Breaking news from SARB

Breaking news from the South African Reserve bank - the offshore or foreign investment allowance has been increased from 4 million rand to 5 million rand per annum

Investments and the tax implications

Understanding the tax implications of Investment

24 October 2011

By Matthew Lester, Professor of Taxation Studies at Rhodes University, Grahamstown

Investment returns have been under huge pressure in recent times. The prime interest rate is at its lowest level since the 1970s. And the Johannesburg Securities Exchange has been trading in a band of 30 000 – 33 000 points for nearly two years. All of this makes it all the more imperative that the investor understands the tax implications of investment so that the South African Revenue Service (SARS) does not walk off with a substantial chunk of whatever returns are achieved.

The two crucial components of tax investment strategy are:

1. Understand ‘the quality of income’ received or accrued to the taxpayer
2. Understand ’the category of taxpayer’ receiving the investment income and the tax rates attributable thereto.

The quality of income
There are three qualities of income for tax purposes:-

Exempt income

• In most instances exempt income consists of South African dividend Income.
• Foreign Dividends are mostly taxable.

• Most of the ‘tax free instruments’ associated with our past have now mostly been withdrawn.

Investors must exercise caution with regard to dividend income in the following circumstances:-

• Preference share dividends can be deemed to be interest income (and fully taxable) where the preference share (or a similar instrument) is issued for a period of less than three years or the holder has some or other right to sell the share or cause it to be redeemed within three years.
• Extraordinary dividends can cause the recipient to incur capital gains tax if the share is sold within the short term.

Dividends tax is scheduled for implementation in South Africa on 1 April 2012 but will have little effect on these principles.

Revenue Income

• Interest Income

Interest receipts are recognised as fully taxable and accrue to a taxpayer as it accrues on a day-to- day basis in terms of section 24J of the Income Tax Act. Premiums and Discounts on redemption of instruments are subject to these provisions as well.

It is critical to note that interest rates have reduced substantially in recent years.

There seems to be little prospect of rates increasing due to a fundamental change in the policy of the Reserve Bank, especially as economic conditions remain very difficult. This leaves the fully taxable investor receiving a mere 3 – 4% after-tax return on interest, a rate that can sometimes be achieved in tax-free dividend yield.

• Trading Profits

Obviously trading profits are fully taxable. The problem arises, when is the profit from trading and when is the profit from investment. This is a question that has stumped many investors over the years.

Without going into too much depth, the deciding factor when dealing with a share portfolio is whether the gain results from:

• an actively managed portfolio (giving rise to a fully taxable revenue gain), or
• a passively managed portfolio (giving rise to a partially taxable capital gain).

Enquiry has to be conducted into how the portfolio managers behave. If they are actively monitoring the portfolio on a day to day basis and making decisions based on predetermined benchmarks of performance, it can be very difficult to defend a fully taxable position. This represents an enormous risk to the taxpayer.

When in doubt the taxpayer is probably best off by simply maintaining an investment position for at least three years, whereafter the proceeds from sale of most shares are deemed to be capital in nature and only partially subject to tax.

Often taxpayers find it easier to protect their capital gains position by investing through Collective Investment Schemes rather than through individually managed private portfolios. Simply put, it is very difficult to maximise the investment potential of a portfolio without creating an actively managed portfolio (the gains from which are subject to tax in full).

• Capital income

Capital income arises where there was no intention to trade with an asset and it was held ‘for better or for worse’, or so to say ‘for keeps.’ Prior to the introduction of Capital Gains Tax on 1 October 2001, capital gains were tax-free exempt income. Today capital gains are taxed at rates ranging between 0 and 22% according to the type of taxpayer.

Conclusion: Quality of the income
Given that the quality of the receipt of accrual can give rise to a tax rate of anything between 0 and 40% the investor has to take into account the quality of the income prior to making an investment decision.

Thereafter the investor is in a position to choose the type of investment vehicle (or type of taxpayer) that is most suitable to be in receipt of the income.

Category or Type of taxpayer or investment vehicle
Once the investor has analysed the quality of income it is then necessary to address the type of taxpayer to be in receipt of the income.



