The workplace of "tomorrow" - a view from the 1990's

Finding work that needs doing
– Considerations of the workplace of tomorrow


Since we are on the topic of finding work that needs doing in changing global contexts – Critical Task #1 of the Integrative Life Planning model – we will further investigate five statements describing the workplace of tomorrow from the (1990’s) perspective of William Bridges:

1. In the organisation of the 21st Century, there is less emphasis on work and an increased emphasis on tasks and assignments:

This is an interesting notion, and may sound a bit awkward at first. In the work of Bridges it was suggested that in future there would be a shift towards tasks and assignments. Since the time of the statement goes back to the previous decade and millenium, his future has become our today.

The kind of working environment we find ourselves in will obviously influence the appropriateness of the statement in current times, but I am sure not too many will be challenging his notion. At this time we have all become accustomed to the idea of working in project teams, working towards a specific goal, and working in teams that have been put together based on the required skills set for that task. Yes, the work still gets done, but the manner in which this is now achieved, is quite different.

In these times where we need to accept and manage change in both organisational and personal spheres, we are bound to identify groups and individuals who have not been able to get comfortable with the idea that the nature of how they do what they do has changed. From the perspective of ensuring that all our staff stay on the bus, it is imperative for decisionmakers to realise staff need to be approached differently. The old notion of job security as we knew it, has gone for good. The challenge now is to be smart about how we treat staff in these uncertain times.

2. Workers will still be performing tasks, but they will be required to create tasks, i.e. for projects, and will therefore be required to become more entrepreneurial:

In line with the first statement, Bridges continues by stating that the workplace of the future will be a place where workers will all need to become more entrepreneurial in their approach to their work lives. Evidence to support the idea that his statement from the 1990’s has come true is readily available; the implications for workers is also an issue worth a thought. Think back to the typical workplace of today: people will be selected to join task teams with the intention of reaching a certain goal. To ensure that we remain relevant and in demand in our organisations, all employees are in some way required to reinvent themselves on a regular basis. The key concept to grasp is that not everyone is equipped with the interest or personality to become full-fledged independent contractors – the largest percentage of people in the corporate arena will probably feel uncertain when presented with an opportunity to go it alone.

Since the time that Bridges put his thoughts to paper, a new word has been entered into the dictionary: intrapreneur. This is quite fascinating, as the definition given is that it refers to an employee of a large corporation who is given freedom and financial support to create new products, services, systems, etc. and does not have to follow the corporation’s usual routines or protocols. Even though this definition may not be fully operationalised in all business operations, there is certainly a move towards view on staff.

Organisations will do well if they empower all staff, regardless of their work level, to act in the manner suggested by the definition. This can only be achieved sensibly if staff in those roles are sufficiently skilled and trained.

3. The actual place where work will be done, will change. No longer will work be limited to the office, but will it spread to other locations:

At the time when Bridges published his questions, he could not have had any idea just how right he in fact would be in future! Originally the statement was written so as to include working at home, on planes, in hotel rooms, and almost anywhere else. This has all come true, but the manner in which this is now achieved, would possibly not been fathomed by Bridges or other writers of the time. The introduction of the internet had taken place in the 1990’s, but the impact of social media, smartphones, the cloud, and tablets, could not have been imagined!

So, in keeping to our main topic, which is looking at changes in the workplace, I think we can all agree that Bridges was absolutely correct in anticipating this change. Our challenge now is to ensure that technology is used constructively and not as a mechanism to create further and deeper division.

4. Every person will be regarded as a temporary worker:

The shift has started to take place. In my previous postings on the topic, it was mentioned to what extent the world of work has changed: the time where a job for life was almost guaranteed, has come and gone; all workers, regardless of their age, training, experience, and the like, have to consider themselves as contract workers. With the move in the world towards businesses becoming smarter, and leaner and meaner, the false security of a job for life has now been removed from the landscape. Thus, Bridges also saw this one coming. Want to know the sad news? More than twenty years down the line, there are still large numbers of people worldwide who have not made the required mindshift and have been found wanting in terms of the right skills and attitude when their organisations start laying off their employees.

