One of the age old discussions in investment circles is the earnings versus cash flow debate.

Some argue that cash is king. The foundation of their argument is that cash is used to pay dividends and reinvest in businesses. In addition, companies have been known to mislead investors with respect to the disclosure of earnings (Enron scandals and the like spring to mind). Therefore they believe cash flow measures are the best way of determining the financial wellbeing of companies.

South African investors have now been given another opportunity to take advantage of the global real estate market recovery.

Redefine International is a vehicle being used by Redefine Properties to list its UK, German and Australian property interests on the JSE. With an attractive property portfolio, and an expected income yield of 8% the stock appears to be a viable investment opportunity. The property portfolio has significant upside in rental growth especially in their retail component which makes up 53% of total income.

In the US, earnings expectations for 2010 are nearly 7% higher than what they were in January. These bottom-up forecasts call for the companies in the S&P 500 to grow earnings by 33% this year and another 16% in 2011.

 Pace of recovery eased in June as growth of new orders and output slowed.

Growth of the global manufacturing sector eased again in June. At 55.0, the JPMorgan Global Manufacturing PMI was down further from the near record high reached in April. Although the rate of improvement eased to its weakest in the year-to-date, it was still solid and above the series average.

Price fall linked to weaker demand

Copper prices have dropped sharply in recent weeks. Having risen to an average of $7,830 per tonne in March, the highest for 20 months, LME copper had fallen to $6,720 by mid- May – a decline of around 14% and the lowest since mid-November 2009.

The decline has reflected investor nervousness following signs of slower economic growth in China and the prospect of slower growth in Europe due to the European sovereign debt crisis.

The volume of total identifiable gold demand in Q1 2010 was down 25% on Q1 2009 levels at 760.2 tonnes. In US$ value terms, the decline was a more moderate 9%.

The cost of insuring debt issued by European sovereign borrowers rose Friday as a weaker euro, speculation in the market about losses at French banks and concerns about Hungary added to persisting doubts over economic recovery in Europe.

Introduction: While the most severe global recession since the Second World War ended some time ago – the IMF reports that the global economy grew by 4.5% in the second half of 2009 – the fallout from the crisis continues to (periodically) haunt global financial markets. The latest source of concern is heavily indebted (mainly Southern, although not exclusively) European countries, most notably Greece.

Grant Thornton released its revised projections of the economic impact of the upcoming 2010 FIFA World Cup on South Africa. And this was carried in the Wall Street Journal, with a slightly different slant.

ZAR In 2009 ZAR strength surprised many in the market, which has in general retained a long-run bearish structural view on the currency (as did we, viewing it as the most overvalued currency globally). There were several issues that kept the currency away from its fair value and allowed it to outperform:

Prof. Shiller, a Yale University professor whose book "Irrational Exuberance" warned of the tech bubble just before it burst in 2000, still worries about the market’s future. Prof. Siegel of the University of Pennsylvania’s Wharton School, whose book "Stocks for the Long Run" was the bible for many investors in the 1990s, is bullish.

• Introduction

• Expenditure proposals – R112bn added over the medium term in a more targeted way

• Tax proposals – significantly less relief Macroeconomic policy - steady as she goes

• Conclusion

In the short-term, the stock market often does whatever it likes. It over-reacts on the upside as well as on the down side but, over a longer period of time; it tends to revert to its normal range of valuations. Over the past ten years, the Top 40 Index on the JSE has traded at a mean (or average to the man in the street) historical dividend yield of 2.76%. Meaning for every R100 you paid, you would have received dividends of 2.76% over the previous twelve months.

China easily beat its 2009 growth target after a blistering performance in the fourth quarter that forms a powerful springboard for it to jump over Japan this year to become the world’s second-largest economy. Gross domestic product expanded 10.7% between October and December, compared with a year earlier, below market expectations of 10.9% but up sharply from 8.9% in the third quarter.

South Africans will spend more on food and drink and less on gifts this festive season, according to Deloitte’s year-end holiday survey. The survey also found that consumers were slightly less pessimistic about their 2009 holiday season spending prospects than last year. However, 69 percent of them still believed the economy was in recession despite official reports to the contrary. Younger South Africans are slightly more optimistic than their baby-boomer parents; the reason for this is probably that they have been less adversely affected by the global economic crisis.

Operating conditions in the global manufacturing industry improved for the fifth successive month in November, although there was an evident slowdown in the overall rate of expansion, with differences between countries accentuating and not diminishing. The JPMorgan Global Manufacturing PMI aggregate reading came in at 53.6, down from October’s 39-month high of 54.4, and signalling that the first wave of post crisis momentum may be losing force as governments slowly start to remove stimulus measures.

The latest economic indicators support the view that China’s economy is back on a strong, sustainable growth path set to extend through 2011 and beyond, with inflation trending up, but at a slow pace.

It is conventional wisdom that big budget deficits tend to lead to inflation, and no one can question that the US has a big deficit right now. In fact, as shown in Chart 1, the Obama administration’s forecast for the deficit this year is more than three times as big as the deficit last year and is the largest, as a share of the economy, since the 1940s.

True or false?