Most investors prefer to receive income in their own names where it is taxed at the personal taxpayer rates. Although the top rates of personal tax in RSA are the highest of all tax rates one needs to recognise that individual tax rates are applied to taxable income (after deducting allowances) and on a sliding scale, after which rebates are granted.

The general tax threshold (for individuals less than 65 years old) is currently R59 750; for those 65 – 75 years old R93 150; and those over 75 years old R104 261. This represents the level at which they actually start paying tax.

However there is also the tax-free interest allowance. The general allowance is R22 300 (for individuals less than 65 years old) and R32 000 for those over 65 years old.

Putting the tax-free interest allowance on top of the tax threshold one gets the actual level at which a person starts paying tax on investment income in retirement. The general tax threshold (for individuals less than 65 years old) is currently (R59 750 + R22300 = R82 050), for those 65 – 75 years old (R93 150 + R32 000 = R125 150), and those over 75 years old (R104 261+ R32 000 = R136 261).

Added to the above is an annual tax-free Capital Gains Tax Allowance of R20 000.

Before even looking at the different investment alternatives available to investors it is appropriate to acknowledge the different categories of the RSA population when it comes to tax.



Trusts
There are many misunderstandings about the taxation of trusts.

In short, unless a trust can be classified as a ‘special trust’ for tax purposes, it will be taxed at the flat rate of 40% on revenue income and 20% on capital Income.

Special trusts are not that common and are generally trusts established for disabled persons or Will Trusts where the youngest beneficiary is less than 21 years old.

It is possible to reduce the inherent tax rate of a trust by causing the income of the trust to ‘flow through’ the trust and be taxed in the hands of the beneficiaries (at the lower individual tax rates). This is achieved by causing the income to ‘vest’ in the beneficiaries and that may not necessarily achieve the investor’s intention.

The use of trusts must be very carefully considered and specialist advice is most often needed in establishing and administering a trust.

Insurance policies
Many investors completely misunderstand the taxation of insurance policies, believing that the returns they generate are completely tax free. This is incorrect. Tax is imposed within the policy and the after tax proceeds accrue to the investor when the policy matures.

The tax rates on insurance policies have been stable for many years and are supposed to represent the average tax rate of all South Africans, being 30% for revenue income and 7.5% for capital income. Taxpayers have to earn more than R325 000 per annum before they will be any better off paying tax within an insurance policy rather than in their own names.

Second hand insurance policies
Capital Gains Tax is imposed as an additional tax on second hand insurance policy withdrawal benefits. For many investors this has made the second hand policy experience more or less obsolete.

Company tax rates
Corporate tax rates are the lowest of all at 28% and this often sends investors off in the wrong direction.

Yes it is true, a wealthy investor stands to reduce tax on interest receipts from 40% to 28% by investing through a company. However,

• The investor should rather be saying ‘should I not be investing in equities. Not because of the tax rate, but rather because the interest rate is so low. Saving 12% on a 6% return does not amount to much; or
• What about the administrative expenses of running the company; or
• When ultimately I withdraw the after tax income from the company, the STC is paid at 10%. This increases the total corporate tax charge to 35,2%; and
• If the company invests in equities then the CGT rate on the returns will be 14% plus STC, resulting in a combined effective tax rate of 22,6% - more than double the CGT rate applicable to the individual.

Exempt Institutions

Exempt institutions generally carry out charitable or philanthropic activities and have little place in the investment debate.


10 concluding observations

1. Very few South Africans need complicated investment structures.
2. Most South Africans would be better off concentrating on maximising the returns on their investments than protecting their returns from taxation.
3. Taxation can be contained to a maximum of 10% capital gains tax on investment income if taxed in the hands of the individual investor.
4. Only when income exceeds R325 000 per annum is there any need to seek the protection of an investment vehicle.
5. Fully taxable interest income is a problem. Not so much because of the tax rate but rather because of the poor interest rates.
6. Fully taxable income can arise in forms other than interest. Fully taxable gains from trading in shares are of primary concern.
7. Before using any type of investment vehicle, always consider any further taxes, primarily CGT or STC that may be payable on withdrawal/maturity of the investment.
8. Before using any type of investment vehicle always consider costs of establishing and maintaining the vehicle.
9. It all goes to show that there is more to investing than just generating a return.
10. Most South Africans need a financial adviser to get the balancing act right and generate the best ‘after tax return’ without taking unnecessary risks.