5. Workers will start forgetting about work and will think more in terms of finding work that needs doing:
All of the points raised above can in some way be summarised by this last statement. In a time and place where the old notion of job security has changed, an attitude of it can’t happen to me has to be seen as reckless and irresponsible; in the words of Bridges, all workers have to become what he referred to as vendors - marketers – of their own goods and skills. The first challenge one has to meet is staying in touch with changing trends and demands in the workplace. Therefore, one needs to identify what could be described as unmet needs. Secondly, one needs to position yourself in such a way that the market you are addressing, will see you as the supplier of their demand. This is perhaps the tricky bit?

In conclusion, I think the original work of Bridges has shown tremendous insight. The final challenge remaining at this time, is to ensure that all employees are able to anticipate the shifting landscape, and that they take some kind of control in these tumultuous times.
Let us see if we are able to further identify some of the markers on this new road.



Based on the work of Sunny Hansen: Integrative Life Planning: Critical Tasks for Career Development and Changing Life Patterns

Finding work that needs doing: Understanding changes in the workplace

At the completion of any cycle, whether in the business or our personal lives, we are often called to take some time and think about the proverbial chapter just completed. Since we have just completed the old year and have been given a taste of what 2012 has to offer, I guess it would be fair to say that this process is currently being played out in the lives of many people and businesses.

Towards the end of last year we were talking about the need for us to find work that needs doing – if you can recall, this forms part of the first critical task according to the Integrative Life Planning model of Hansen (1997). Let us continue looking at some of issues related to this first critical task.

We have said it before, but it needs to be said again: the world of work has changed, and all workers will need to realise that thinking differently in this ever-changing landscape is no longer a choice. A key challenge organisations are faced with, is finding ways to manage their employees in these new times where old ways of doing have been replaced by a new mindset of workers. If one starts looking into related literature on the topic, we will be able to find many examples showing us how employment patterns have changed, how the availability and nature of work and work patterns have changed, and how the link between work and famliy has shifted.

One significant example of the availability of work can be seen on the International Labour Organization (ILO) website. The ILO is suggesting that the number of migrant workers in the world is so numerous that, when brought together, they would be equal in number to the world’s fifth most populous country! If we apply our minds to the challenges brought by these astonishing numbers, it becomes clear in no time that current policy and practice is simply not offering sufficient strategy in terms of dealing with this challenge.

Another example of changes in work patterns, can be seen in the number of American citizens above the age of 65 (previously called retirement) that are still working; this number has almost doubled since the early 1980’s. According to Mark Penn (Microtrends), there currently are 5 million people in the USA over the retirement age of 65 that are still working! At this time, I am wondering what the 2011 South African census will reveal on this issue.

Penn continues to spell out the possible implications of an increase in this number; for one, younger workers now have to compete with even more people for a piece of the same economic pie. Previously, succession planning was less of a headache for companies; with the above-mentioned shift being seen in more and more companies, it goes without saying that a new approach and perspective has to be found.

Taking an even closer look at the changes in the workplace, we see that there are even more perspectives that warn us of looming chaos! In the words of Giddens, a British sociologist, the world is characterised by chaos; this can already be seen in what he refers to as the world being a “risk society”; according to this perspective, there are three important sociological trends we need to take cognisance of: globalisation, de-traditionalisation, and social reflexivity. The latter trend, in the work of Giddens, suggests that it is the move towards reflexivity that is making it possible for people to cope with change and uncertainty.

In our attempt to understand how the workplace is changing, we have already looked into some closely related issues. If I may remind you, we have already spent some time considering what has been called the bigger picture and changing global contexts, we have taken a cursory look at how we can promote the constructive use of technology, and also how to approach new thinking on preserving the environment. Putting all of the above together should help us understand how we need to approach the first critical task spelled out in terms of the Integrative Life Planning model.

To conclude our current discussion, please allow me to leave you with 5 statements on the workplace of tomorrow (today?):

1.In the organisation of the 21st century, there is less emphasis on jobs and an increased emphasis on tasks and assignments

2. Workers will still be performing tasks, but they will also be required to create tasks, i.e. for projects. This implies a shift towards becoming more entrepreneurial in their thinking.

3. The actual place where work will be done, will change. No longer will work be limited to the office, but will it also spread to other locations.

