Greetings,

Yesterday we got to witness true monkey mania (well in this case anxiety)
... yesterday we got to see the US treasury bills go to a zero percent yield!

Yup, you heard me correctly.
Investors are so fricken scared out of their little trees that they are willing to give capital away for FREE.

Hell, if only I was running a hedge fund.
I would be shorting the hell out of those zero percent government bills!
How can you lose money?
Can the yield go negative?
Will investors actually be willing to pay the government to lend the government money?

I dunno.
The spectacle and farce grows grander each and every day.
I love it.
Better than reality TV any day of the week.

Until next time,

Keep a swinging,

... and don't forget to take notes about these extraordinary markets, they will make great tales for your grandkids.

MM.

Greetings,

A quick post today
... on my favourite little topic
... The Northam/Mvela/Impala deal.

I just finished purchasing some Northam yesterday.
Why?
Well, I don't understand the market?!
They get happy when they should be angry.
They get sad when they should be excited.
They sell when they should be buying.

Yesterday the Northam / Impala ratio got down to about 100 Northam shares for every 15 Impala shares. Now, remember the original deal was done at about 35 Impala shares for every 100 Northam shares ... Impala stated that this was however too rich for them.

The maths is therefore simple.
Will the deal happen?
What ratio do you think the deal will be concluded at?

Today, Mvela said that they are confident the deal will happen ... I think the deal will happen.
At what price?
I think a ratio of 15 is too low.
As I mentioned in one of my previous posts, I think 25 is closer to the mark.
That combined with the fact that I think the PGM counters are undervalued currently
... and KaChing!
... we have a Monkey Buy!

Anyway, we will soon find out if it was a wise move or not.
What I do know is that it is a much wiser move than buying Northam at R60.00 per share!

Until next time,

Keep a swinging,

MM.
 

Greetings and glorious salutations,

I have some time on my monkey hands so I thought I may as well write a little about the bond market since a few of my readers didn't seem to know much about it ... and I love chatting about markets.

Ok. Let us start with the simple question, "what is a bond"?

A bond is a financial instrument which entitles its owner to a fixed set of payments.

For example:

The government wants to build a new road. They need to fund it. They therefore sell a bond to investors. They get a fixed amount up front (e.g. R100m) and promise to pay the investors a fixed amount (e.g. R10m ... or 10%) every year. They also promise to give back the original principle amount (R100m) when the bond reaches maturity (say in five years time).

Got it?!
Simple huh?

Now many different institutions sell bonds.
Governments sell bonds. They use the proceeds to build infrastructure and fund their excess expenditure. Companies also issue (i.e. sell) bonds. They use this capital to fund their growth.

Ok. Now for the next question, "what determines the yield a bond trades at?".

The "yield" is the amount the investor gets every year (i.e. the R10m) divided by the amount the seller needs to raise upfront (i.e. the R100m). In the example I gave above, the yield on that government bond was 10.0% ... R10m / R100m = 10%.

So, why does one government/company's bond sell for a higher yield than another?
For example, if our South African government wanted to sell a bond currently they would have to promise the investors a 8% yield. The US government however would only have to pay a yield of about 3%. This is also true for companies. In South Africa some companies have to pay 12% yields and others have to pay 15% yields. The question is, "why the difference?".

It comes down to a number of issues.

The first one is the currency in which the bond is issued. If the South African government issued a Dollar denominated bond, they could most probably sell it for a lower yield ... but then they would have to worry about the movement of the Rand versus the Dollar ... and that could get tricky. All you need to know is that "stronger currency" (what ever I mean by that) bonds, tend to trade on lower yields than "weak currency" bonds.

The second criteria comes down to the issuer's ability to make good on their payments. A stronger company is in a better position not to default, it therefore gets to pay a lower yield. It is exactly the same for us when we go and ask for some debt. Bonds are just another form of debt. If you are a risky loan, you must pay up to compensate me for the risk.

The third point relates to the length of the loan. Generally, the longer the payback period - the higher the yield. Once again this makes sense. The longer you have to pay me back, the greater the likelihood you will default ... I therefore want to be compensated for the extra risk.

There are other factors but these tend to relate to funny "exotic" bonds, which I don't think I need to discuss.

The final question is, "what do bond yields tell us?".

They tell you a whole bunch!

If I see a country's bond yields going up then I know that the market is getting more concerned about the level of inflation in that country. If I see the longer dated yields trading below the shorter dated yields then I know the market is concerned about growth and expecting inflation to come off (this is what we currently have in South Africa). If I see a company's bond yield trading much higher than its country's yield, then I know that the market is worrying about that company's financial health.

The current yield in the market therefore gives you an indication of the perceived risk.
The higher the yield, the more the risk.
Inflation is viewed as a risk, since if I have bought a bond (i.e. signed a contract to receive fixed payments) and inflation takes off then those payments are going to worth less to me in "real" terms.

I hope I have explained this market to some extent.
It is a pretty large topic
... and is actually quite important.

Anyway, until next time,

Keep a swinging,

MM.