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from the editor 28 AUGUST 2009 ISSUE 109 ISSN 1995-4476

South Africa Gareth Stokes – Editor Julie Brownlee – Deputy Editor Annabel Koffman – Publisher Editorial & Production Gary Booysen, Karin Iten, Jeremy Miles Subscriptions and marketing Tel: +27 11 699 6530 Advertising sales Shaun Besarab – Tel: +27 82 725 8355 Paul Vidas – Tel: +27 82 926 3429 MoneyWeek is published in South Africa by Fleet Street Publications (Pty) Ltd, Unit 2, Block B, Northlands Business Park, Newmarket Street, Northriding.

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Is the green shoot finally flowering? Are you sick and tired of hearing about the so-called “green shoots” of economic recovery? Globally, analysts have sprouted this phrase repeatedly in the last six months; we’d expect to find them enrolled at advanced classes at their local nurseries. Instead, they continue to caress the market pages with their “green” fingers – going so far as to declare their infant plants “ready to bear fruit!” Yes dear reader, a mixed bunch of economists and market analysts are proclaiming the first buds on the stems of the “green shoots” of recovery! Sentiment in developed economies is turning fast. In the US, Federal Reserve chief Ben Bernanke last week predicted the US was nearing a recovery. You need only consider the 52% surge in the US-benchmark stock index (the S&P 500) since its 9 March 2009 lows if you need evidence of this improvement in sentiment. And the feeling from the UK is similar. Website proclaims that Recession in UK seems ‘at an end’ before publishing the positive result of a business confidence survey conducted among 1 000 financial professionals. Why are investors ploughing back into equities amidst so much uncertainty? “Bets that the sky is not falling after all and the economy will recover – paired with generous fiscal and monetary stimulus – have boosted the market,” writes Alexandra Twin on What’s with all these “fairytale” analogies in the business world?

Economic recovery or not – your investment goal is to grow your available capital at a rate in excess of inflation. This feat is easily accomplished in rising markets as fund managers and private investors demonstrated through the five year bull market rally that started in 2003! You could practically earn real returns by throwing darts at a list of local shares and investing in anything you hit. Does that sound too easy? You could also – until December last year – earn real returns by staying in cash. But the wheel has turned. Analysts expect around 7.5% real return from equities in 2009 and a similar uninspiring number in 2010. And real cash yields have gone negative following a series of aggressive interest rate cuts this year. It’s difficult to correctly structure your portfolio when markets are in a state of flux. When equity markets are booming, you can afford to load up on equities. When markets hit the doldrums, you must be more selective. In today’s feature article, we’ll consider the asset allocation strategies to apply through a drawn out economic turnaround. Turn to page 16 to find out how much of your portfolio should be in bonds, cash, equities and property.

South Africa’s market commentators seem upbeat too. The consensus is for the country

Gareth Stokes Editor, South Africa

In this issue 5 Markets US property enjoys a respite – but for how long?

19 Blogs The best way to spend money and buy happiness.

8 Who’s tipping what The best bet in

22 Profile The Christian adventure seeker

the franchise sector; and an industrial firm to dump.

making millions from war.

11 Strategy Three top investing tips; the

28 August 2009

to return to positive GDP growth in the third or fourth quarter of this year. But don’t expect improvements in these statistical measures to display in the real world just yet. There’s still a long way to go before the current wave of corporate failures, insolvencies and retrenchments play out. And it takes time for the man in the street to process financial shocks like those experienced in the past 12 to 18 months. For as long as consumer balance sheets remain highly geared, we can expect sub-par new vehicle sales, retail sales and disappointing house price growth.

24 Toys Get ready to flaunt your green

tricks the market uses to short-change you.


14 Matthew Lynn The euro is facing its biggest test so far – Spain.

means for markets.

25 Blowing it What John Cleese’s divorce

news fighter”, warding off the threat of global debt deflation by “showering markets with liquidity”, as Ambrose EvansPritchard pointed out in The Daily Telegraph. This is just as well, as he “helped cause the raging fire of 20072009 in the first place”.

Central banks

Markets soar as Bernanke stays on President Obama this week reappointed Federal Reserve chairman Ben Bernanke for a second four-year term. Stockmarkets, already cheered by his weekend statement that the prospects for a return to global growth in the near-term “appear good”, jumped, with US and European indices hitting ten-month highs. The FTSE 100, up 40% since March, is enjoying its best six-month run in 50 years.

Bernanke agreed with his predecessor Alan Greenspan’s view that it was better to clean up the mess after a bubble burst than pre-empt the damage, and thought that complex derivatives were making the system safer. The latter fuelled his “excessive optimism” as the financial crisis developed. As late as October 2007 he declared that the financial system was “healthy”, said Edward Hadas on Breakingviews. Still, Obama knows that “jittery investors want continuity at the Fed” and, in any case, there are no alternative candidates who would represent much of a change.

The markets’ positive reaction “highlights a strange truth” about central bankers, said Lex in the Financial Times. “Everyone seems desperately to need to believe in their powers”, even though recent evidence suggests they’re just as clueless as everyone else. Nine rate cuts by the Fed in a year at the beginning of this recession hardly suggests that it was “ahead of the curve”. After a slow start, Bernanke “proved himself a heroic fire-


Bernanke and other Western central banks are now “between a rock and a hard place”, as a Morgan Stanley note put it this week. Economies are still extremely fragile, weighed down by retrenching consumers and companies and damaged banking systems.

Ben Bernanke: Reappointed to the Fed

If economies show signs of recovering, policy makers will have to withdraw massive fiscal and monetary stimuli to keep a lid on inflation and deficits. But if they do that too soon, “they would undermine recovery and tip the economy back” into recession, said Nouriel Roubini in the FT. Wait too long, however, and bond investors worried about inflation will demand higher long-term interest

rates, raising borrowing costs across the economy. The result would be “stagflation”. As the FT put it, Bernanke’s “travails have only just begun”.

SA economy

The great food price rip-off Have you gone shopping recently? You must have noticed just how much food prices have gone up this year. In fact, over the past two years, food prices have risen more than 35%! And it’s not something only affecting us here at home. Globally, food prices have surged a staggering 67.5%! That’s enough to take anyone’s appetite away. And now it looks like we’re in for yet another hike! In an article in the Sunday Times, Rowan Philip showed that “a huge gap has opened over the past 15 months between what farmers charge for their produce and the prices consumers have to pay in stores”. Farmers have lowered the price of maize (used in the production of maize meal) 22.4% in the past year. But, despite this, store prices for a 5kg bag of maize meal have risen 13% (on average) over the same period. This farmer/store disconnect holds true for almost every product – including flour, rice and even sugar. So, what’s driving this increase? No one knows. But we believe recent events will shed some light… Last weekend, Jannie de Villiers, the

The bottom line £500m The cost of

Angelina Jolie (right) are spending on buying a 35-room French chateau.

upgrading the Jubilee Line – a programme now severely delayed, with line closures expected to last into 2010.


The monthly fee of Michael Jackson’s doctor, Dr Conrad Murray.


What the ANC Youth League raised to help South Africa’s athletics medallists “relax”, says Floyd Shivambu. He’d hoped to give more to first time winner, Caster Semenya, but she’ll have to settle for just under 50%.


28 August 2009


How much actor Adam Sandler is estimated to have earned last year, propelling him to No. 2 in Forbes’s 2009 rich list.

R500,000 The amount a 12-year old girl is suing ZigZag magazine after it published a photograph her, with her back to the camera, and printing the

word “filth” next too it. The girl was in tears on the witness stand as she “recounted the humiliation” the clandestine photograph, taken in Cape st. Francis, had caused.


The value of gems that six motorbike smash-and-grad raiders managed to steal in just 39 seconds from a jeweller in Knightsbridge.


The amount spent on cancer worldwide – the figure includes treatment, drugs, loss of earnings and carers’ fees, according to a study by the Lance Armstrong Foundation.


£45m What Brad Pitt and

news executive director of the SA Chamber of Baking told the media that thanks to the need to comply with the Department of Health’s (DoH’s) new food labelling and advertising regulations, manufacturers will have no choice but to raise the price of food. This comes on the back of the Department’s decision to distinguish “non-essential” food items, like ice tea, biscuits and savoury snacks, from essential foods, such as mealie meal and rice. If this regulation comes into being, it means yummy goodies like biscuits won’t be allowed to put any nutrition value (like how much sugar or protein each biscuit contains) on the label. Manufacturers will have to redesign and reprint ALL their packaging.

travelling less and airfares are becoming more expensive. The result: Domestic air travel has fallen 10% in the past year. This week, and parent company Comair Limited (JSE:COM) voiced “serious concerns about the financial crisis at the Airport Company of South Africa (Acsa),” reports I-Net Bridge. Acsa is the state-owned operator of South Africa’s major airports. This follows last week’s release of Acsa’s financial results, which showed a massive R17bn shortfall. This money is supposed to be going into capital expenditure commitments. But it seems the group’s excessive spending (on unfounded developments like the new R7.5bn La Mercy airport near Durban) has finally caught up with it.