4. Every person will be regarded as a temporary worker.

5. Workers will start forgetting about work and will think more in terms of finding work that needs doing.

Take a few minutes to ponder the above; next time we will be looking at these statements in the context of the 21st Century and will assess what the implications for career planning and development will be.

Based on the work of Sunny Hansen: Integrative Life Planning: Critical Tasks for Career Development and Changing Life Patterns

Is the 'Silent Stock Killer" Hunting our stock portfolios? A look at the fundamentals of the TOP 40 Index

In my previous post I suggested that the JSE Top 40 Index may be heading for a crash. I looked at a very long run technical chart that suggested that the SA stock market is basically on the verge of  massive crash. 

Have I been proven wrong? Short term coverage seems to say so.  In a technical research chart, released yesterday, by one of the big brokerage houses in SA, it was indicated that the JSE Top 40 index had broken a historic technical resistance level. 

Such a confirmed breakout suggests a very positive upward move for the market, which does not look good for my previous technical analysis.  Yet, in all fairness, yesterday's move still has to stand the test of time.  So we'll just have to wait and see.  

However, I am still concerned about the index. In today's post I want to present the findings of some research I did on the Top 40's fundamentals. What I did was to analyze the historic Price to Earning multiples of 39 of the 42 Top 40 shares. I also looked at earnings per share (EPS) histories of 22 of the 42 shares (selection favored shares with 10 years or more EPS  and PE histories). 

I used these numbers to develop annual PE multiples and an average annual EPS histories*. 

A bit of context ...  

But first a bit of context: briefly explained the PE multiple/ratio indicates how much investors are willing to pay for the earnings of a company. For example a stock with R1-00 EPS and a PE multiple of 10 will have a market price of R 10-00 on the stock market. A stock with a PE or 15 will cost R 15-00, and a stock with a multiple of 5 will cost R 5-00.   

Why is this important? Certainly for many reasons, but in this post I want to look at ways how a share's price can fall in the context of PE and EPS. 

Basically, there are two ways for a share to drop in market price 1) through a shrinking EPS and 2) through a shrinking PE.

Lets say the share in our example above still has a PE multiple of 10 but the EPS shrank to 50 cents; now our share will be valued at R 5-00 (10 x R 0.5).  Or, lets say the share's EPS is R 1 but the multiple shrank to 5, in such a case the share is also valued at R 5-00. Both a drop in EPS or a shrinking multiple imply a drop in the market price of shares. 

But, what happens when the both the EPS and the PE shrinks? Lets say our share has an EPS of R 0.5 and a PE of 5, in such a case the share will be valued at only R 2.50 (R 0.5 x 5). The reverse is also true; shares may go up in value when the PE multiple expands or when earnings expands. 

To profit in stocks

So, to profit in stocks it is necessary to watch the PE multiples and EPS of stocks carefully. Note that markets trade a different multiples at different periods of time.  

Jim Cramer of CNBC's Mad Money explains that the multiple is expected to shrink when interest rates are raised and is expected to expand when interest rates are lowered. 

Why? Simply because savers (e.g in the money markets) and bond holders earn greater profits in high interest rate scenarios. When interest rates are raised, the risks associated with stocks look less appetizing to investors. Consequently investors downgrade the valuation on stocks resulting in lower PE's (all things being equal).     

Beware of the 'silent stock killer'

A shrinking multiple can kill the market prices of stocks, even when earnings (EPS) remain stable. Cramer calls the shrinking PE multiple the "silent stock killer".  If both earnings and the PE multiples shrink stock investors may be in for a double whammy!

So, now that the stage is set it is time to consider the following chart of the TOP 40's averaged PE Multiples since 1992. I used the data obtained from Standard Bank OST for my calculations.  I averaged the annual PE's of 39 stocks for each year since 1992 and plotted the data on the chart below: 

Click to Expand

The numbers I ran seem to suggest that since 2003 the Top 40 has expanded from  a PE of 9.1 to a PE of 15.6 prior to the 2008 market crash. During the crash the PE multiple shrank to  9.8. Thereafter, the multiple expanded again from 9.8 to 16.5 in 2009 -2010. However, the last numbers available to me shows that the multiple has since 2010 to date again started to shrink. The average multiple at 2011 was at 15.1 close to the mean average of 14.4.    

