I think it is now a given that we have fallen about as far as we can go in terms of lost value. I further believe the recession worldwide will be L-shaped and that we are going to claw our way, inch by inch, in a most arduous way, out of the trench. The question is: Have we bottomed?
Speaking to investors in Windhoek, I was asked this same question a dozen times this week. I think local investment managers and traders do not fear a prolonged recession nearly as much as they fear the utter unpredictability of the markets. What does one tell a client when you have just lost him N$2 million in capital?
When investors try to isolate a bottom in the market, in essence what they are yearning for is an indication that they can re-enter and start building portfolios again targeting all those quality shares that now look so very cheap. But are they really cheap?
I track Anglo American as my benchmark share on a daily basis. This share provides me with a micro-picture of the entire southern African economy. It is a resource share, thus reflecting a very large part of the domestic economy. It is dual-listed, so it reflects value here, in South Africa and in the UK. It is the share of a massive mature company with a myriad of subsidiaries and operations in many other countries, so it reflects the influences from other economies and other markets.
It is a fairly expensive share so a large part of the fly-by-night pennystock traders is excluded from influencing the share price by silly trades. And lastly, the company is run by perhaps one of the most diligent management teams in the world, so the company knows what it is doing.
Earlier this year a single Anglo share knocked you back over R500. A week ago that same share turned at around R170, and late this week, it hovered between R220 and R230. Yet if I follow its history, it is very enlightening to see that not so long ago, in 2004, Anglo traded at the R140 levels and earlier still, in 2002, around R120. I believe Anglo, with a few splutters up and down, will resume a downward trend for the next six months, and by April next year I shall be able to buy them again at R140 a share. And only when we have reached that point, will I be comfortable to say I THINK WE HAVE POSSIBLY REACHED THE BOTTOM.
Let me put it this way. I do not see any other factors except speculators that convince me we will go back to a R500 level soon. Maybe in five years, I honestly do not know. And if Anglos were to go below their 2004 value, then I think we really are in the cusp of a catastrophe. But why do I take 2004 as my rough indication of a cut-off point. Because that is the year in which the Federal Reserve started inching its interest rates up again, and that is also the year in which Mr Greenspan's liquidity exercise started filtering through to the real economy.
When one look at a graph of Anglos over five and ten years, it is immediately obvious that the share price tracked the real economy roughly until the end of 2004 and that by 2005, there is a noticeable distortion with an ever rising trend culminating in the excesses of the financial economy late last year and early this year. Of course by that time, the cracks have already appeared.
The rest is history, of which the past two months proved to be particularly disastrous. So, if you are trying to make sense of markets, and you are looking for some semblence of a direction, watch those blue chip resources of which you know the company well.
Be the first to Write a Comment!
Copyright © 2008 Namibia Economist. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