Yet another profitable trade

Congratulations is in order! We bought Kumba during the past month and sold for between 15% and 35% profit. What a great trade. Investors will be happy.

One of our trades

We bought MTN at R136,60

Another successful trade

Just closed another successful trade - MTN installments bought about 3 weeks back sold today. Made a return of 17% on the deal.

On the lighter side of things...

Our newest offshore portfolio buys

For our offshore portfolio we have added the following stocks: Air products, Applied materials, Seagate. See the graphs for the reasoning behind our picks.

It's time to invest offshore as well - contact us now to find out how easy it really is!

Closing the Goldfields trade from July 6

We closed our trade on Goldfields from 6 July.
Bought shares at 98 Rand a share, sold at 115,50 for a nice profit of 17,50 and return of 17.8% in just over a month.

We close our short USDZAR trade for 1,5% profit on the portfolio

Our Forex trade on the ZAR USD - Yes, its going positive already!

We traded short on the ZAR vs. USD, thus if one looks at the attached graph we want the graph to move upwards.....

We used this trade as a hedge on our offshore portfolios and did not apply any gearing - for example if your portfolio is 125 000 USD, we only hedge 125 000 USD/ZAR. The return on this trade to date is 1% for the week (since opened).

We short ZAR vs USD

Time to do our old currency trade again, the ZAR is too strong and if we see good news from the US on the debt ceiling negotiations we could see the USD rally which will then put pressure on the ZAR etc.

Gold is breaking records

http://www.rte.ie/news/2011/0718/gold-business.html

Gold soars above $1,600 for first time

Updated: 09:55, Monday, 18 July 2011

The price of gold surged this morning above $1,600 per ounce for the first time in history.

1 of 1

Gold - Record-breaking surge continues

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The price of gold surged this morning above $1,600 per ounce for the first time in history, as investors bought the safe-haven metal amid deepening worries over the euro zone debt crisis.

Gold jumped as high as $1,600.10 an ounce in early morning trading on the London Bullion Market, as the precious metal extended its recent record-breaking surge which began on Friday.

This week, euro zone countries will seek to settle their debt crisis at an emergency summit to try and stop Greece toppling into default and dragging bigger euro economies into deeper trouble.

EU president Herman Van Rompuy has said the summit in Brussels on July 21 would focus on both the financial stability of the eurozone and future financing of the Greek programme.

Meanwhile, US politicians are wrangling over a deficit reduction plan which would allow President Barack Obama to avert a potentially catastrophic debt default in return for $1.5 trillion in spending cuts.

Markets has slid last week as the euro zone debt crisis, which has already sunk Greece, Ireland and Portugal, showed signs of spreading to Italy and Spain.

The European Union announced late on Friday that only eight of 91 European banks had failed so-called 'stress tests' which were designed to assess their ability to withstand a worst-case economic scenario.

A ninth bank, Germany's Helaba, said it had failed according to the EBA's standards but passed on its own calculation.

New forex trade for the day - long EUR

We think the Euro could strengthen in the very short term.

Forex trades for the day

We are buying Goldfields at R98.00

Should you buy or rent?

A very very interesting piece I came across worthy of sharing.

Conventional wisdom goes something like this: Go to school. Get a degree. Get a decent job. Get a mortgage. This particular nugget of common knowledge has never appealed to me...

A number of my friends have recently bought properties and I find myself having to explain why I choose not to own the flat that I live in. You see, I’m one of those people who choose to rent and today’s Angle looks at the decision purely from an investment perspective.

Which will give me the better overall return, to pay off a mortgage on my current flat or to rent it and invest the difference available in the equity market?

To answer this question will require a number of assumptions so please bear with me whilst we look at a few important issues.

House price returns

First and foremost: what return can one expect from house prices? The longest property index that I’m aware of is the “The Herengracht Index”, constructed by Prof. Piet Eichholtz[1]. This index tracks the transaction values of buildings along the Herengracht, a canal in Amsterdam, starting in 1628. In his paper, Prof. Eichholtz estimates that the real (in excess of inflation) return of the Herengracht Index from 1628 to 1973 was 0.45% p.a.