On average, you can expect to pay about R720 for a domestic air ticket – 14% (or about R100) of which goes to Acsa. These charges are already among the highest in the world. And now the group wants to double them! According to Comair joint CEO, Erik Venter, “demand is very price sensitive and there’s a direct correlation between air fares and demand”. Any price increase on Acsa’s behalf will send this dwindling demand plummeting further. But it’s not all doom and gloom in the airline industry. Comair’s currently taking advantage of the global airline industry slump to negotiate bargain prices on new planes. Its aiming to increase its services by 50% in time for next year’s Soccer World Cup.

De Villiers told the Business Report that while consumers have the right to know what they’re eating, complying with these new regulations will just increase costs.

The way we live now What’s even more worrying is that if such a small change to food labels can increase prices by 15% or more, there’s really no telling what other price manipulations are going on behind our backs.

A good samaritan has been landed with a hefty bill in Germany. Resul Mor was driving home from work in Hamburg when he was flagged down by a man asking him to take his seriously ill wife to hospital. Mor agreed and drove her to hospital, but was surprised to receive a bill for her medical care two weeks later when she was released. What he hadn’t realised was that the registration form he signed when he dropped the woman off also committed him to settle any fees she couldn’t pay. Judges have since ruled that Mor is legally liable and must pay the £6,000 bill.

Acsa: Just another parastatal burden Flying is by far the most convenient form of getting from A to B – especially if you need to be in Cape Town on Tuesday and Durban on Wednesday. But people are

Vital numbers % change

FTSE 100 Nikkei S&P500 Nasdaq CAC40 Dax Top 40 All Share Rand/Euro Rand/Pound Rand/US$

*4890.58 10639.71 1028.12 2024.43 3668.34 5521.97 22661.00 25114.00 11.21 12.76 7.86

**2.82 2.47 2.06 1.77 4.65 3.97 2.12 2.08 -0.46 -1.89 -0.27

*26 Aug ** since 20 Aug



Best and worst-performing shares Winners

% change Price

28 August 2009

% change Price

Cenmag (CMG)



Sabvest -N- (SVN)



Mustek (MST)



Alliance (ALM)






Jubilee (JBL)



Trnpaco (TPC)



Mazor (MZR)



Cenrand (CRD)



Aquarius (AQP)



Bell (BEL)









Nepi (NEP)






Erbacon (ERB)



AfPrefInv (AFP)



Nedbank-P (NBKP)




Eastplats (EPS)





Weekly change to JSE stocks as 26 August 2009



the markets

Property fizz will go flat We are seeing “a turn in S&P/Case-Shiller Home Price Index the US housing market”, 24% says Gary Wolfer of 16% Univest Wealth Management. Bullish 8% sentiment has mounted 0% amid recent signs of 20-city composite -8% stabilisation. Sales of existing homes rose for -16% the fourth month in a -24% row in July, leaving them 2002 2004 2006 2008 5% up year-on-year. The Source: S&P/ widely monitored CaseShiller index tracking prices in 20 cities has now risen for two foreclosures as it prompts homeowners successive months after falling for 34. to give up on property. But the recovery looks shaky. For starters, the sales picture isn’t as healthy as it looks; around 30% are “distressed sales” of houses that have been foreclosed on. Then there’s the supply overhang. In July the number of homes on the market rose by 7.3%. So at the current pace of sales it would take 9.4 months to sell off existing stocks – far above the 7.5 months’ supply historically consistent with stable prices, says Capital Economics. “The inventory overhang needs to reduce much further before prices can start rising on a sustained basis.” Yet that inventory looks set to rise as repossessions increase. The proportion of residential mortgages in foreclosure, or at least one payment behind, hit a record 13.2% in the second quarter, a trend unlikely to reverse until unemployment peaks next year. Meanwhile, according to, 23% of homes with mortgages are in negative equity. This is also fuelling

Not only is the demand-supply outlook uninspiring, but the slide in house prices since the peak has still left prices around 10% above the long-term trend line, says Louis Basenese on But markets tend to overshoot on the downside and fall below their long-term trend lines, especially after massive bubbles. Given all this, “the recent pop in prices will probably fizzle”, as The Economist puts it. Don’t count on the housing slump being over just yet.

This Sunday’s election is likely to see a decisive victory for Japan’s Democratic Party of Japan (DPJ), ending 54 years of rule by the Liberal Democratic Party. This “can only be a potential positive” for investors, as Christopher Wood of CLSA puts it. Political stagnation has hitherto hampered economic reforms, while the DPJ has “good instincts on… releasing pent-up consumer spending and addressing problems in the labour market”, says the FT. But while hopes for political change are often dashed, the reasons why Japanese stocks look appealing over the long term have nothing to do with politics. Unlike its Western counterparts, Japan’s economy has already been through a credit bubble collapse. Meanwhile, the Topix remains the cheapest major market on 1.2 times book value, compared to pan-Europe’s 1.5 and the S&P 500’s 2.1.

Beware the coming September slump Bears who reckon that overheated stocks are set for an autumn dip have market history on their side. In America, investors have lost an average of almost 1% in every September since 1926. In each of the other 11 months, they gained almost 1%, says Brett Arends in The Wall Street Journal. It’s a similar story here, says Chris Dillow on Since 1966 the All-Share index has returned 0.9% on average in September. And that’s not just down to “a few awful months”. Strip out the three worst Septembers and the month’s average return is still 0.16%, worse than any other month bar June.


The big picture: the banks’ debt binge

“Wall Street is... conducting itself as though time skipped from 2006 to today... lobbying hard against derivatives regulation in the little time it has to spare between raising salaries and signing exorbitant new contracts to hire new traders who were somehow missing-in-action in 2008 when their alleged talents were really needed.”

This chart from the Bank of Cumulative excess returns to finance England’s Andrew Haldane is a 12000 stark illustration of the banking 10000 debt bubble, says Tim Price of 8000 PFP Wealth Management. 6000 It shows the results of a 4000 hypothetical bet, made in 1900, 2000 on banks outperforming non0 bank sectors. One hundred -2000 pounds was invested in banks 1900 1920 1940 1960 1980 2000 and £100 in shorting the rest of Source: FT Source: Bank of England/PFP Wealth Management the market. Until 1985, this would have returned 2% a year; by the end of 2006 the figure soars 16% before falling to under 3% in late 2008. Banks boosted their return on equity, a key gauge of profitability, to spectacular levels by loading up on leverage, an effect that went into reverse when the bubble burst.

Michael Lewitt, The HCM Market Letter


On the demand side, a tax credit for firsttime buyers, which expires in November, has recently bolstered sales. But this just brings forward future demand. Not that there is likely to be much of that around. High unemployment and falling wage growth are a “pretty substantial headwind”, says Keith Hembre of First American Funds. And tight credit control, plus ongoing losses on mortgages, suggest banks “will remain tight-fisted for some time”, says The Economist.

More good news for Japanese stocks

28 August 2009

the markets

“The only genuine growth story in the world”

Hot air escapes from gas prices While oil keeps hitting new highs, natural gas prices are heading south. With US futures having hit a sevenyear low under $3 per million British thermal units (mBtu), down almost 50% this year, the price ratio of oil to gas has reached over 26 to 1. That’s the highest since gas futures began trading in 1990 and a far cry from the long-term average of around 13 to one.

Asia and emerging markets, on the other hand, look set for a bubble. A bubble “somewhere” is “almost inevitable”, given the massive global monetary easing that’s taken place. Money flows to the most appealing investment stories – now Asia and emerging markets – “the only genuine growth story in the world”. They enjoy scant consumer, corporate and government debt. Thanks to high savings rates, they are “in much better condition than the developed world”. A bubble should push Asia to two or three times the p/e ratio of the S&P 500 (yet the p/es are currently about the same). The key markets are China, India and Brazil. China’s blue-chips are dominant, state-owned firms with little competition. Brazil has a range of commodities and now it’s “finally cracked” inflation it can lower interest rates and stoke long-term consumption. India offers a Western-style legal system and diverse sectors, making it “my favourite emerging market”. Stocks


Christopher Wood of CLSA Asia-Pacific Markets is worth listening to, says Leslie Norton in Barron’s. He flagged the likely global impact of problems in the US mortgage market as early as 2005 and also saw trouble brewing in Thailand before the Asian crisis of 1997. Now he says long-term investors should steer clear of the Western world. Amid the deflationary backdrop of indebted consumers deleveraging and damaged banking systems, the “best case is a long period of subpar, anaemic growth”.