So it is likely that the Top 40's PE multiple may be declining.

But, what about the average EPS? To answer, I did a similar exercise averaging the annual EPS of 22 of the 42 companies of the Top 40. 

[Note that we have to interpret these numbers with caution since it is a smaller sample and the 2011 earnings data for many of the companies are not available yet. I had a sample of 12 companies for 2011's to work with. So the EPS average, in this case, might not be as reliable. However, the sample does point to the possibility that the earnings of the Top 40 companies may be under pressure for 2011].  

Refer to the chart below:

Click to Expand

Notice that for 2010 the average EPS was R 9.44 and for 2011 it was 9.33; suggesting a potential drop in EPS. 

The Repo Rate at 5.5 % is very, very low 

Next, we have to consider interest rates. To do this looked at the RSA Repo Rate.

According to Liberta.co.za the "Repo Rate is the rate at which commercial banks can borrow money from the Reserve Bank".

In a crude explanation of the Repo Rate's function, we can say that the lower the Repo rate, the more people and companies can afford to borrow, and the greater the supply of money will be in South Africa.

So, at low interest rates, more money is available to chase goods, services, and investments (such as stocks).  

Testing Cramer's idea mentioned above; I have plotted the average annual PE's of the TOP 40 (in red) along with the averaged annual RSA Repo rate (in blue) on the chart below.  

Click to Expand

The following things struck me looking at the chart. 1) The Reserve Bank has dropped the interest rates to a historic 10 year low in response to the 2008 recession.  

[It seems to me like they cannot drop rates by much more. At some point they have to start raising rates or face run-away inflation produced by all the excess money supply that has been created].  

2) Even at the historically low interest rates the Top 40's PE Multiples had still started to indicate possible decline. 

How is this possible I wonder? If the market is facing a PE decline in the low interest rate scenario, what will happen if the Reserve Bank starts to raise the Repo rate (which they have to do at some point).  

In conclusion ... 

This posting concludes a number of posts I did on the economy and 2012.  When considering stock investments I like to think in terms of upward pressure and downward pressure.  The question we have to ask ourselves is which on the of the two pressures are more likely to win.  My bet is that downward pressure will win in the medium to long term.

It is clear to me that we may be facing a possible scenario of shrinking of PE multiples, which may erode the market price values of shares, even if earnings remain stable (which appears not to be the case). My research also seems to suggest that corporate earnings may be coming under pressure again. If both earnings and PE's comes under pressure, buying and holding shares may not be a good idea. 

Many may disagree with me, but I think that the JSE is being kept alive on stimulus through low interest rates and global money printing, not through actual value. In value the index may have actually declined.

Will the market's prices follow suit, I guess only time will tell ... 

Posted by Gerhard van Onselen. Follow me on Twitter, Linked In or Google Plus. 

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Disclaimer:

I am not a professional financial adviser. Information presented is intended to be solely conversational and educational, please don't make investment decisions based on just this  source, do your own research, and consult a registered financial adviser.

While I tried my best to present accurate information and numbers in this posting, I cannot guarantee the accuracy of any information presented.  

"Fear the Boom and Bust" a Hayek vs. Keynes Rap Anthem

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design ... "

F.A. Hayek - The Fatal Conceit 

JSE Top 40 - Long-run Technicals Seem to Point to a Fall

In one of my previous posts I looked at how much value we can buy with one share of the JSE Top 40 Index. The numbers I ran seem to suggest that while index prices were going up, the value we're able to buy is trending down. This is bad for stocks, but understandable due to the high prices of commodities.  

For today's posting I decided to open the technical analysis/charting toolbox again, this time considering the JSE Top 40 index. What does the technical chart suggest? It suggests that the local market may be heading for a downturn. 

Just to be clear, this is not set in stone.  Technical analysis is not always right, and there is much debate on whether it works. I like to look at technical charts in context of the market fundamentals.  

So what do we know about the markets at this point? Here are some things to consider. 

1) The Eurozone is in trouble ...

2) The US expanded its M1 money supply from about 800 billion to about 2.4 trillion USD since 2008, basically keeping their economy alive on debt... this makes high inflation very likely.  
3) US debt burden is massive; see US debt visualized
4) Global GDP growth appears to be slow ...