Prof. Robert Shiller publishes an index of house prices in the United States of America. In his book, Irrational Exuberance[2], Prof Shiller shows a graph of the real house prices since 1890. This index is updated on his website, www.irrationalexuberance.com. At present, the index suggests that USA house prices have increased by an annual real rate of 0.14% since 1890. If we only focus on the period since 1966, the real return was 0.18% p.a.

In South Africa, we can look at the Absa House Price Index. This index only goes back to 1966 but suggests that South African house prices have increased by a real amount of 1.5% p.a. over this period.

Based on the above, I think that assuming that house prices in South Africa increase at a rate of 1.5% p.a. in real terms is a fair, if not aggressive, assumption.

Mortgages

Since we are looking at the long term average returns, I will also focus on the long term average mortgage interest rates. The prime lending rate in South Africa has averaged 14% since 1966. Over the same period, inflation has averaged 9.3%.

If we assume that the bankers will like me and offer me 1% below prime, I should be able to borrow at an average of 13% over a 25 year period. For the purposes of our exercise, let us also assume that my friendly banker would require me to put down a deposit equal to 15% of the purchase price.

Property Costs

Let us further assume that the value of the (modest) home I am renting is R1.7million and that its market-related rental is R8 000pm with annual increases linked to the value of the property.

Property ownership costs

In buying, owning and selling a property, one will incur many costs. A quick bit of research suggests that the cost involved in purchasing a property lies in the order of R40 000. This covers the cost to register a bond and to conduct the transfer, but not the actual transfer duty which is calculated according to the purchase price of the property. I estimate the ongoing costs of ownership in the order of 1.7% of the property value per year. This would cover insurance, levies, maintenance, rates and taxes.

When one ultimately sells the property one inevitably incurs agents commission (in the order of 5.5% to 7.5% + VAT) and capital gains tax on any growth above the R1.5 million concession offered by SARS.

The equity market

My alternative to a property purchase is an investment in the South African equity market.

Over this same period starting in 1966, the JSE All Share Index has delivered an annual return (including dividends) of 8% in real terms. So, allowing for some generous asset management and other transaction fees, let us assume that the return that one can earn over the long-term from an equity investment would be inflation plus 6%.

A model of investment return

Right, those are the assumptions. Now let us look back to the initial question: Which will give me the better overall return, to pay off a mortgage on my current home or to rent it and invest any surplus funds in the equity market?

If I rent, I can invest the money I would have to have disbursed as a deposit and in respect of the initial property costs on Day One and can add to the investment for so long as the rental costs are below the monthly mortgage payment. This will require some financial discipline. If rents increase to a level higher than the mortgage payment, I will fund the difference out of the returns the investment generates.

At a current rent of R8 000 per month, the rental yield on the property is some 5.7% p.a.

This chart below shows the net value of an investment in the equity market, compared to the value of my flat if I were to sell both investments at different stages over the period of the mortgage.

According to the model that I built on these assumptions, I will be in a better position in 25 years by renting this property. In fact, by the time that I have settled the mortgage, I will have some R3.2million more than what I could realise selling the flat.

Do note that this calculation is particularly sensitive to the rental yield that I start with. My model suggests that as long as I can rent for a yield of below 6%, I will be in a better position by renting rather than buying.

For those who would like to construct their own model, here are all my assumptions:

• Purchase price of R1 700 000
• 15% deposit (R255 000)
• Long term borrowing rate of 13.0% (1% below the average prime rate of 14.0%)
• 25 year mortgage
• Inflation of 9.3% p.a. (the South African average since 1966)
• House price growth of 1.5% in real terms
• Maintenance, insurance, rates and levies of 1.7% of the property value
• Transfer duties of R53 000
• Initial purchase costs of R40 000
• Sales commission of 6.5% + VAT
• Capital gains tax of 10% on the gains if more than R1 500 000.