Consumption is roughly 70% of GDP True

Consumers face major headwinds (eg. high unemployment, tight credit) True

Consumption is likely to be more constrained compared to past recoveries True

The economy cannot grow or recover without robust consumption growth False

Most of us are gathered at the station, watching for the Inflation Express to come rumbling in. But we have been waiting for a while now.

When should we expect the big locomotive to arrive and start pushing the prices of most things uphill? We would all like to know the exact date, of course, but no one can know for sure. Not even a careful reading of the Mayan calendar will help. What we can do is estimate a time range for price inflation to show up, and that alone should have some important implications for investment decisions.

Gamblers dream of achieving a trifecta: picking the first three horses, in the right order, in a given race. The payout is huge but so are the odds against success.

Congratulations investors. The Dow has hit 10,000 on October 14th, 2009. You now have made officially 0% return if you invested in this index when the Dow first hit this magical level in late March 1999.

The JP Morgan Global Manufacturing PMI posted 53.0 in September, broadly in line with the 26-month high of 53.1 reached in August. The sector continued to record robust gains in production and new orders, but at less marked rates than in the previous month. The downturn in the labour market continued to ease, although job losses remained substantial.

Living in a consumption-oriented society makes the notion of value very close to us; it is present in our environment and contained in the goods we possess or consume. This proximity makes it difficult to assess all the different aspects of value. Goods can be characterized by their value and price, which are usually equal – at least according to our perception.

After two years of stellar performance, the average price-to-earnings ratio of emerging market equities is comparable to mature markets, at about 14 (Figure 1.) Driven in part by carry traders engaging in interest rate arbitrage, emerging market bond yields have also converged with mature market levels.

 In a nutshell

• Upbeat July output data, improved growth outlook should dominate the MPC’s deliberations

• Above inflation wage increases cloud the inflation outlook, although sustained rand strength points in the other direction

• 50bps cut a distinct possibility, but our call is for no change

Gold broke through the $1,000 an ounce mark on Tuesday for the first time since February – driven by speculators who want to avoid inflation eating up their assets’ value. They seek safety in the precious metal, regarded as a safe haven investment during turbulent times. A weakening of the dollar also made the investment in the US currency-denominated metal more attractive to foreign investors.

Amongst other key information, the central bank’s September 2009 Quarterly Bulletin (QB) provided the reference point for the end of SA’s longest business cycle upswing on record. According to the central bank, the historic upswing (lasting 99 months) that started in September 1998, ended during November 2007. The previous longest business cycle upswings were both 44 months (from September 1961 to September 1965 and January 1978 to August 1981).

Like the European Central Bank (ECB), the Bank of England (BOE) decided in early August to leave base interest rates unchanged at historic lows. However, the BOE did decide to boost its £125 billion bond-buying program by a further £50 billion, suggesting the central bank still has concerns about the UK economy, despite some tentative signs of improvement.

If the US recovery is to take place, if the fiscal stimulus must be phased out, and if private domestic demand is weak, then US net exports must increase. In other words, the US current account deficit must decrease. That means that the rest of the world, now in substantial surplus, must reduce that current account surplus. Where should this reduction come from?

After surprising the markets by keeping the repo rate unchanged at 7.5% in June when most analysts expected a further 50bps cut, the Monetary Policy Committee (MPC) Thursday again acted against the market consensus by unexpectedly reducing the rate by 50bps to 7%. The latest ease brings the cumulative rate cuts since December 2008 to 500bps, meaning that the 500bps worth of rate hikes between June 2006 and June 2008 have now been given back to the consumer.

According to the JP Morgan global manufacturing PMI survey, global industrial activity stabilised in July and is set to boom in 2H-09. Seven months after reaching its all-time low of 33.7, the headline index – a weighted combination of the indexes for new orders, output, employment, delivery times, and inventories – finally reached a neutral level of 50 (Fig1).

Although the (for the most part) peaceful conclusion of the 2009 general elections and narrowing SA trade deficit can to a degree explain the 15% gain in the rand versus the US dollar during 2009-Q2, the local currency has mainly been driven by global factors. In particular, swings in investor appetite for risk are a crucial factor in explaining the Rand’s gyrations.

An old investment cliché says that fear and greed drive markets, and it is true: we cannot ignore emotions. Over the past three decades the role of emotions in investing has become increasingly well understood by the rapidly evolving academic discipline of behavioural finance.

The last time stocks in developing countries got this expensive was in October 2007, just before the MSCI Emerging Markets Index began a 12-month tumble that erased half its value.

The world economy is stabilising, helped by unprecedented macroeconomic and financial policy support. However, the recession is not over and the recovery is likely to be sluggish. Following a disappointing first quarter, during which the global economy contracted almost as fast as during the fourth quarter of 2008 (Figure 1), high-frequency data points to a return to modest growth at the global level (Figure 2).

While China has been outspoken in expressing concern about the United States printing too much money, those worries might be better focused at home. No country beats China when it comes to effective monetary easing.

Amidst global economic recession and financial-market fragility, net private capital inflows to developing countries fell to $707 billion in 2008, a sharp drop from a peak of $1.2 trillion in 2007. International capital flows are projected to fall further in 2009, to $363 billion.