5) Commodities showed strong growth and money follows growth ...  

Technicals suggest a crash is likely ...

With that out of the way, let's consider the following Technical monthly chart of the JSE Top 40 Index.  I applied a long term Moving Average Diversion Conversion Indicator (MACD - basically an indicator that measures momentum - the strength of a market uptrend or downtrend):

Click to expand

Remember, we are only considering a technical chart for information on probable market moves. Some things are evident: The index has tested the current resistance level, the highest red diagonal line, (a price ceiling) for some time and is trading in a trading range, between current support and current resistance lines.

The Crash of 2008

Consider the descriptive comments on the MACD indicator before the crash of 2008. It is likely that the previous strong bull run (an upward market move) started in 1998 and gained momentum in 2003 after a short consolidation (look for the red downward pointing arrow below the label "bull market 03 -08" on the chart.

Consider what the Top 40 Index did at the arrow labeled with "Crash! 08". Most certainly we all remember what happened in 2008 when the market crashed, crazy times.

Important to look for is the cross over of the black line over the blue line in a downward direction on the MACD indicator (The crossover occurs at the arrow labeled with "MACD Bearish Signal!"). Such MACD crossovers are commonly regarded as signals of a changing market movement.

The market confirmed the indicator with the recession of 2008 where the index lost a lot of points.

MACD Bullish Signal and Price Recovery


The chart suggests that the price recovery and upward trend started in Mid 2008. Notice that the MACD confirmed the recovery and upward trend with another crossover; where the black line of the MACD crossed over the blue line in an upward direction.

Current MACD Bearish Signal

At the end of 2011 the MACD experienced another MACD crossover (look for "MACD Bearish Signal NB!'). This crossover suggests that a strong and lengthy downward move is probable.

Historic support levels are indicated on the chart at Support 1 and Support 2 (there is another potential support level at around 23000 points not indicated on the chart). Support levels are like mattresses that break the fall; these are levels in the market where bottom buyers are expected to halt the decline of prices. In the 2008 crash the market found support at the level denoted by the label "Support 1".

If/when we experience the next big downtrend; I expect the market to find support at either around 23000 points (best case scenario); Support Level 1;  or support level 2 (worst case scenario). Such moves would entail massive losses.


Conclusion

So, the technical chart, I considered, shows that it is probable for the market to experience a crash in the long run. Since Technical Analysis is not always correct, I decided to do some additional research on the Top 40 Index.  I considered historic PE ratios and earnings, I'll cover these in my next posting.

Read my next post to see what that research suggests.

Any thoughts or comments, please share below.

Posted by Gerhard van Onselen (follow me on Linked In and Twitter)

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Disclaimer:

I am not a professional financial adviser. Information presented is intended to be solely conversational and educational, please don't make investment decisions based on just one source, do your own research, and consult a registered financial adviser.

While I tried my best to present accurate information and numbers in this posting, I cannot guarantee the accuracy of any information presented.   

SA Property Market - Your house now buys much less coffee, gold and oil

A friend asked me earlier this week what I thought about the property market in South Africa. 

Indeed, that is a complicated question.  After scanning a number of articles online, it seems like the prevailing expectations for SA's property market is that it will keep going up. 

One website I looked at expects a compounded growth rate of 11.25% until 2050 for our property market.  

If that is correct, the price of the average home in SA should grow with R 112,500.00 each year for the foreseeable future (assuming the average home cost R 1 million ZAR and excluding the complexities of compounded growth averages). 

So, it seems to me like many if not most people expect house prices to keep going up. Some may expect some weakness, but overall the expectation is that property prices never go down.  

Consider the following chart I have compiled from nominal house price data on the average south African home, obtained from http://housepricesouthafrica.com/. 

Looking at the chart, it is not hard to see why most people expect house prices to keep going up, staggering growth is evident. 

Click to expand

A common reason suggested for continued growth is that South African property was traditionally under priced when compared to the rest of the world. It sounds logical, that being the case, prices should keep going up until some form of fair value is reached, economics 101! 