I will assume the following for the alternative investment

• An initial investment of R348 000 (R255 000 + R53 000 + R40 000)
• A gross rental yield of 5.6% of the property value at beginning of year
• A real return of 6% p.a. form the investment in the JSE.
• 10% capital gains tax liability

Some elements that I have excluded:

• The cost of appliances, furniture and DSTV that is included in my rental agreement
• There are benefits to the ease at which a mortgage allows you to leverage yourself at opportune times
• The special levy that the body corporate is currently charging to upgrade the lift in the building
• Some people will benefit from the forced saving a mortgage provides
• The luxury of having a landlord who I can call to sort out the mess when the geyser bursts in the middle of the night
• The fact that a man’s (or woman’s) home is his castle and that it feels good knowing that you can drive a nail into the wall (or break the wall down) if you want to

[1] Eichholtz, Piet M. A., A Long Run House Price Index: The Herengracht Index, 1628-1973. Available at SSRN: http://ssrn.com/abstract=598 or doi:10.2139/ssrn.598

[1] Shiller, Robert J, Irrational Exuburance, www.irrationalexuberance.com

This was written by Henno Vermaak.

An interesting piece by Matthew Lester, Professor of Taxation Studies at Rhodes University, Grahamstown

Retirement Benefits from Retirement Funds

13 June 2011

By Matthew Lester, Professor of Taxation Studies at Rhodes University, Grahamstown

The government policy is ‘partial taxation of the withdrawal benefit.’ Taxation is not imposed on withdrawal willy-nilly. There is a wide range of procedures to legitimately minimise or control the incidence of tax on withdrawal benefits.

There are also various misconceptions relating to the taxation of retirement fund withdrawal benefits. In addition, many relate to the approaches we undertook vis a vis retirement planning prior to substantial amendment to the second schedule of the Income Tax Act. Then add to the pot a variety of changes over the past 10 years that have been largely ignored.

The Way We Were

Commence with retirement planning as it was 20 years ago:

• Taxpayers’ contributions were tax deductible (no change).
• The growth within the fund was tax free (No change there either).
• Withdrawal by way of annuity income was expensive due to the very narrow income bands within the personal tax tables. The personal tax tables quickly escalated to a marginal rate of tax of greater than 30%.
• The tax exemptions relating to lump sum benefits contained in the second schedule of the Income Tax Act were considered generous.
• The taxable portion of lump sum benefits was subject to the ‘averaging concession.’ And there were a variety of ways to manage the average rate on retirement.
• Medical aid benefits were continued by the employer post retirement, often at full cost to the employer.
• There was widespread fear that a new Government would seek to access wealth in retirement funds as a way to fund the new RSA, either through taxation or prescribed investment. This acted as an incentive to exit retirement funds.
• Interest rates ranged between 12 and 22% per annum, thus there was no incentive for the investor to take on risk.

The above retirement strategies were essentially driven by the following rules of thumb:

• Leave as little as possible within the fund to be subject to tax on withdrawal at a high marginal rate.
• Exploit the second schedule to obtain the maximum tax-free lump sum withdrawal benefit.
• Maximise the loopholes within the averaging formula.
• Invest the after-tax lump sum withdrawal benefits in the money market using up the lower marginal rates of tax and the annual tax-free interest concession.
• If necessary, use insurance policies to contain taxation at a maximum rate of 30%.

The Way We Are

Now consider the extent of change over the past 20 years:

• The ‘Trevor Manuel era’ was committed to building a better deal for the individual taxpayer.
• Tax thresholds (i.e. the level at which one commences actually paying tax) have been increased for the 2012 year of assessment to:
  • Under 65 years old - R59 750
  • Over 65 years old - R93 150
  • Over 75 years old - R104 261
• The interest free abatement has been increased to:
  • Under 65 years old - R22 800
  • Over 65 years old - R33 000
• Thus the true tax threshold for a pensioner today is actually:
  • Under 65 years old (R59 750 + R22 800) = R82 250 or R6 854 per month
  • Over 65 years old (R93150 + R33 000) = R116 980 or R9 665 per month
  • Over 75 years old (R104 261 + R33 000) = R136 261 or R11 355 per month
• Now apply an inflation rate of 6% and a growth rate of 14% (a very optimistic outlook) and calculate the capital required to yield an income stream equivalent to the tax threshold for a taxpayer retiring at 60 today.
  • Under 65 years old (R59 750 + R22 800) = R82 250 or R6 854 per month for 5 years, today = +/- R337 000
  • Over 65 years old (R93150 + R33 000) = R116 980 or R9 665 per month for 10 years, in 5 years’ time = +/- R534 000
  • Over 75 years old (R104 261 + R33 000) = R136 261 or R11 355 per month for 10 years in 15 years’ time = R284 000.
• Total capital requirement to achieve tax threshold on retirement = R337 000 + R534 000 + R284 000 = R1 155 000

