RARE OPPORTUNITIES - FOORD COMPASS DEBENTURES - LAST DAY TO TRADE FOR 5% INTEREST PAYMENT

The market constantly provides us with opportunities to act in our own best interest; and this is one of them. In just about an hour from now, the market will close and the opportunity will be gone. Sure there will be another one, but this particular one will not come by again.

Foord Compass Debentures (FCPD). We are not going to waste time explaining exactly what the company is all about or how this particular debt instrument works. Simply, it is currently on offer for R8.69 and it is the last day to trade for a 49 cent interest payment. That is a yield of 5.6%.

Not only that, we estimate that the next two cash-flows coming from FCPD will come in at 50 cents and 52 cents, each 6 months apart. So let's say that is R1.50 from FCPD in 12 months. So lifting the offer at R8.69 means that in 12 months you will have yielded an estimated 17.2%. 

I've added a weekly chart for those who want to see it. Less than an hour before the market closes.

FCPD - Weekly Chart

SA a debt timebomb, warns expert

Cape Town - Some credit providers allow consumers to use up to 70% to 80% of their monthly income to repay debt and this practice is reckless and immoral, Octogen director Paul Slot charged on Tuesday.

Slot said consumers who allocate more than 40% to 50% of their earnings to service debt may battle to meet normal household expenses. 

In South Africa, the total consumer debt has increased by 22% over the last four years and is currently at R1.39 trillion.

The amount of credit active consumers increased by  8.5% to 19.69 million over the last four years, with 47% being behind in repayments.

Also, unsecured debt has increased by 156% over the four year period and this results in increased short term debt, more expensive debt and a higher monthly debt repayment, according to Slot.

Although credit providers refute talks of a consumer debt crisis, the fact remains that millions of consumers are in crisis mode and need assistance, said Slot.

Why is it so difficult to rectify this position? 

"Many consumers are in a crisis mode simply because they do not have sufficient funds to service debt after paying normal household expenses.

"Any shock to the ability to repay debt such as cost of credit, price increases, salary increases, value of assets financed or unemployment will aggravate the situation," said Slot. 

For most consumers tackling a debt problem is a daunting task and it can take several years for them to reduce the debt burden.

This may be one of the reasons why so many consumers use new debt to repay existing debt. "This is obviously not a solution but rather an aggravator of the situation," said Slot. 

Slot said excellent progress has been made in South Africa with rescheduling consumer debt and more consumers should make use of the options available to solve their debt woes. 

"In the first place the National Credit Regulator (NCR) allows debt counsellors to pursue reckless credit but a lack of incentives and a dedicated process is a cause of concern.

"Secondly, credit providers have an internal restructuring program and thirdly the current bold industry agreement allows for massive reductions in the cost of credit to the consumer as part of the formal debt review process and this solution should be used by more consumers." 

However, Slot said, an amendment to the NCA is long overdue, but active support of the NCR and the government could improve the effectiveness of implementing the formal debt review process, which includes the industry agreements. 

Currently consumers under debt review pay R300m a month to credit providers, however, many consumers who entered into debt review a few years ago are now debt free.

Slot said a solution that has been implemented with great success in other countries is "out-of-court restructuring of all debt" but this solution is not available to consumers in South Africa. 

Where consumers are not able to repay debt over a reasonable period, a “poor man” sequestration is also not available in terms of current legislation, added Slot.

By: 28E Capital (Pty) Ltd

TECHNICAL VIEW ON BHP BILLITON PLC (BIL)

Usually when looking for trades, one starts with the longer time-frames and works ones way down to the shorter time-frames and since my English teacher once warned me that using the term 'one' traps one in a paradoxical situation where one can no longer use any other term other than 'one', I will be switching to 'you'. So, when you are looking for a trade, you normally start with the longer term time-frames and work your way down to the shorter term time-frames. This allows you to find the good strong weekly trending shares, then down to the daily for confirmation and then onto the 1 hour picture to try and optimise entries and exists. 

In this case though, we are already in the BIL trade, I will start with the smaller time-frame and work my way up. Now before going any further, you must understand the nature of this particular trade. This is exactly what the name suggests, a trade, not a long term investment but a short term trade aimed at making a percent to add to the kitty. 