Asia’s where the growth is Norton likes include Chinese internet search engine Baidu, China Life Insurance, Indian bank HDFC and Hong Kong’s Sun Hung Kai Properties. But while stocks such as these are worth watching, jumping into emerging markets looks risky. Wood expects the S&P 500 to fall again in the next few months as investors adjust to the gloomy outlook for stocks in the West, and emerging markets will be unable to escape the US-led global trend. But with Asia and emerging markets in sound structural shape and more investors realising it, their long-term future is bright.

Is China the global bellwether? There is now a “growing belief that the Chinese stockmarket is a barometer of global growth”, says Jack Ablin of Harris Private Bank. Last week’s sharp slide and subsequent rebound appeared to set the tone for other major indices. Analysts have also pointed out that last November’s bottom in Chinese equities foreshadowed the trough in Western markets a few months later. But don’t put too much faith in Chinese stocks as a global bellwether as they reveal little about the wider Chinese economy. First off, they are subject to continual government interference – a greater influence than economic fundamentals, says Ablin. And the market “yawned its way” through both the Asian financial crisis and the rocketing growth of the early 2000s, as Ben McLannahan points out in the FT. Shanghai is also still tiny compared to Western exchanges (it comprises just 1.5% of the FTSE World index) and is closed to foreign investors. As such it can’t reflect global sentiment the way larger, open markets can, say David Oakley and Michael Hunter in the FT. So China “is not about to take over from the US as the benchmark market”. 6

28 August 2009

Yet the odds of gas closing the gap rapidly are slim. North America is “choking on the stuff”, says Lex in the FT. The recession has hit demand, especially from industry, and a rapid recovery is unlikely. According to the Energy Information Administration, US consumption will fall by 2.3% in 2009 and stay flat next year. Domestic inventories have swelled to record levels for this time of year – in some areas storage is already close to capacity, yet the beginning of the heating season is still two months away. Supply has boomed due to continual recent discoveries of gas beneath shales, which has also reduced the proportion of supply provided by the Gulf of Mexico. That means hurricanes are less of a worry for supply. Although explorers are beginning to cut back production, this isn’t happening fast enough to bring supply and demand back into balance, says Marshall Adkins of Raymond James. No wonder energy research group Simmons & Co. reckons prices could fall as low as $2.25 mBtu.

Gold watch The traditional link between the gold price and the dollar has strengthened markedly since the spring, says Suki Cooper of Barclays Capital: the correlation has risen back above 70%. That largely explains why gold has been in a volatile trading range between $930 an ounce and $970 this month. Meanwhile, overall demand for gold fell by 6% year-on-year in dollar terms in the second quarter as high recent prices hampered jewellery sales and investment demand eased. But the latter was still up by an annual 46%.

sector of the week

Turning electrical junk into profit laptops and monitors and piled for resale. Much of what’s left ends up on shipping containers bound for Asia.

by Eoin Gleeson It was as if they couldn’t stand to watch anymore. As the prospect of an English victory in the Ashes sank in on Saturday, residents all over Canberra were seen carrying televisions and computers out the door and tipping them into the boot of their car. Within hours, the roads leading to the Sims waste dump on the south of the city were backed up with traffic. By the time Andrew Strauss had collected the urn on Sunday evening, there were 20,000 computers and televisions piled up in the Sims waste yard.


This is a lucrative business. The industry generated revenues of $3bn last year. In Hong Kong, the e-waste import centre of Asia, a container of monitors and TVs that sells for $5,000 can net profits of $4,000, according to BusinessWeek. The trouble is that this is illegal trading of hazardous waste. Much of what’s left after the equipment is reworked is dumped in huge toxic mounds on A tonne of old PCs can yield as much gold as 17 tonnes of gold ore the outskirts of cities. Sooner or later, the authorities will have to Sour grapes? Not at all. It just so crack down on this activity. introducing laws that require electronic happened that the Ashes coincided with titans to fund recycling drives such as the an electronic recycling drive by Apple So a far better area to focus on is the one held in Canberra last week. For Australia. For one day only, Apple offered recycling of mobile phones in Europe. example, in July 2007, the EC directive on to waive the £20 recycling fee for It’s legal and it’s even more lucrative than Waste Electrical and Electronic Equipment computers and televisions. With Australia recycling TVs and computers. The average (WEEE), which sets Europe-wide targets making a transition to digital TV next phone returned to retailers in Britain still for the collection and recycling of year, the city’s dumps were deluged with has a working life of between six and electronic goods, came into force in electronic waste. In fact, electronic waste seven years, says Hill. “Each of those Britain. In the US, 20% of all e-waste is – from PCs to mobile phones and phones is worth approximately £16 for already recycled and state regulators are microwaves – is the fastest-growing form the companies who know how to unlock queuing up to follow the EU’s example. of rubbish worldwide. In America alone, their value.” We have a look at how you 20 million personal computers and 128 can benefit in the box below. Equipment such as that recycled by the million cell phones become obsolete every citizens of Canberra is unloaded at the year, according to Turner Investment warehouses of electronic recyclers. analyst Robb Parlanti. Many of them end There, computers and TVs are stripped for up in landfill sites or incinerators. Update: take profits in reusable microchips and parts. These are Mylan sent back to the likes of Apple and The trouble is that this waste is horribly Generic drug manufacturer Mylan Panasonic for remanufacture. Then the toxic. The cadmium from just one mobile is now up 56% since we tipped it recyclers get to the valuable bits – the phone battery is enough to pollute on this page on 1 December. With rising commodities. A tonne of scrap from 600,000 litres of water – a third of an competition in the field and benefits discarded PCs contains more gold than Olympic swimming pool. A million from medical reform in the can be produced from 17 tonnes of gold phones are discarded in the UK every year. US priced in, now looks a good time to ore. Silver and copper are stripped from So governments worldwide are take profits.

The best bet in the sector There are more than 1,200 groups involved in recycling electronic waste. But among 90 European phone recyclers, one company 80 rules the roost: Regenersis (LSE: RGS). 70 The firm collects unwanted mobiles from major phone companies and sells them to 60 suppliers in the developing world, from 50 Africa to the Far East. Thanks to the EC 40 directive WEEE (see above), Regenersis is Jan 2008 able to produce handsets from as little as $5 each for basic models and $100 for the top of the range models, notes MoneyWeek’s Paul Hill. Of the phones the firm receives, 70% can be reused or sold overseas.


28 August 2009

The other 30% are sent to factories across Europe for recycling into everything from traffic cones to saucepan handles. Figures in pence Regenersis also acts as a repair shop on warranty claims for the likes of Vodafone and Apple. The company is doing great trade in repairing phones, as consumers opt to get phones fixed rather than fork out for new ones. It’s a £15m company with a Jan 2009 £100m turnover and about £4.3m of debt. On a trailing EV/Ebitda multiple of only 4.2, Regenersis is also ludicrously cheap. “I see the shares more than doubling over the next two years,” says Hill.


who’s tipping what Julie Brownlee, MoneyWeek’s analyst, picks the best – and worst – tips from the press and brokers’ reports, and suggests a share for the brave.