Talking about fair value. I think it is important to realize that even if things go up in price, it doesn't necessarily mean they are going up in value.  To illustrate my point, I took the average house prices above and divided them with historic commodity prices since 1995 (commodity prices were obtained from indexmundi.com). 

This tells a different story. It appears that if you were to trade your house for cash, and convert that cash, into commodities, you'll actually be losing a lot of value.  

Consider maize for example: 

In 2005 the average house was worth 1081 tons of maize. Today it is worth only 510 tons of maize.   

Soybeans: in 2005 the average south African house was worth 513 tons of soybean; today it is worth only 326 tons.

Robusta Coffee: in 2005 the average home was worth 258492 pounds of coffee. Now, at the end of 2011 it is worth only 129385 pounds of coffee.  So compared to past value, your house is worth much less in cappuccino today! 

Crude oil suggests a similar story. Trading your house for crude oil? Bad idea, in 2004 you would have received 2366 barrels of crude oil for the average South African home, today priced in oil, you'll only get about 1489 barrels of crude for the same house.   

What story does gold tell us? The trend appears to be similar. In 2005 you could purchase 248 oz gold with the average home.  Today, the average home will buy only about 86 oz of gold.  

If I am reading the info correctly (correct me if I am wrong); in value, the high point for the South African property market occurred in 2005. 

Now rising house prices do not necessarily lead to increased value (it probably reflects only US and European monopoly money circling the globe).  

Assume you bought the average house in 2000 for R 310,686-00 cash, and held it until 2005. In 2005, based on the data, the house would have been worth about R 704,353-00 in nominal terms. Let's say you sold the house in 2005 and switched to gold.  In 2005 you could have purchased 248 oz's of gold with the average house.  

If you held 248 oz's of gold since 2005 of gold and sold at today's market price, you could have sold your gold for R 3,290,454.08. 

So, by staying in the property market, has the average property investor lost the opportunity to make and additional R 2 million rand since 2005 on the average house, by not switching to commodity investments?     

Why will house prices keep going up? 

Much credit to the economist Peter Schiff for bringing this basic question to my attention.  The questions that Schiff has for people assuming that house prices will always go up are:  

1) Why should people buy when they can rent more cheaply? And, 2) which fundamentals are going to drive house prices higher?  

Also what is the premium on ownership worth? Is it the premium on ownership that will drive up house prices? If so, was the premium on ownership really worth more than the lost opportunity to pocket and additional R 2 million on the average SA house since 2005? 

The Cash Flow Argument

Yes, but what about cash flow? Gold does not pay you rent does it, you may wondering? True, I agree wholeheartedly that properties with good cash flow are some of the best investments out there. 

Yes, but most residential property investors I know do not own cash flow positive properties. Look at our family home as an example. 

Our house was last valued at R 1,250,000.00 million. Let's say I win the lotto and purchase the house cash. I'll then only be able to rent it out for about half its bond repayment value, say about R 6000-00 to R 7000.00 (not sure, I am assuming here).  

So, conservatively my annual rental income yield is only 5.76% (R 6000 x 12 = R 72 0000/R1,250,000 = 0.0576). Assuming, of course, that nothing on the property breaks and I don't have to pay taxes, rates, etc. 

Since, I cannot buy a home cash at this point I'll have to mortgage the home. I'll then have to pay a deposit of 10- 20 % and my bond will cost me about R 11,500.00 per month (roughly estimated at 1% of purchase price). With rental of R 5000, R 6000 or even R 9000, it does not really produce cash flow positive investment, does it? 

So all I can hope for is capital gains and hoping for capital gains is not the best strategy.   

Let's take an even more preposterous position, let's say I am a ga-zillionaire able to buy each and every house in SA at average prices. Since I cannot stay in each and every house I bought, I'll have to rent them out. 

Then, I'll still only get in order of 5.67% rental income from my investment (excluding all the added costs associated with ownership). How many ga-zillionaire investors will settle for a return of 5.67% or less? That does not even beat CPIX inflation.  

So, for prices to go up in the residential property market, sellers would have to find buyers who'll pay even more for a negative cash flow asset. Maybe I am missing something, but that's just crazy.  

So, now I ask again, why should the prices keep going up? That charts above show us that houses are actually falling in value when measured in gold and other commodities. 

