Climbing Walls of Worry – MR

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Is this the bottom (Paying to Lend Money)?

An interesting thing happened in the first week of December, the retail 3-month USA treasury rate dropped into negative. In other words you pay the USA government to keep your money. This is clearly not a long term solution to life’s investment questions. Especially considering that the Fed is dishing out bailouts in $100bn spoonfuls.

Investors may therefore decide that since the alternative of giving their money to banks is even worse, taking some risk on equities may be the only alternative. This is especially so because investors can earn a couple of percent more on dividends than the 10-year bond rate. This is pretty close to unprecedented.

Climbing the walls of worry

Equity markets seem set to rally. The South African market appears to be no exception in this regard. Risks however abound as a dividend valuation is only meaningful provided that dividends are relatively safe. The key to us will be to look for companies that have some degree of security in their future earnings profile. Another truism is that markets climb walls of worry and it is often when markets are appreciating in the face of bad news that extensive rally’s occur. There is certainly no shortage of things to worry about in the world economy at this stage. We see a very severe recession playing out in most of the world economies next year. However 2009 should be a year for the courageous to buy stupendous bargains in the midst of chaos.

We would see the period of Dollar strength coming to an end with the Euro in particular rallying strongly. This will offer some respite to the Rand and allow the Reserve Bank more leeway in reducing interest rates in the New Year.

We would like to wish all our investors a time of wonderful relaxation and refreshment over this holiday season.