Ok then, first up is the 1 hour picture. Here I have indicated a few things:

1.) The entry trigger - Trend line that was broken

2.) The target for the trade - A recent high

3.) A bearish signal - A Shooting Star candle formation (the reason for thinking about the trailing Stop-Loss)

4.) The trailing stop-loss - trend line that if broken, will trigger an exit out of the trade

BIL - 1 hour

Perhaps getting out when that trailing stop-loss is triggered will be too soon as we know that nothing moves up (or down) in a straight line. None the less, we can always buy it back and aim for the R307.50 target after it has retraced a little.

Moving on to the Daily picture, a few things stand out:

1.) The trend has changed to Bullish - Indicated by the circle as there is a convergence of moving averages as well as a price move above that all important 89 moving average

2.) The long trigger line is made a little more clear

3.) The price is moving up from an oversold position - Bodes well for a bullish move

4.) Longer term Fibonacci price target - Target is R320.00 and since this is Fibonacci

* There is also bullish divergence here, but I think that someone should point it out in the comments, or mail a chart that shows the divergence to me (petri@rockcapital.co.za) and I will then put in on the blog as part of this write up. Only one way to get interaction from your readers and that's to make them work a little ;)

BIL - Daily

So that there is a much bigger target on the daily picture than there is on the 1 hour picture, you might find yourself asking why we are not targeting R320.00 but rather R307.50 and the answer is rather simple. Well maybe not that simple, but simply put, the strategies used for shorter term time-frames and longer term time-frames are different. This is too much to get into now, so I will leave it at that for the time being.

Again, moving onto a higher, or longer, time-frame - the weekly. Here we see a few things happening all at once:

1.) There is a very large symmetrical triangle with a very large target - it's very far away and will probably take years, but hey, inflation is on our side and it will probably reach there at some point

2.) Recession Fib showing key support and resistance levels - see how that Fibonacci target on the daily almost lines up with the high's of old? 

3.) It looks slightly overbought and the volumes are starting to fade a little - this could indicate that it is going to come back to test that triangle break out before moving further up, although note that this is a weekly chart and that re-test can take weeks or months to play out, just like reaching the target for that triangle can take years

*In general though, it does look pretty bullish. 

BIL - Weekly

And that in a nutshell is a, although done backwards, technical view on BHP Billiton PLC. Please leave your questions and comments below and we will be happy to respond to them. Also don't forget that if you spot the Bullish Divergence on the Daily Chart, email me at petri@rockcapital.co.za and I will put in here.

INVESTMENT CASE - ELLIES HOLDINGS LTD (ELI)

When looking at Ellies Holdings Limited (ELI), it was difficult to pin down the one thing in this company that is has going for it. The truth is, there are just too many for simply one to be considered the 'most' important. So instead of trying to identify just one reason why Ellies would make for a good long term investment, we will rather discuss - briefly - some of the activities of the company.

Starting with the part that everyone probably already knows; Ellies imports and manufactures electrical products ranging from light-bulbs to DSTV remotes.  Included in this list are things like; alarm systems, power-surge protection accessories, terrestrial and satellite receivers, generators, you get the idea. Generally all things that are, well, needed for everyday life in Africa. Then on the more industrial side of things, Ellies manufactures large and small power generation and power management solutions, as well as electrical switch-gear and mini-substations. So that means that they make the everyday things that none of us realise we need, as well as the everyday things that none of us realise we're using.

Another interesting observation regarding Ellies is that they take ownership of the entire supply chain of their products. Sure some they import and some they manufacture, but they prefer to control the product from start to finish. In other words, everything from manufacture/import to marketing and sales, packaging and distribution; they manage the entire process and perform all the individual tasks themselves, from start to finish. Even new DSTV installations. Well ok, that they outsource, but you can still go to their website and arrange it through them.

Further, they are making inroads into Africa via their Megatron business which manufactures those power management solutions and large, large generators mentioned earlier. This business looks promising when seen in the light of the continual development of the African continent. Also worthy of note is that they supply data centre solutions as well, which should provide for good organic growth as the internet spins it webs across our continent.

Then onto some of the more well known activities of the company. These are the Eskom Power Save project and the SABC Digital Terrestrial Television project. 

Starting with the Power Save project; it is a joint venture between Ellies Renewable Energy (a division of Ellies Holdings Ltd) and Eskom to distribute power efficient light bulbs and geyser timers by leveraging off Ellies' existing distribution network. The project started in February  2012 and to date has created roughly 3000 jobs, removed about 75 Mega Watts from the power grid and installed geyser timers and halogen light bulbs (free of charge) to about 410 000 households. Naturally, Ellies expects that this project will continue into the near and foreseeable future.