My concern is that the masses in the South African (and global property) market are going to start to question the current premium paid for home ownership, which appears to be very very high, when measured in lost opportunity.  

Mortgage Lending Graph

Another concern I have is that mortgage lending growth has slowed ... a lot! Check out the following graph taken from the Exceed Group's market report September 2011.

   

Assuming that the graph above is correct, mortgage lending growth has contracted to levels below those in 2000! Doesn't that suggest that the supply of money to buy houses at the current prices is severely restricted?  If so, shouldn't house prices be coming down, instead of going up? 

Sellers may be trying to sell at legacy prices, they were used to in 2005 - 2006, but are those prices realistic? 

It seems to me like the free market does have a solution for restoring to property/rent income yield; 1) by raising rents, or 2) through falling property prices.

A drastic drop in commodity prices should restore value. 

If rent increases are often controlled by contracts, and if all the quantitative easing money printed since 2008 continue to drive up commodities, then why should we expect property prices to keep going up?        

To tell you the truth, I won't be entering the property market just yet. Seems to me that there is very little true upward price pressure, and much more downward pressure.  Assuming that prices will always go up is a highly dangerous position often found near the top of a bubble.

The SA Property market may have been undervalued, but it is also very possible that the global property markets were overvalued. If that is the case, we might be screwed!

Thanks for reading. Please share your insights below.

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Disclaimer:

I am not a professional financial adviser. Information presented is intended to be solely conversational and educational, please don't make investment decisions based on just one source, do your own research, and consult a registered financial adviser.

While I tried my best to present accurate information and numbers in this posting, I cannot guarantee the accuracy of any information presented.    

Posted by Gerhard van Onselen (follow me on Linked In and Twitter)

My take on the JSE Top 40 Index - why I ran from stocks

I am back with yet another very bearish take on the stock markets, this time a bit closer to home, this time I am looking at the JSE Top 40 index and I am considering the possibility of a severe pull back in the market in the coming years.  

In this posting I am hoping to show that the current gains we had on the JSE since mid 2008 were merely a smoke screen, and that in fact, the Top 40 Index has already crashed when measured in value.  We just have not caught up to the idea yet. While the index has not dropped in price, what appears to be eroded is what we can purchase with our stocks.      

In my previous two postings I looked at the the US SP500 index (a technical view) and some predictions for the global economy in 2012. Both these predictions were very negative.    

This led me to investigate the matter further, a bit closer to home. I decided to run some numbers for myself.

So, with information obtained from Standard Bank Online share trading and Index Mundi, I considered the prices of 5 important commodities, in relation to the Top 40. The main question I looked at was how much value one share of the JSE Top 40 will purchase as measured in commodities.     

Put in a more simple way; how much stuff does 1 share of the Top 40 currently buy? Why is this important? Well if we cash out our stocks, it does not help us if we can buy less with the proceeds.  

Let's begin by considering the following chart of the Top 40 Index. This represents annual closing prices of the index at the end of every year since December 1995.

Click to enlarge

If you look closely, you'll see that the index closed at 26250 at point 1 in December 2007 just before the big crash of 2008.


That is our first reference point. During the crash of 2008 the index closed at 19201 points (December 2008). Since December 2008 we had a price recovery.

Now consider point 2 on the chart (our second reference point): the closing prices for December 2010 and December 2011, these are 28558 and 28487 index points respectively. Also notice the sideways movement. The index recovered and closed even higher than it was in 2007 before the crash, only 2828 points away from the all time high in 2008. 

[Note: the index reached its highest level on the 23 May 2008 at 31315 index points, from there it fell to a low of 15905 on 20 Nov 2008, this is not reflected on the year end chart). I had limited information, so I had to use closing prices. See the last technical chart for the monthly closing prices.   

So, we had a crash on 2008, recovered, and now the index is close to its all time high. But, does this tell the entire story. I don't think so.

Most savvy investors know that they have to account for inflation.  In order to make a real profit in the stock markets, you have to be able to buy more stuff than before with your proceeds or dividends, logical isn't it? Your growth must beat inflation.    

With that being said, how much commodities could we buy with 1 Share of the Top 40 in 2007-2008.