Moral to the story Number 1:

• Accept that annuity streams are taxable. But even with a very optimistic outlook on investment returns, capital of R1 155 000 would not actually generate taxable income.
• But the story goes even further --

It is not only the tax threshold that has increased. The marginal rates of tax have been softened considerably over the last 10 years to the extent that the 30% marginal rate now applies only when income exceeds R325 000 per annum.

Thus before there is a real tax problem:

• Thus the true tax threshold for a pensioner today is actually
  • Under 65 years old (R325 000 + R22 800) = R347 800
  • Over 65 years old (R325 000 + R33 000) = R 358 000
    All in R360 000 per annum or R30 000 per month
• Again apply an inflation rate of 6% and a growth rate of 14% (A very optimistic outlook) and a retirement age of 60 and a life expectancy of 25 years. Now calculate the capital required today to yield an income stream that would be below the 30% marginal rate. Answer R8, 045 million.

Moral to the story Number 2:

• Accept that the personal tax marginal rates now escalate far slower than they did in the past. The problem is rather to find a taxpayer with sufficient retirement capital to retire comfortably than to find a taxpayer with a tax problem on retirement.
• And the story does not end at this point.

The second schedule benefits on which the South African retirement planning principles have for so long been based were revised with effect from 1 March 2011 as follows:

All termination payments: Death, retirement or retrenchment

• Don’t look a gift horse in the mouth. If R630 000 displays at an acceptable tax rate then by all means take it.
• SO THAT’S R630 000 TAX EFICIENT ON RETIREMENT
• But wait, there is even more!

Medical expenses are probably the largest single problem in retirement. And there is no medical aid instrument available to save for retirement on a tax-deductible basis. Basically put, the deduction of medical expenses is capped for the under 65 taxpayer.

This does not mean that the taxpayer cannot contribute to a retirement annuity fund that will provide an annuity stream to pay medical expenses and medical aid contributions post retirement.

In short, contributions are made on a tax-deductible basis to a retirement annuity fund - as opposed to adding to any other fund or medical savings plan.

Once retired the taxpayer withdraws taxable annuity income from the retirement annuity. But at 65 years old the taxpayer undergoes a substantial change in tax profile:-

• The income drawn from the retirement annuity fund may remain taxable but
• medical expenses become fully tax deductible.

Moral to the story Number 4:

• Just because an annuity stream is taxable, this is not the end of the world in retirement planning, provided it can be matched with an equal and opposite to tax-deductible expense.
• An ‘executive level’ medical aid currently costs approximately R3 000 per principal member per month. Thus, assuming such a medical aid is required for 20 years in retirement, and applying a 9% inflation rate and a 14% growth rate, the capital sum required to cover medical expenses in retirement would be R453 000. That’s the bad news.
• The good news is that all contributions to the retirement annuity fund would be tax deductible, thus potentially discounting the cost by up to 40 percent.
• Want some more?

The new South Africa works on the basis of ‘one-taxpayer-one-tax return’. The joint taxation of husband and wife had to be abandoned in the early years of the new South Africa as it made for the inconsistent treatment of taxpayers.

With retirement planning, most often there is ‘planning for two’. That gives a doubling up of all allowances across the board. Thus, diagrammatically the classic retirement plan of a new South African family today looks something like…



Please be mindful that a ‘spouse’ for income tax purposes includes any person in a relationship of a permanent nature.

Moral to the story Number 5:

• Correctly planned the RSA taxpayer can save up to R9 million in a retirement fund without incurring a tax charge exceeding 30% on withdrawal. This is based on an optimistic outlook on both inflation and investment returns.
  
  An integral part of retirement planning is the creation of a separate suite of investments and solutions for both husband and wife. Please be mindful that a ‘spouse’ for income tax purposes includes any person in a relationship of a permanent nature.
  