Let this resilient share service your portfolio with impressive gains Tip of the week: “A worthy defence stock for a cautious investment portfolio” – Finweek It doesn’t take an economic genius to see the financial landscape has changed over the past couple of years. Back in the good old days, we experienced a slight jitter when the word “subprime” was born. But who would have thought things would have got as bad as they have? It’s not surprising that companies didn’t perform as management expected. Supply services giant, Bidvest Limited (JSE: BVT), has merged in with the crowd with its recent trading statement

release. Not surprisingly, it notes a decline in earnings. But, when you take a good overall look at the company, it has faired the mayhem rather well. And it’s time you sat up and took notice. The share’s come off a bit – but the crisis didn’t decimate it. In fact, it’s quite resilient. Life kicked off for Bidvest in 1988. And its track record makes for impressive reading. Over the past 15 years, its remarkable annual growth is clear to see. On an annualised basis for the period, revenue has swelled 36.2%, compound growth has rocketed 41.8% and attributable income grew 25.8%. This trading and distribution company has a global footprint, operating in four continents. It

Gamble of the week: Taste Holdings Limited (JSE: TAS) I don’t know about you, but when it comes to certain types of foods, I don’t care how bad things get – I’ll sacrifice a lot to have a pizza! And it seems I’m not alone. Despite the recession’s vice-like grip on South Africa, this franchise company is going from strength to strength. Proving, despite the credit crunch, that takeaways are still high up on consumers’ shopping lists. It goes without saying that if you’re experiencing high demand for your products, your share price will follow suit. This is exactly what’s happening with this franchise babe on the JSE. Taste Holdings Limited (JSE: TAS) listed on the JSE’s AltX in 2006. The share took a bit of a hammering along with the overall market over the past 18 months. But since the global markets hit their lows in March, it hasn’t looked back. Being a small-cap makes it


28 August 2009

employs a staggering 106,000 people and prides itself on running the company with the determination and commitment evident in small businesses. With its promise of turning ordinary companies into extraordinary performers, you simply must feel optimistic about the future.

more vulnerable to general market sentiment… but, it also makes it a fast mover, recovering quickly. So, what franchises does Taste own the reins for? You’ll be more than familiar with South African pizza chain, Scooters. At the turn of the millennium, a few friends with a serious pizza addiction (like me) got together and Scooters was born. Who would have thought that nine years later they’d be opening up their 100th store? Scooters’ success is admirable. Especially because the pizza space is crammed full of offerings. Now Scooters is the second largest pizza franchise in the country. Just Debonaire’s is ahead of them. What’s its recipe for success? Taste encompasses ethical franchising. It aims to provide stakeholders an acceptable return on their investment. To make sure this remains a top priority for the company, it focuses on franchise profitability. So by taking the financials seriously and respecting the bottom line, the rest just falls into place.

who’s tipping what Why the decline in earnings then? There are several reasons. In an attempt to stave off the financial crisis, the company took steps to streamline and cope better until the climate improves. Among several actions, it closed one business. It also reorganised, making the company a more efficient machine. Not just content with trying to cut costs, Bidvest is still on the hunt for more companies to add to its already enormous stable. At the beginning of August, the company announced its purchase of the Nowaco Group. This now gives the group food service exposure to Poland, Slovakia and the Czech Republic. The deal was for a tidy €250m (R2.8bn). As Shaun Harris notes in Finweek, this acquisition “should provide an immediate boost to earnings”. Food services already account for about a third of its profits. So concentrating on this side of this business should prove lucrative.

results in the following period? Who knows! But that’s exactly what Bell Equipment Limited (JSE: BEL) has done. Bell Equipment started life as a family business just after World War II. So experience is something this company most definitely has stacked up beneath its belt. It’s gone from strength to strength over the years and is now a global supplier. It supplies big dumper trucks and all types of industrial machinery. It has more than 19,000 machines operating in over 70 countries across the globe. Bell employs over 2,100 people. It listed on the JSE in 1995 at a modest R3 per share. But, what went wrong? In retrospect, it appears that the company wasn’t geared up for the possibility of a global

With the future looking bright for Bidvest and renowned CEO Brian Joffe in the driving seat, we have to agree with Harris: “The share looks like a buy.” Buy. Recommendation: BUY at 10940c Market capitalisation: R37.706bn

Turkey of the week: “It’s no surprise that Bell’s results were awful,” says the Financial Mail How is it possible to surprise the market with your best results ever – and then post one of the worst

Taste is also treading on the toes of the extremely successful Steers and Wimpy offerings at petrol stations like Engen. It now owns the BJ franchise agreements and is springing into a Caltex forecourt near you soon. As we’ve seen with the Wimpy stops at the Engen’s, they’re a massive success. On a recent drive to the Vaal, we stopped off at an Engen to grab a toasted sandwich and a cappuccino. But when we pulled in, there wasn’t ANY parking available… thanks to the massive queues pouring out of Wimpy! Not content with its ever growing share of the food market, Taste has also dipped its finger into the jewellery market. It purchased popular jewellery chain NWJ last April. You may wonder why it would jump into something away from its speciality, but CFO, Duncan Crosson is confident that it’s a


28 August 2009

recession. Now, it’s fighting to keep its head above water. As Jamie Carr states in his Diamond & Dogs column in the Financial Mail, “this has meant a brutal pruning of expenses”. This includes retrenchments too. The company has been running well below capacity. This has, obviously, led to a complete bleed out. For example, “its Richards Bay plant has been running at 20% of capacity”. No company can survive productivity at near zero levels. But when crisis brews, the troops rally round. Staff accepted cuts in salary until the company gets itself back on the straight and narrow. As Carr says: “There is a real commitment to bring Bell through the current crisis, and we should applaud its resilience.” Avoid for now, but keep it on the watch list. Recommendation: Avoid Market capitalisation: R958.995m

fantastic growth opportunity. This acquisition boosted the company’s headline earnings per share a staggering 55%! Taste believes it’s all down to its franchise model – not about the product. Taste is looking good for much more as its expansion continues. The share has run up well over 100% since its March lows, but it has far higher to go to get up to over 100c, where it was trading before the market shenanigans struck. The share looks good at its current price of 53c for the medium- to long-term. Just be careful when stocking up. As a small-cap share, it’s a bit illiquid, so accumulate and sell in small lots. Buy.

Recommendation: BUY at 53c Market capitalisation R91.097m

best of the financial columnists

Michael Lynch The New York Times

Brown has let down British soliders William Rees-Mogg The Times

Reform – or IMF will force it on us Bruce Anderson The Independent

Microfinance works for the poor Jonathan Morduch Foreign Policy


28 August 2009

Advocates of ‘peak oil’ theory warn we’ll reach the point where global production peaks within just ten years – some say it’s already happened. But this doesn’t hold up, says Michael Lynch. The case tends to rest on three claims: That the world is finding just one barrel for every three or four produced; that supply is threatened by political instability; and that we’ve already used half of the earth’s two trillion barrels. But firstly, the peak oil crowd tend to ignore revisions to size estimates of older fields, even though these have been bringing discoveries up to pace with production for many years. Secondly, the solution to political instability is to shift investment to new regions, which is what the industry has been doing, even if production isn’t yet on line. Lastly, the geological consensus is that there are around ten trillion barrels, some 35% of which should be recoverable. Oil is abundant, the price is likely to fall, and governments should stop using the “false threat” of peak oil as an excuse to waste public money on “harebrained renewable” schemes.

Money talk

No wonder Gordon Brown and Bob Ainsworth hoped to stop Bernard Gray’s report on defence procurement from being published, says William Rees-Mogg. It contains a “devastating critique of the management of defence planning and procurement” over the past 11 years. Current projects are £35bn over budget and five years late, observes Gray, and the equipment being ordered isn’t appropriate for the UK military’s current needs. We are at present fighting a “tough infantry war” in which “more and better helicopters and armoured vehicles are the key to rapid response and reduction in casualties”, yet the MoD seems more concerned about finding “funds for two aircraft carriers and a replacement for Trident”. And where is the money going to come from? The shadow defence secretary, Liam Fox, accuses Labour of creating a defence black hole, which not only affects operations in Afghanistan but could leave defence in crisis for years to come. Brave British soldiers are the victims of this “indecision” and “incompetence”.

“Rather than spend my money on stupid things, I have got myself on the property ladder.” N-Dubz musician Fazer (pictured above), quoted in The Sun

This government commissioned a report from Sir Peter Gershon, which found over £70bn worth of government waste, says Bruce Anderson. “What happened? Nothing.” But with the UK’s national deficit about to hit £200bn, they must face facts. Either they learn to control public spending, protecting vital services but squeezing out the waste as the Canadians and Swedes have done in the past, or “there will be a sterling crisis, a gilt strike and enforced cuts on the orders of the International Monetary Fund”, in which case reform will occur at gunpoint. The other “pernicious” form of waste is of people. Six million people of working age now subsist on benefits, many of them “third generation welfare junkies”. They deserve “more sympathy than they receive”: If a “welfare-state becomes an ill-fare state which traps its clients in moral poverty”, the society that puts up with it is partly responsible. But the good news is we cannot afford to tolerate it any longer. Change will be hard, but in the longer run this “crisis could bring benefits”.