To calculate this I divided the index points of the Top 40, with the prices of commodities. That should give an indication to the Top 40's buying power per share

We'll consider maize, soybeans, crude oil, gold and coffee for this analysis. Wheat and maize underlies much of the world's food supply, so maize is up first.

Maize:

Click to enlarge

The chart above seems to suggest that before the crash it, near the previous high of 08, it was possible to purchase between 25 and 20 tons of maize with one share of the Top 40. As at the end of December 2011 we could only purchase 12.77 tons with 1 share (even with the index near its previous high); amounting to about 10 tons less.

Soybeans:

Click to enlarge

Soybeans seem to tell a similar story. Before the crash of 2008, it was possible to purchase up to 13.24 tons of soybean with one share of the Top 40. Now, near the index top, we can only buy about 8 tons of soybean; about 5 tons less.

Coffee (Robusta):

Click to enlarge

With coffee, the trend seems to be the same.  Before the crash of 2008, we could purchase about 5138 pounds of Robusta coffee with one share of the Top 40, now we can only purchase about 3237 pounds; about 1900 pound less with one share.

Crude Oil:

Before the crash of 2008, your one share of the Top 40 purchased about 57 - 58 barrels of crude oil. Now that same 1 share buys only 40 barrels; approximately 17 barrels less.

Gold:

Click to enlarge

How about gold? Before the crash of 2008 you could buy about 5.5 to 5.8 oz's of gold with one share of the Top 40. Now one share buys 2.2 oz of gold.

Logically, the drop in purchasing power of the Top 40 owes to the increase in commodity prices. So we seem to have a scenario where the index went up and commodity prices went up. Does this increase seem to suggest a dilution in real purchasing power?

My wallet seems to agree. This explains, to me, why it lately felt like everything had become so much more expensive in South Africa.

We have to confront the possibility that we are experiencing a silent market crash, where the market moves sideways, or even goes up in price, but drops in value when measured in commodities.

Why is this bad?

One thing I am sure of is that the markets 'live' to find fair value. And, in order to restore value, I think only one of two options are possible; deflation of commodity prices or a drastic drop in the markets; both options are scary.

It is more than likely that the inflation of the commodity prices, we have seen, is directly related to the quantitative easing (money printing) the US has done since 2007.

Economists tell us that when too much money chases the same goods and services, we have inflation. Printed money also runs up investment prices, this I believe is reflected in the increase of the Top 40. But, printed money also dilutes the purchasing power of every rand or Dollar.

A problem may arise when more people invested in the markets realize that their stock portfolios will buy less than before.  That realization may generate a mass exodus from the markets, a run on real assets, and a subsequent market crash

(Click here to see what gold has done up to now)

Personally, I am no longer invested in the stock market. Am I missing out on opportunities? Maybe I am, no one can predict exactly what the markets will do. But based on real value the Top 40 seems to me to be declining in value, for now, I'll rather be a bear sitting in cash and metal.

I am just not willing to carry the inherent risk of stocks in a declining value scenario. Still, the markets may even go up in price this year, the question is will it go up in value?    

What to take away from this? 

• Consider that the markets may be declining in value when measured against commodities, you may want to ask your financial advisers about this. 
• To restore value, the markets may eventually correct/crash or, commodity prices may fall, which may suggest a decline in aggregate demand for goods and services (also bad!) 
• It may be pertinent to investigate some ways of hedging against a potential market collapses.  
• Remember that proper diversification should cover both stocks AND other asset classes. Often, the gold guys love gold, the stocks guys love stocks, real estate guys love real estate. However, falling in love with one asset class may prove fatal in this economy.    

As Promised earlier in the post, here  is the monthly chart of the JSE Top 40, I've included some technical analysis to the chart which I will explain in my next posting.

JSE Top 40 Index Monthly Chart, click to enlarge. 

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Disclaimer: 

I am not a professional financial adviser. Information presented is intended to be solely conversational and educational, please don't make investment decisions based on just one source, do your own research, and consult a registered financial adviser. 

While I tried my best to present accurate information and numbers in this posting, I cannot guarantee the accuracy of any information presented.     

Posted by Gerhard van Onselen (follow me on Linked In and Twitter)