Next up is the Digital Terrestrial Television project; SABC has committed, along with various other role players and broadcasters in the CEMEA region (Central Europe, Middle East and Africa) that it will transmit all terrestrial television broadcasts digitally by 2015. Ellies is positioned to supply the STB (Set to Boxes) to the public via retail channels as these will be required to receive and decode the digital signal. There are just over 10 million television watching households in South Africa with about 80% coverage rollout planned over 2 years starting in 2013 and ending in 2015. This means that most people will have to go out and buy one of these units and therefore, Ellies stands to make healthy profits from this rollout.

Looking at  some of the financial ratio’s we see that Ellies offers a Return on Equity of 21.62 and Retrun on Assests of coming in at 20.52. These aren't the greatest numbers in the world, but it is good. Currently the PE Ratio is at 15.6, which is a little high, but once the income from the Digital Terrestrial Television starts coming in, we suspect that this ratio will drop, but only momentarily as investors scramble to jump on board.

Turning our attention to Technical Analysis; we can clearly see the the impact the Power Save project had on the share price and the sentiment surrounding Ellies, which could perhaps explain the inflated PE Ratio, none the less it has formed a very healthy and strong uptrend. 

ELI - Weekly Chart

Looking slightly closer, at a daily chart, we see that there is a strong primary trend in place as well as a slightly steeper secondary trend. Do not let a break of the secondary trend scare you, it is the primary trend that is the most important. Perhaps that secondary trend does not break any time soon and continues to hold for some time into the future? It would then be a good idea to buy some stock now, as it is in that area where you would like to be accumulating. However, if you buy now and it does break the secondary trend, do not fear  as (was mentioned) the primary trend is the one to watch.

ELI - Daily Chart

As always, please feel free to leave comments and questions and we will be happy to get a conversation going.

THE 10 RULES OF SUCCESSFUL TRADERS

Trading the markets can be one of the most difficult disciplines to master and the reason for this is that there are really not very many rules to trading. Other than the exchange rules which govern trading times and other such things, in the trading environment traders can do whatever they like. If you think about it, you can go long or short, stay in the trade for 10 minutes or 10 years. The only real rules that apply to your trading are the rules that you create and enforce on yourself.

Discussing the many thousands of different rules and strategies that people have come up with is not really the aim of this post, but rather to focus on 10 guidelines, or lifestyle rules that successful traders live by - as identified by Mike Bellafiore.

These are:

1. Successful traders have meaningful attachments or some other source of motivation and happiness outside of the financial markets.

 

2. Successful traders are proactive, they know what they need to learn and they know what they need to do in order to execute. Being active alone is not sufficient.

 

3. Successful traders tend to be process driven, they develop and refine routines that turn good trading behaviors into habits and execute these routines habitually.

 

4. Successful traders have a unique signature, they have an edge that they execute consistently and improve constantly.

 

5. Successful traders treat every trade as a learning opportunity, especially losing trades.

 

6. Successful traders identify their A+ setups, best products, and optimal timeframes that are most intuitive for them and work to maximize their production in those ideas

 

7. Successful traders avoid thinking in dollar terms, they standardize in terms of percentages to measure performance as well as put on risk.

 

8. Successful traders have a sniper mentality, they are prepared to wait for as long as it takes and ready to pull the trigger when a valuable targets appear in their scope.

 

9. Successful traders have a comprehensive set of measurable and challenging yet realistic goals, they regularly evaluate their progress and always ask what they need to do to make further progress towards their goals.

 

10. Successful traders use all their resources to improve, particularly other traders.

We hope that you find these useful and in some way applicable to your own trading style. Stick to the rules above and the rules of your particular or individual strategy and we are sure that you will have another successful year of trading.

WHAT IS THE DEBT CEILING?

Definition: The national debt ceiling is a level imposed by Congress on how much debt the U.S. can carry at any given time. The debt ceiling is only imposed on the "Statutory Debt Limit," which is the outstanding debt in U.S. Treasury notes adjusted for unamortized discounts, very old debt, debt held by the Federal Financing Bank and guaranteed debt. It's a little less than the total outstanding debt recorded by the national debt clock.