Statistics tell us the world’s poor are the 1.4 billion who live on less than $1.25 a day, but their economic lives remain largely out of view of policy makers who aim to help, says Jonathan Morduch. A year-long study tracking the financial habits of the poor could help to change this. For a start, the ‘financial diaries’ debunked the idea that “typical poor families are living hand-to-mouth”; they also showed that many such families are arguably “far more adept at money management” than your average Westerner. Unreliable earnings mean great efforts are made to save. In one South African township such was the value of a safety net that people were paying local ‘deposit collectors’ to collect a few cents a day. Microfinance institutions are cottoning on. Grameen Bank has introduced a new range of savings and loans that have proved “so popular that the bank now takes in more in deposits than it lends out”. Offering poor people the tools to make saving and borrowing easier to do would help “the poor help themselves”.


‘Peak oil’ is a false threat

“I bet the people in Barnet who had to sell their houses to get into care homes wish they’d robbed a train.” Ronald Webb in a letter to the Daily Mail on the release of the ‘Great Train Robber’, Ronnie Biggs “I got off lightly. Think what I’d have had to pay Alyce if she’d contributed anything to the relationship.” Comedian John Cleese on his £12m divorce payout, quoted in The Mail on Sunday “Money isn’t just a tap you can turn on and off.” Former cricketer Jack Russell, quoted in The Sunday Telegraph “No entertainment is so cheap as reading, nor any pleasure so lasting.” Lady Mary Wortley Montagu, quoted in Forbes “I made all my money by selling too soon.” J Pierpont Morgan, quoted on

investment strategy

Three basic rules for investment success stock exchange and have lower annual charges). Better yet, pick an exchange traded fund (ETF), which will allow you to track the performance of a sector or index at a fraction of the cost of a unit trust.

by Tim Bennett Long-term investment success comes down to some basic rules. Here are three of the most important.

Leave that R1,000 a month invested until you turn 40 and you get R329,120. But if you’re able to earn, say, 7.5% a year before tax (just below the average longterm return from US equities), that R1,000 a month invested aged 20 creates a pot worth R1,355,870 aged 40, rising to R3,042,720 aged 60. So, lesson one is think long-term. But how do you boost your chances of getting 7.5% a year? 2. Keep it cheap: Let’s say you invest in a unit trust that gives an average return of 5% a year before charges on your R1,000

3. Keep it simple: The cliché suggests you should cut risk by not putting all your eggs in one basket. But you should also avoid spreading yourself too wide. The FT points to a study by James Norton of Evolve Financial Planning, which suggests that if you’d split your assets 60/40 between the FTSE All-Share and the Citi Bond index between 1988 and 2008, you’d have earned 8.83% a year. Widen that to eight asset classes and this rises to 9.91% for very little extra risk. But beyond that, you add very little extra return for a lot more risk.


1. Start early: Compound interest is “the eighth wonder of the world”, says Erin Burt on As the Motley Fool points out, two ingredients are required for compounding to work its magic – plenty of time and a decent return. For example, invest R1,000 a month from the age of 20, earning interest at 3% a year, and by the time you’re 30 you’ll have a pot worth R140,090. That’s because the interest you earn each year also earns interest for every subsequent year, provided you leave it in the account.

Start young if you want to grow your savings monthly investment. Stay invested between the ages of 20 and 60 and you’ll have a pot worth just over R1.5m. But let’s say the fund you’ve chosen charges a fairly typical 1.5% a year in fees (before any other upfront or exit charges). Take those into account and your R1.5m ends up around R1.05m. That’s why you should pay attention to charges. In most cases, we would avoid unit trusts where possible and invest instead using investment trusts (which are listed on the

Worse, those all-important charges rise the more asset classes you add, especially if you dabble in obscure assets, such as private equity, hedge funds, or fine wines. Indeed, US analyst Rob Arnott reckons “most of the advantage of diversifying happens with three of four seriously cheap asset classes”. So you’re better to get a decent level of exposure to a small group of assets that represent good value, rather than trying to get a little bit of exposure to every asset class going.

How the market gets ahead of you Banking profits and bonuses are back with a vengeance. Astute trading, in the wake of the sharp recovery in the FTSE 100 since March, has helped City traders return to the black. But so have the following three investment tools, currently being investigated by global regulators, which give professional investors an advantage over the average private investor.

to front-run the market – get a buy or sell order in on a stock, basket of stocks, index or pretty much anything else, before everyone else buys or sells – without alerting them. That lets those with the best software spot, test and then trade the shortterm direction of the market, creaming off profits in the process.

3. Flash trades: Flash trading gives another advantage to 1. Dark pools: Share trades can take place on regulated exchanges, such as the London and New York Stock Exchanges, but plenty don’t. These are done off-exchange, or ‘over-thecounter’. They include broker-owned, unregulated ‘liquidity pools’, where deals can be done for large volumes at better prices than are available on public exchanges. But only those who know about them – and have the software to access them – get to use them.

2. High frequency trading (HFT): Goldman Sachs recently disclosed that it had 46 ‘$100m trading days’ in the second quarter of 2009. That, says Martin Hutchinson on, is “a record number”. HFT helps explain why. Fast, algorithmic (mathematical) programs help traders in effect


28 August 2009

those with the fastest share-trading systems. As Sean O’Malley, a partner at Goodwin Proctor LLP, tells Bloomberg: “computerbased trading can do things in a split second that no human could have done”. So, for example, investment banks or hedge funds can ‘flash’ their interest in buying or selling large numbers of shares at potential counterparties operating on a target stock exchange. They then get deals done milli-seconds before anyone else (often brokers acting for retail clients) can get a look in.

What can you do about this? Nothing. That’s a regulator’s job. But these tricks help to explain why, at times of stress, markets can suddenly become volatile or illiquid (difficult to trade). They also explain why retail investors rarely get the best deals.

personal view

Bread and butter is your best prospect in these uncertain times What I would invest in now When it comes to the market, the JSE almost always takes its direction from the US. And the current situation is no different. US markets have been trending steadily higher since March.

This week, Tapiwa Karoro an independent currency, commodity and equity futures trader tells MoneyWeek where he would put his money.

Over the past few days, we’ve seen some very good signs come out of the US. Consumer confidence numbers came in better than anyone expected. At 54, it’s over the crucial 50 mark level, which means consumer confidence is back in positive territory. This is the highest it’s been in three months. Equity markets have run up higher on the news. Here in SA, government and the Monetary Policy Committee are doing what they can to reduce the effects of high interest rates. Two weeks ago, they handed us a further rate cut of 50 basis points. This brings prime down to 10.5% and inflation down to just 6.9% (at least according to government figures, that is). The effects of this should help sustain our economy going forward. To date, the JSE has run up 36.98% since hitting new lows in March. And, as we expected, investors recently claimed some profit. This has opened up a good opportunity for us to get into quality shares cheaper and position ourselves for further upside. In general, emerging market currencies have rallied strongly on the back of all this positive sentiment. The rand, for example, has gone from trading at over R8 to the dollar to its current level of R7.84. There’s definitely a great opportunity for risk takers to make some money trading the currency right now.


28 August 2009

Taking our cue from what’s happening in the US, it appears as though the worst is behind us. Equity markets across the globe are in an upward trend. You must still tread carefully because there might be some pullbacks ahead of us, but the two shares I’m going to tell you about are good bets in the current market. Despite all the good news that’s out there, consumers are still hard pressed. They want to make every cent go as far as it can. That’s why I like the looks of Shoprite (JSE: SHP) and Massmart (JSE: MSM) right now. Thanks to its diverse stable of shops, which includes Checkers, OK and Usave, Shoprite covers just about every income bracket and type of consumer in the country. And, as we can see by the superb set of results it released yesterday, consumers are flocking to its stores. Trading profit is up 28.1% to R2.941bn and turnover rose 24.5% for the year ended 30 June. Clearly, its expansion into the rest of Africa is proving to be a winning formula for SA’s largest supermarket chain. Massmart is in a similar position. I like it because it not only provides consumers with the essentials, but is blazing its way to expanding its retail exposure to the rest of Africa at a rapid rate just like Shoprite. At the current price of R80, it’s presenting us with a great opportunity to get in at the start of great things.

The shares Tapiwa likes: Shoprite Massmart

12mth high 12mth low Now R60.99 R40.50 R58.99 R90.29 R61.20 R80.00 * Share prices as at 26 August 2009

investment briefing

Where next for Russia? It’s ten years since Vladimir Putin assumed power in Russia. So what has he achieved, and what does the future hold? David Stevenson reports. What’s up with Russia’s economy?