  Some say that there are no tax planning opportunities remaining in the income tax act. Perhaps there are more than ever before.

And then comes the cherry on the top. Yes, there is one!

On death, the value remaining within the retirement annuity funds is exempt from taxation

US Bonds downgrade

German Rating Agency Feri Downgrades US Government Bonds: AAA to AA!

On June 9, 2011, In Big Picture, Economy, Markets, Smart Money Europe, By Smart Money Europe
Tags: Feri Downgrade US Debt, US Debt Downgrade, US Debt Downgrade 2011, US Government Bonds AA, US Government Bonds AAA, US Government Bonds Downgrade 2011

The first Western downgrade of US government bonds is a fact! The German credit rating agency Feri lowered its rating on US debt by a full notch, from AAA to AA.

Rock Capital Equity Fund and Managed Futures performance to end May

The Rock Capital Equity fund returned the following numbers;

Since inception January 2011: +2.35%
ALSI over period: +0.84%

Rock Capital Equity Fund..................... ALL Share Index
Jan -1.64% ..................................................................-2.24%
Feb +2.25% ................................................................ +2.78%
March +0.94%............................................................ -0.21%
April +3.43% ..............................................................+1.96%
May -2.53% ............................................................... -1.36%
---------------------------------------------------------------
Total +2.35%................................................................. +0.84%

Managed futures account (One Million Rand Investment Club or as we affectionately call it OMRIC)
Past 12 months +22.34%

Jun 2010 +4.50%
Jul 2010 +15.45%
Aug 2010 +3.92%
Sep 2010 +7.35%
Oct 2010 -4.63%
Nov 2010 +2.25%
Dec 2010 +1.62%
Jan 2011 -0.7%
Feb 2011 +3.2%
Mar 2011 -5.31%
Apr 2011 -1.54%
May 2011 +0.32%

Total return for 12 months = +22.34%

Should you wish to enquire about any of our funds or products, please do not hesitate to contact me at 086 000 ROCK (7625) or pierre@rockcapital.co.za

Safe trading

USA food stamps

Latest data for the US Supplemental Nutrition Assistance Programme......... released may 27.... covering March 2011.... food stamps ..........44.58 mio Americans now receive food stamps, up from 40.12 mio in march 2010- corresponding to every 7th person in US now receiving food stamps.....

Silver, has it turned?

50USD by year end? We think so. Some pundits are even calling for 150USD, although we don't think this is on the cards for 2011. The market has shown in the past that such moves are indeed a possibility (albeit remote according to us).

Long Microsoft

Monopoly, selling software around the world, 90% of all PC's run Windows OS on a 10 pe etc, do we need to say more....

So we just went long at 24.69USD for our off-shore portfolios.

Closed short USDZAR position

We closed our USDZAR short booking a tidy profit.

We think the SA market could do a bit better for the next week or two, stronger ZAR mainly because a good election, no violence etc.

We are looking at AGL, BIL, MTN, BTI and CPI at the moment.....

Pierre

The market and short ZAR

I feel that we are seeing so much good news and the market just does not respond to this going up more, this is always worrysome so I am really keeping an sharp eye on the short term news flow for now.

We just took a very short ZAR vs USD position at 6.75, it seems like the USD wants to strengthen a bit after the recent sell-off. We will be looking to sell this position at around 6.85 to 6.92.

It's Easter weekend and time to close some long positions, why pay interest on geared positions for 4 days and run event risk as well. The markets closed for 4 days is a long time in a trader's life.

Enjoy your Easter and drive safe!
Pierre

Close of ZARUSD trade

We have just closed our long position on the ZAR vs USD at R6.85, locking in a 2% profit.

A few months ago the correlation between the markets and the EURUSD exchange rate was fairly strong, but in recent weeks it looks like it has broken down since the markets have pulled back while the Euro continued to strengthen against the greenback.