Congress created the debt ceiling in the Second Liberty Bond Act of 1917. It allowed theTreasury Department to issue Liberty Bonds so the U.S. could enter World War I. It also gave Congress the ability to control government spending.

Why the Debt Ceiling Matters

The debt ceiling forces a conversation between the President and Congress to become more accountable in fiscal policy. Without it, the annualU.S. budget deficit pushes the national debt higher and higher. That's because there is very little incentive for politicians to curb government spending. They get re-elected for creating programs that benefit their constituency and their contributors. They also stay in office if they cut taxes. Deficit spending does, in general, create economic growth. There's only a concern if the debt to GDP ratio gets too high -- above 90%. Then debt owners become concerned that a country can't generate enough revenue to pay the debt back.

For this reason, the conversation about the debt ceiling is usually brief. Congress and the President simply agree to raise the debt ceiling. In the last ten years, Congress has increased the debt ceiling ten times -- four times in 2008 and 2009 alone. If you look at the debt ceiling history, you'll see that Congress usually thinks nothing of raising the debt ceiling. However, Congress delayed raising the debt limit in 1985, 1995-1996, 2002, and 2003.

The Debt Ceiling Crisis

In January 2013, Congress hinted it may not raise the debt ceiling to force the Federal government to cut spending in the FY 2013 budget. It's position was that $1 of spending should be cut for every dollar the debt ceiling was raised. However, President Obama said he would not negotiate. Some Congressmen thought it would be better to let sequestration take place -- an across-the-board 10% spending cut. They think that not raising the debt ceiling could plunge the country into another recession.

Congress learned this when it threatened to not raise the debt ceiling in 2011. The uncertainty surrounding this crisis was one reason the bond rating agency Standard and Poorlowered the U.S. credit from AAA to A in August 2011. This caused the stock market to plummet.

As a result, Congress raised the debt ceiling in early August by passing the Budget Control Act.. This allowed the debt ceiling to be raised to $16.694 trillion, which the U.S. was quickly approaching as of August 31, 2012. That's when the total debt exceeded $16 trillion, although the statutory debt subject to the debt limit was only $15.976 trillion.

The Act also required a Congressional Committee to suggest ways to reduce spending. The Simpson-Bowles Report developed a lot of good suggestions to reduce the debt, but neither Congress nor the President adopted it. Instead, a set of mandatory tax increases and spending cuts, known as the fiscal cliff, were enacted to take place on January 1, 2013. Congress avoided the fiscal cliff by passing the American Taxpayer Relief Act. For more, see Fiscal Cliff 2013.

What Happens If the Debt Ceiling Isn't Raised?

As the debt approaches the ceiling, Treasury can stop issuing Treasury notes, and borrow from some retirement funds (but not Social Security or Medicare). Normally, it can withdraw around $800 billion it keeps at the Federal Reserve bank. Between 2008-2010, the Fed vastly increased the amount of Treasury notes it held, a policy known as Quantitative Easing. Congressman Ron Paul (R-Texas), Chair of the Fed Oversight Committee, has suggested that the Fed could forgive the $1.6 trillion in debt it owns. This would postpone the need to raise the debt ceiling.

Once the debt ceiling is reached, Treasury cannot auction new Treasury notes. It must rely on incoming revenue to pay ongoing Federal government expenses. This happened in 1996, and Treasury announced it could not send out Social Security checks.

Competing Federal regulations make it unclear how Treasury could decide which bills to pay, and which to delay. Owners of the debt would get concerned that they may not get paid.

If Treasury did actually default on its interest payments, three things would happen. First, the federal government could no longer pay any its employees' salaries or benefits. All those receiving Social Security, Medicare, and Medicaid payments would go without. Federal buildings, and services, would close. Second, the yields of Treasury notes sold on the secondary market would rise. This would create higher interest rates, increasing the cost of doing business and buying a home. This would slow economic growth. Third, foreigners would dump their holdings. This would cause the dollar to plummet, probably removing its status as the world's reserve currency. The standard of living in America would decline. This would make it highly unlikely that the U.S. could ever repay its debt. For all these reasons, Congress shouldn't monkey around with raising the debt ceiling. If members are concerned with government spending, they should get serious about adopting a more conservative fiscal policy long before the debt ceiling needs to be raised. (Article updated January 7, 2013)

By Kimberly Amadeo