Everything. “The past year has cruelly exposed the weaknesses of Putinomics, showing how it relied on rising commodity prices and cheap foreign credit,” says the Financial Times’s Lex. The economy began shrinking late last year with GDP crumbling by an annual 10.2% in the first seven months of 2009. Despite a 0.5% seasonally adjusted expansion in July, any recovery is set to be shaky. “While the recession is over, the crisis hasn’t yet been overcome,” says the deputy economy minister, Andrei Klepach. “The revival still isn’t robust or intense.” Indeed, output may shrink by 10% this year, making Russia one of the former Soviet bloc’s laggards. Meanwhile, “the Kremlin’s war chest is vanishing fast as the budget deficit rises to 9.4% [of GDP] this year”, says The Daily Telegraph’s Ambrose EvansPritchard. “The picture could turn ugly if there is a second leg to the global downturn.”

it has been down to over-reliance on oil and gas exports. This ‘resource curse’ pushed the rouble to uncompetitive levels, “throttling what remained of Russian industry”, says Evans-Pritchard. President Dmitry Medvedev reckons the country’s huge reliance on energy and commodity exports can’t continue. “The situation is outrageous and has been for a long time. We continue to ship raw timber for export, and processing isn’t being developed,” he says. “Medvedev’s comments are a veiled attack on Putin, who has long viewed Russia’s energy resources as the spearhead to its return to superpower status,” says Evans-Pritchard.

Any other problems?

“One of the major obstacles to conducting business in Russia is the all-pervasive corruption,” says Harvard professor Putin’s muscle: all braggadocio? Richard Pipes. “Because the government plays such an immense role in the economy, little can be done without bribing officials. A recent survey by Russia’s Ministry of the Interior revealed – without shame – that this year’s average Did Putin start this badly? bribe has nearly tripled compared to the previous year.” Further, No. Ten years ago this month Vladimir Putin, an obscure exbusinesses can’t rely on courts to settle their disputes. Lastly, this KGB man, took up the reins as Russian prime minister. By the month the IMF highlighted the instability of Russia’s financial end of 1999, following Boris Yeltsin’s surprise resignation, he’d system. “There’s a risk that banks will continue to struggle to become acting president, where he stayed until he returned to adjust balance sheets, stifling credit expansion and impeding a the prime minister’s office last year. Examples of his reforms recovery. The central bank should... be more willing to compel include the introduction of a 13% income tax flat rate and new bank closures and consolidation as banks’ capital deteriorates land laws. “Many of Putin’s economic reforms are impressive,” and the level of problem loans increases.” The US vice-president, says Michael McFaul in The Putin Paradox. Inflation and Joe Biden, recently went further: “Russia has... a banking sector unemployment fell, most foreign debt was repaid, while poverty that’s not likely to be able to withstand the next 15 years.” more than halved. Nominal GDP (annual output) leapt from $200bn to well above $1,000bn and average wage levels soared from $100 to $600 a month, says Lex. What’s stopping reform? Vested interests. Even minor government officials “have aped the state-led asset grabs of their superiors”, says Lex. Instead of How bad was pre-Putin Russia? embracing Medvedev’s bold “An economy on the brink” reform agenda, “the best that was how the BBC described may be expected is probably a Russia in 1998, the year before kind of Putinomics-plus, Putin’s first prime ministership. So are Russian shares a disaster? involving limited efforts to “The weak financial system Surprisingly, no. Russia’s MICEX index is up 82% this year in build more refineries, smelters had been hit by the spill-over rouble terms; that equates to a 71% US dollar return. It’s been and timber processors. Not the from the Asian financial helped by investors’ growing appetite for high-risk assets, best start for Medvedomics.” crisis”, while oil export receipts which has driven the global stockmarket bounce since Indeed, “Moscow is starving were collapsing. The state mid-March. Yet Russia remains a “heaven or hell” market, itself of foreign technology and deficit was soaring and Russia says Peter Lucas at RBC Wealth Management, without the investment, but Putin may not was paying interest rates of up broad growth scope of other big emerging countries. Further, care”, says Philip Stephens in to 150% and also had to Russia has dropped this year to 120th – from 112th in 2008 – the FT. “Perhaps the borrow from the International in the World Bank rankings for ease of doing business in braggadocio that drives him Monetary Fund (IMF). individual countries. This highlights the “issues investors tells him all is well as long as have to deal with in a system where the mercurial judicial the world shows Russia respect. So what’s gone wrong system provides little protection”, says Patrick Sherwen of In that case, Russian power under Putin? Citywire. We’d avoid it in favour of other emerging markets will wither as surely as will For all that things have with healthier prospects and fewer risks. Putin’s physique.” improved since 1998, much of 13

28 August 2009


The euro has had a good crisis – but can it survive the fallout from Spain? Almost a year on from the credit crunch, one verdict at least seems reasonably settled. The euro had a good crisis. Despite all the warnings, Matthew Lynn particularly from this country, about the system’s fragility, the single currency sailed through the collapse largely unscathed. The banking system didn’t implode. The European Central Bank dealt with the challenge smoothly. There were no rioters on the streets demanding the return of the deutschmark or the franc. If the key test of a currency is its ability to deal with tough times, then the euro appears to have acquitted itself.

Global view

Ireland will do worse. The government is running a budget deficit of 9.5% of GDP, almost as bad as Britain: the big difference is that the UK isn’t supposed to be keeping its deficit to 3% of GDP, as required by the euro rules.

measured by market value. BBVA is one of the top five. So without a Spanish contribution, Europe will hardly grow. And if the Spanish banking system collapses, it will blow a hole in the euro’s hull that could capsize the whole vessel.

And that’s just the obvious problems. Look underneath and the picture doesn’t get any better. Spain now has as many unsold homes – more than a million – as the US, even though the US economy is more than six times the size of Spain’s. About a third of new homes built in the EU since 2000 were built in Spain, although it accounts for only about 10% of the euro area economy. Most of that was with money borrowed from the rest of Europe: there are now close to €500bn

So far, none of the big Spanish banks has collapsed. Santander has taken the chance to expand, taking over the UK’s Abbey and Alliance & Leicester at what may well prove the bottom of the market. But their troubles may be hidden. Spanish banks are thought to have been raising around 40% of their funds abroad at the peak of the property boom. It’s hard to believe they’ll find it easier to refinance those loans when the time comes.


But hold on. Maybe it is too early to tell. The euro still has to deal with the unfolding horror story of the Spanish economy. Spain always looked like the weakest link in the euro chain. It had the biggest property bubble of any major euro-area economy – only Ireland came close to matching it. It had the fastestgrowing banking sector, and the most spectacular economic growth. Now it looks as though it will face the deepest downturn of any of the main economies. The economic figures coming out of Spain are wretched. It has been hit harder by the global recession than most of the euro area, and shows no sign of sharing the modest recovery being enjoyed by Germany and France. In the latest quarter, the economy was still shrinking at an annual rate of more than 4%. Unemployment has already climbed to a staggering 18% of the workforce and will climb higher still before the economy recovers. According to forecasts from the Organisation for Economic Co-operation and Development (OECD), Spain will be the third worst-performing nation of its 30 members this year. Only Hungary and 14

28 August 2009

This is the real testing ground for the euro

of loans outstanding to Spanish developers and construction companies. It’s hard to believe that much of that is going to be paid back. “Spain is set for a long, painful deflation that will manifest itself via a spectacularly high unemployment level for an industrialised economy, a real-estate collapse and general banking insolvencies,” argue analysts at the economic consultancy Variant Perception in a recent report. And much as it might like to, the rest of Europe won’t be able to ignore Spain’s problems. Between 2003 and 2005, 39% of euro-area growth came from Spain. Without it, the region would hardly have grown at all. Banco Santander, now a familiar name on British high streets, is the biggest bank in the euro area,

Sure, the banking system in Spain is generally held to have been more prudent than elsewhere. A system of ‘dynamic provisioning’ forced Spanish banks to salt away more money when times were good; other countries, such as the UK, may end up copying that. But it’s unlikely the banks have built enough of a cushion to pull through a property collapse on the scale Spain now faces without serious losses. These may be hidden for a time by lax accounting rules, artificially inflating asset values, or expanding abroad to raise money. But banks can seldom hide their losses permanently: the market always catches up in the end. Traditionally, a country with Spain’s problems would devalue its currency, as Britain has in effect done. But that door is now shut. Spain faces a protracted slump, one that will test its social fabric to breaking point. Unemployment could go as high as 25%: that’s a lot of punishment for any country to take. So in truth, the real test for the euro over the next five years is how it deals with the Spanish patient. If Spain can pull through and start to grow again, investors will conclude, rightly, that the euro can survive just about anything. But don’t be surprised if a long and grinding recession results in calls from the Spanish people for the return of the peseta.

investing in property

Minimise CGT and maximise wealth by Gary Booysen for you to use as your primary residence; or because the house has (accidentally) been made uninhabitable.