Safe trading

Possible triple top formation on the EURUSD

A Triple Top is a pattern very similar to the Double Top -- only there are three distinctive tops rather than two. A triple top formation is a distinct chart pattern characterized by a rally to a new high followed by a moderate pullback and a second rally to test the new high. As the stock rallies to make the second peak (top) sellers overwhelm buyers and the stock price falters again This process is repeated a third time but buyers finally submit, support levels are broken and a massive decline ensues. - http://chart-patterns.netfirms.com/tripletop.htm

Markets looking to run out of steam

The past 3 days the markets have been pulling back a little bit.

When studying these two graphs, the top one is the JSE ALSI Future and the bottom one the Dow Jones Industrial Future, the moving averages have crossed and it looks like the market is losing momentum.

Also looking at our big counters like SASOL, ANGLO and BILLITON the pictures is basically the same, since they make up about 35% of the ALSI Future due to their size in relation to the market.

PPI and unemployment claims are released at 14:30 out of the US and it looks like the economic news is also on the weaker side.

To play it safe I would take profit on my trades if you haven't yet. To go short in this market is a totally different question altogether.

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A pullback on the cards?

As per my previous post, the market went and tested the previous level around 29900. It tested it again yesterday but couldn't break through and pulled back around 400 points this morning.

We think that the market will pull back a little before it goes up again. Taking profit around current levels could be a good idea. It looks like the market is losing momentum and will test the 200 day moving average again.

Volatility will start to pick up as we kick off the earnings season in the USA with Alcoa reporting not such great figures last night.

I think we could test 29000 on the ALSI quite soon.

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Are you quaking in your boots?

The recent natural disaster in Japan was the catalyst for the correction that was due.

It created a nice opportunity to buy stock at more reasonable levels. It looks like the relief rally is over and volatility is more subdued for the moment.

We are still in a strong bull market and we expect the market to test the highs again.

There are rumours of Portugal needing a bailout thus igniting the embers of the European debt crisis again.

We'll probably see some volatility which will create enough trading opportunities. So don't use too much leverage since opportunities will be aplenty.

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NAV on Reinet

The NAV of Reinet is R14,11, and the Spot price is R11.09, a simple calculation tell us that the discount is 25.5% and that should Reinet unbundle all their BATS (British American Tobacco) shares to shareholders and one sell these shares in the market one would receive R11,40 per Reinet share, and the rest of Reinet is for free.

Reinets total assets are R27,272,028,032 with 1,959,412,860 shares outstanding.

We trade Reinet (buy at R11 to R11,10 and sell at R11,60 to R11,80)

New highs

Oil is currently trading above $100 per barrel. The catalyst being the unrest in Egypt with fear that the Suez canal could be closed for traffic.

Markets around the world are reaching new highs due to strong earnings results and better economic statistics.

The recovery has gained traction and interest rates are low, which is beneficial for stocks.

We've had two fuel price increases with a third one looming at the end of February, which looks to be the biggest one so far. It won't be too long for inflation to start rising and thus interest rates to start rising too.

It looks like we've hit the bottom of the interest rate cycle for now with an increase in the prime lending rate on the cards during the second half of 2011.

Wait for pullbacks to go long. We're in a very strong bull market and going short is a definite gamble.

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Steady ahead

Trading yesterday was a bit lacklustre with volumes subdued. The American markets were closed due to Martin Luther King Day being celebrated.

One does get the feeling that the markets has had a good run and that a correction is due. But, it seems that the markets have stabilized and have been taking the bad news in its stride.

Earnings season has kicked off in the US and companies such as Alcoa and Intel have reported better than expected results. Apple and Citigroup report results today.

With volatility at fairly low levels, we expect the market to trade sideways or creep upwards slowly, until the next event. The markets can even be boosted by better than expected earning results.

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2011: The year ahead

2010 ended on a high note and 2011 started off well.

Debt contagion fears are the flavour on the news channels at the moment with the market speculating that Portugal will be forced to take a bailout and Spain to follow.

The strength of our currency is protecting us from inflation at the moment. Just look at what soft commodities such as wheat and corn are doing price wise. Oil is also flirting with the $100 per barrel level, which will have an effect on the pace of inflation.

Commodity stocks could be an attractive investment for 2011 as the world economies pull themselves out of the financial crisis. It looks to be a long walk before we are out of the woods yet.

If the Euro debt situation can be contained properly, we should expect less volatility in 2011.

Safe trading