Don’t be deluded into thinking that inflation "might be coming" in the future and that once you see the signs you can protect yourself. Inflation is already here. And if you wait too long to take precautions, this silent thief will most certainly steal your wealth and savings.

Value investing is all about picking up bargains on the share market. If you are an investor, with the market at such low levels, now is the time to look at adding to your longer term portfolio. If you’re a short term trader, the underpriced stocks can often be the ones to rebound strongly. Where did value investing come from?

During the economic and financial downturn, the sell-off in emerging-market equities, bonds and currencies reflects a rush for the exit sparked by global deleveraging and a need to raise cash, rather than any change in the fundamentals.

Probably the most important catalyst for an improvement in the residential property market is a firm household financial foundation, given that the residential property market is largely dependent on the household sector.

Watching financial television channels is the equivalent to taking a road trip with your children that are constantly asking that very question: "Are we there yet?" At some point, you get the urge to yell "yes" just so they will keep quiet. Unfortunately, the current situation actually demands all of our attention so it’s fair to ask – have we seen the bottom?

The South African Reserve Bank (SARB) held their Monetary Policy review meeting on 14 May 2009. This is always an important event as it provides the market with insights into the thinking of the SARB.

The US markets are up +20.6% since the S&P500 index hit 676 on Monday 9 March 2009. In turn, the JSE has advanced by 14.6% since 9 March 2009! The question is how far and for how long will this rally last, or is it just a bear market rally?

The nature of a bear market rally can be identified as follows: on average a 21% growth in four months, with complete reversal of out- and under-performers. There have been nine bear market rallies since 1970. Bear market rallies are driven by the hope that the unwinding effect of monetary policy will succeed. Bear market rallies are too big to overlook.

In the past week the retail stocks rallied with the market. The clothing retailers rallied on positive news of the SA Reserve Bank’s now more frequent, monthly Monetary Policy Committee ("MPC") meetings and an apparent turn in retail sales (up 1.7% y/y at constant prices in Jan 09). Important to note however, is that Kagiso/BER expects real disposable income to reach a trough only in 2009 at a y/y change of 0.8% from 2.8% in 2008. In line with that, final consumption expenditure by households will likely slow to a 0.4% y/y increase in 2009 from a 2.6% increase in 2008. FCE should accelerate again to 2.5% y/y in 2010.

The more defensive food and drug counters are clearly missing out to some extent on the potential interest rate and turn in retail spending euphoria, probably as investors keep in mind the potentially sharp expected declines in the inflation rate. Headline CPI averaged 11.5% in 2008 and Kagiso/BER expects a drop to an average of 6.5% in 2009.

The economic indicators released during the week confirm the view that we will see aggressive interest rate cuts during the course of 2009. We expect the prime overdraft rate to be 350 basis points lower by the end of the year to a level of around 11.5% from the current level of 15%.

On paper it appears that the "stars are aligned" in favour of the retail sector, suggesting that one should buy into the recent run that the retail stocks have experienced. But beware of over-paying… we’re not out of the woods yet.

The market started 2009 in a sorry state. During the first two trading weeks of 2009, the All Share Index lost around 2.2%, driven by resources (down 1.4%) – and this after we lost more than 23% during 2008. To put the 2008 drop in perspective, this was one of the worst calendar years in almost five decades – since 1960, it seems that only 1970 was worse.

2008 has been a year of extremes – we have seen exciting new highs, extreme volatility and multi-year lows. The JSE All Share index surged to an all time high on 22 May reaching a level of 33 233, just to turn around and plummet to 17 814.42 on 20 November, the lowest since 20 December 2005.

As economic conditions deteriorate world-wide, and markets have fallen to almost five year lows, the question is when is the time to start buying equities again. Although difficult to make a call in a bear market, there is still value in certain sectors. Looking at macro economic factors, including the falling oil price, the Rand looks stable between levels of 10.10 and 10.50 to the Dollar, and with the poor quarter-on-quarter GDP figures falling to a mere 0.2% from a previous 4.5%, we believe that we are entering a downward cycle in interest rates.

It was the first time in three months that the JSE enjoyed four consecutive days of gains, last seen in August of this year. What makes it even more noteworthy was the fact that this was against the background of mixed economic and company news.

Markets are being dominated by two major themes – the debate around the US Automakers bailout and the sharp movement in local money market rates.

True or false?

Consumption is roughly 70% of GDP True

Consumers face major headwinds (eg. high unemployment, tight credit) True

Consumption is likely to be more constrained compared to past recoveries True

The economy cannot grow or recover without robust consumption growth False

At 55.2, down slightly from 56.1 in January, the JPMorgan Global Manu-facturing PMI posted its second-highest reading in almost four years.

The cost of insuring debt issued by European sovereign borrowers rose Friday as a weaker euro, speculation in the market about losses at French banks and concerns about Hungary added to persisting doubts over economic recovery in Europe.

In a nutshell: Strong May retail sales numbers and forecasts for CPI inflation to accelerate in 2011 argue against a further rate reduction, but it should be another close call.