The great lumbering beast we call residential property has finally turned the corner. At least that’s what all the indicators are telling us. The Lightstone House Price Index tells us that “house prices are in a modest upward trend”. And the Reserve Bank’s latest rate cut makes buying a house that much easier. Even across the water, US house price data shows a positive rise for two months in a row. The world is finally shaking off the last remnants of the credit crisis. The result for us, as investors? A unique buying opportunity. It’s time to get in while house prices are at historic lows. ClareMart Auction Group’s CEO, Jonathan Smiedt, says: “Those who have worked wisely with their money and have not overextended themselves will now be able to upgrade by purchasing property at a higher level.” And when you’re coming of an incredibly low base, you’re going to reap the benefits as the market plays catch up over the next six years. But would be property investors should consider this thorn Capital Gains Tax (CGT).

How to make CGT work for you Your real estate property is, perhaps, the largest asset you own – Understanding CGT is vital when you sell – and buy – a property. Our law states that any gains you make from a property sold on or after 1 October 2001 is subject to CGT. But, CGT excludes certain assets. That’s right. If you arrange your finances correctly, you can save hundreds of thousands. One of the most important exclusions is a primary residence with a gain or loss of less than R1.5m. What’s a primary residence? Well, for SARS to consider your residential property as a primary residence, it must fulfil two requirements. First, an individual – not a company, trust or close corporation – must own it. So, attention all investors: Buy the property in your own name and not in the name of a corporate legal entity. This will


28 August 2009

keep possible CGT to a minimum. Secondly, the owner – or the owner's spouse – must live in the home and use it as an ordinary private residence. If you use part of the house for business purposes, then that part doesn’t form part of the primary residence. SARS will include this area in your CGT assessment. If you’re a non-resident, don’t think SARS has forgotten about you when it comes to CGT – you’re liable for the payment of CGT on the sale of any of your immovable property in SA. You’ll also pay CGT on the disposal of an interest of at least 20% in the share capital of a company where 80% or more of the net asset value of the company is attributable to immovable property. You can easily avoid this by keeping your investments in the correct ratios. The question many people ask is what happens if they don’t live in their home because they moved before selling it. In this case, SARS treats you as if you’re an ordinary resident. But only for a continuous period of up to two years and for any of these reasons: Your old home was being sold while you were searching for and buying a new one; or your home was being built

So how do you calculate CGT? Craig Deats, National Insurance Manager at Mortgage SA explained in the Sunday Tribune: “A house purchased for R1m and which generated a R4m capital gain over a six year period is now worth 5m. The first R1.5m gain on a primary residence is exempt from CGT. The net taxable gain on the property is thus R2.5m, of which 25% will be taxable – in this case the taxable amount totals to R625,000. The tax levied will be at the seller’s marginal tax rate, and should that for example be 40%, the CGT payable will be 40% of R625,000 which amounts to R250,000.” Simple when you know how! The “primary residence exemption” doesn’t apply to secondary properties. So, the first R1.5m of the net gain forms part of the capital gain. If you’re looking to upgrade and buy a little buyto-let investment on the side, it could be in your interest to put a little more cash into your primary residence (depending on the values). What forms the basis for working out the taxable amount? Well, it appears that this largely depends on the cost of the property. This includes the buying price, agent’s commission, transfer duty, advertising costs, broker’s fees and any other home improvement cost. Deats says the base cost doesn’t form part of the profits and SARS won’t consider this as a capital gain. It’s comforting to know that CGT only applies when you make a profit. If your property is worth less now than when you bought it, you won’t be liable for CGT. That means now’s a great time to upgrade your property – even if you’ll be making a loss. You’ll keep CGT to a minimum but still plant the seeds for massive retirement riches.

cover story

Mind the gap! Steer clear of negative real cash yields through 2009 The yield holiday South African savers have enjoyed is officially over. As bank interest rates plummet, the after-tax return on cash can’t keep pace with inflation. Gareth Stokes investigates the correct mix of assets for an economy in transition.

In an extraordinary piece published in The New York Times on 16 October 2008, investment guru Warren Buffett warned US investors of the danger of holding cash. He said investors who preferred the asset class “had opted for a terrible long-term asset – one that pays virtually nothing and is certain to depreciate in value!” He was referring to US dollar holdings at a time when financial contagion had blighted every nook and cranny of the developed world. If we look at the massive swing out of equity mutual funds (the US equivalent of unit trusts) into cash or cashequivalent investments, we must assume the average American investor ignored Buffett. Through 2008, the yield on US cash and long-term government treasuries – although unimpressive – was enough to insulate panicked investors from the looming deflation monster. “If deflation is in your future – then the equation is simple – all

you really want to hold is cash or US long-dated bonds to secure 2% per annum,” said Sam Houlie, portfolio manager at Investec Asset Management. It appears investors listened to him instead. South Africa’s situation was entirely different. While the developed world slashed rates to stave off looming recession, the South African Reserve Bank stuck to its inflation targeting policy. Interest rates peaked in June 2008 when prime reached 15.5%, remaining there until the end of 2008. Cautious investors spurned equities for attractive real cash yields, mostly out of fear of massive capital losses. The Association of Savings and Investments SA (Asisa) reported net inflows to domestic money market funds in excess of R14bn per quarter since Q3 2008! And by 30 June 2009, about 55% of the invested assets under management in domestic funds were in fixed interest or money market funds.

The cash to equity roundabout When global markets tanked in 2008, investors took shelter in cash and government treasuries. At the height of the financial crisis, the Total US Market Fund versus the S&P 500 market cap ratio moved above 30%. US pension funds’ allocation to equity shifted to as low as 35%. “Institutional and retail funds all over the world moved into cash,” said Brooke. Asset managers faced two realities as 2009 dawned. The first: Cash wasn’t the place to be. And second: A mountain of cash awaited better opportunities. In South Africa, cash lost its allure after a combined 5% cut in domestic interest rates. This began with a 50 basis points on 12 December 2008 and culminated with the latest 50 basis point reduction on 14 August 2009. As we entered 2009, most fund managers were confident the interest rate cycle had turned. Peter Brooke, head of macro strategy investments at Old Mutual Investment Continued overleaf

The problem with playing it cautious South African investors are traditionally risk averse. They tend to be underweight equities regardless of where they are in their investment lifecycle. And as the world emerges from financial crisis, there’s no doubt investors have been slow to emerge from their shells. The problem with cautious investment strategies is that while they provide real returns, you must consider the drag on the overall portfolio returns of a cash-heavy asset allocation strategy. This is particularly concerning given analysts’ expectations of 2% per annum growth for domestic cash over the next five years. What’s the problem with cautious? The short answer is, in most asset allocation, the word “cautious” translates to “cash”. Let’s consider a typical unit trust in the Domestic Asset Allocation Prudential Low Equity category. This fund is “sold” to private and institutional investors as a low to moderate risk product. It’ll grow income and capital over the medium-term – usually a


28 August 2009

period of three to five years. According to the Association of Savings and Investments SA (Asisa), 70 (out of 754) domestic unit trust funds fit this definition. Fund asset allocation is heavily in favour of cash, often as much as 50% of total assets under management. The balance is divided up between the available local and domestic asset classes. As example, consider Investec’s Cautious Managed Fund (which Houlie heads up). At 31 July 2009, this fund invested 50.7% in domestic cash, 20.5% in local equities, 7.2% in domestic bonds and 3% in gold. Its offshore component spreads between cash (4.5%), bonds (4.2%) and equities (10%). Although this mix of assets has served investors well, providing a 9.8% annualised return over the past three years, one must question the long-term effectiveness of a product that so severely limits the asset manager’s investment choice. Continued overleaf

cover story


new game of quantitative easing,” said Brookes. Globally, governments are now applying alternative monetary policy strategies to kick-start their economies. But these fiscal stimulus packages will further erode cash values. They’ll also rekindle inflationary pressures. “Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts,” said Buffett.

"It's time to step away from cash" Continued from previous page

Group SA (Omigsa) was among the first to utter the “cash is trash” mantra. Since then, most fund managers have urged investors to rebalance their investment portfolios, sacrificing cash in favour of equities. In part, we can attribute the equity market correction we’ve seen since March 2009 to a rightsizing of investor risk appetite. Investor site reported the extent of this frenzied exodus from money market funds in the US. In just one week, ending 20 August 2009, investors withdrew $12.07bn assets from that space, leaving a still daunting

$3.581trn in that sector.

It’s a “no-brainer” to get out of cash overseas! Why is cash trash? The obvious reason is the low yield on cash investments thanks to plummeting global interest rates. Banks used interest rates as their primary method to tackle the massive fallout from subprime. Unlike South Africa’s Reserve Bank, international banks cut rates aggressively! Of the 46 banks Bloomberg tracked in June 2009, 44 cut rates. The G7 average interest rate at the end of the second quarter fell to just 0.6%. “Rates are at zero and we’ve moved on to the

Holding cash in the developed world is counterproductive. “You are going backwards in nominal terms – backwards in real terms after fees – it’s just not viable!” said Brooke. Although today’s American saver’s practically pay for the “privilege” of holding onto these savings, the low yield on cash is familiar to them. In contrast, South African investors have had fantastic real cash yields. Going back 15 years confirms real cash yields of around 5% per annum. Today, cash yields 6.5% with inflation at close at 6.9% – that’s a negative real yield. Brookes believes it’ll be at least five years before we return to the “easy investment” of leaving money in the bank! “We are starting to see yield elsewhere – for the first time in three-and-a-half years Continued overleaf

Continued from previous page Houlie’s challenge is the same as other asset managers in the “cautious” space. How do you earn acceptable real returns for your investors when the bulk of your portfolio is in asset classes tipped to underperform for the next five to ten years? How do you best serve your investors when you’re restricted to just 40% equities when this asset class could provide the best returns over five years? Domestic cash – for example – could yield negative real after-tax returns over the same period. And most fund managers are using the “cash is trash” label for cash prospects offshore. Can investors really meet their long-term goals in a fund that strives for “low capital loss” while benchmarking against its peer group average? Investec says their “value-based contrarian approach to stock selection reduces the equity downside risk.” There’s nothing wrong with this except that investors in “cautious” instruments should be less concerned about equity risk and more concerned with the heavy weighting to cash, locally and offshore. At the group’s Q2 2009 economic update, Houlie


28 August 2009

spoke passionately about value opportunities in equities, both domestically and offshore. He spent a great deal of time on the merits of financial sector shares as the world emerges from financial contagion. The top ten holdings in Investec’s Cautious Managed Fund include FirstRand, Absa, Standard Bank, African Bank Investments and Liberty International. But he cautions that earnings from resources companies – the cornerstone of South Africa’s equity market – would disappoint through 2009. For this reason, gold exchange traded fund, Newgold Issuer Limited, is the funds top holding. Houlie isn’t concerned with the cash weighting of his fund. He must invest within the mandate agreed when the fund’s established. He has to provide an industry leading return – measured against similar funds – without breaking the fund’s rules. The warning for private investors: Make sure you know the mix of assets in each of the unit trust funds you invest in. Don’t make the mistake of assuming your unit trusts investments are mostly in equities. If you invest cautiously, there’s a danger of overexposure to cash and bonds!

cover story sentiment is in the gutter. International markets are soaring as investors replace their fear of deflation with an expectation of inflation! And this positive mood is underpinned by mountains of cash on the sidelines. Despite the rapid market turnaround, there’s still plenty of opportunity to buy into top companies. Shares on the JSE are valued some way below their historical average, though not as poorly as in February 2009.

Continued from previous page

both bond yields and property yields are better than cash,” said Brookes. Savvy investors can now buy shares paying annual dividends much higher than the after-tax cash yield. A poor cash yield forces investors to rethink their asset allocation strategy. They’ll pull money from cash and realign their investments for maximum yield. Risk appetite returns, giving a much needed boost for economic growth.

Strategies for stock pickers

The bond market’s lost momentum Which asset class should you favour for real returns through 2010? Cash is obviously a no go area. That leaves bonds, properties and equities. Bonds remain an integral part of fixed income and cautiously managed funds. “Bonds were very expensive as we entered 2009. They’d had a stellar run through 2008 – well ahead of where they should have been,” noted Brookes. This performance (with offshore bonds particularly rewarding for local investors) isn’t going to be repeated. The main drivers for bonds remain declining inflation, falling interest rates and improving economies. Those who argue that South Africa is a perfect storm for improving bond prices must consider that markets have largely priced in lower interest and inflation levels, while the economic recovery’s likely to be a drawn out affair. There may be some upside in bonds, but there are better outlets for capital through the next two years. Both local and overseas investors should find bonds more attractive than cash at this stage. Most fund managers remain bullish on listed property – although the next 18 months will be tough. Brooke says investors should achieve a real return of 6% per annum from this asset class over the next five years. And the expected 8.8% yield should easily beat the yield on bonds and cash for full-year 2009.

Real return resides in equity markets But the real return – locally and internationally – will be in equities. Earning concerns aside, the per annum real growth in equities should top 7% per annum over five years. That explains South African institutional investor behaviour through recent dips in the equity market. Industry statistics confirm that fund and pension fund managers bulked up on equities through the market


28 August 2009

Real returns reside in equity markets corrections in September 2008 and March 2009. But private investors haven’t kept up with the game. In the second quarter of 2009, the Old Mutual Money Market Fund topped R10bn as the man-in-thestreet stuck to a cautious, “cash only”’ strategy, missing the best of the equity market correction. Since the March 2009 low, global equities have staged a remarkable comeback. The Morgan Stanley World Index (dollar based) clawed back 40% from its March 2009 lows. It produced the best second quarter performance since 1998. Private investors sitting on loads of low-yield, low-risk cash in the expectation of further market correction has missed out on a big slice of equity market gains. Private investors also make the mistake of assuming they’re adequately exposed to equities when the reality is far from this. Brooke warned that most unit trust funds in the prudential low equity category held around 50% of their funds in cash. Investors in these types of products are reducing their chances of real return over the next 18 to 24 months. There’s no doubt shares are the right place to be. Last October, Buffett said “equities will almost certainly outperform cash over the next decade, probably by a substantial degree”. Brookes firmly believes equities are the only game in town. Equities remain the only asset class where you can practically guarantee a real return next year, although the easy money's in the bank. Investec fund manager, Sam Houlie agrees. He says the best time to purchase shares is when

Too many investors remain on the bench out of fear that they’ve missed their window of opportunity. Houlie dismisses such concerns. He says investors should forget about trying to time the market. Peter Lynch, one of the greatest fund managers of all times, echoes this sentiment. Lynch is on record saying that “more money has been lost in trying to time corrections than in the corrections themselves!” Investors should focus on valuations, commit to a strategy and have the courage of their convictions. You should, however, take more care in selecting winning shares. In January this year, all you had to do was pick a share – sectors were bombed out across the board – and you were going to lock in recovery wherever you invested. “Sector bets made by portfolio managers will be as a result of picking specific stocks rather than a macro economic overlay,” said Houlie. The important strategy is to determine what discount companies are offering to fair value and make an honest assessment of the earnings outlook. How should you go about structuring your equity portfolio? Holie's a big fan of stock picking, while the Investec group remains bullish on value. “Valuation is a function of the fundamentals and the expectation priced into stocks,” said Houlie. Now is “a phenomenal time to be invested in equities [especially] if you consider the low yields in the alternative asset classes”. Dividend yields on wellselected equities are already returning better than cash. Under these conditions, stock pickers will do particularly well over the next 12 to 18 months. Market conditions are also ripe for diversifying to top listed offshore companies, particularly in the US and Europe. “There is an opportunity in global equities that should not be ignored,” said Houlie. With the rand holding strong below R8.00/$, investors should load up on quality while international prices remain bombed out.

the best blogs What the bloggers are saying

Why the poor go private Can money buy happiness? Sure, says Drake Bennett. But you have to know how to use it. When spending, we tend to value goods over experiences, and objects over people. But when it comes to buying happiness, these choices are not the right ones. The spending that actually makes us happy is the type where the money vanishes and “leaves something ineffable in its place”. Examples include taking a friend for lunch or splurging on a holiday. If your daily earnings “were less than the price of a newspaper”, would you buy private healthcare and education? Well, millions of the world’s poor do, says Tim Harford. The reason? Accountability. For example, two World Bank researchers found that three quarters of visits to doctors by poor people in Delhi were to private practitioners. That’s because privatesector doctors don’t get paid unless they do a good job. Public sector ones, on the other hand, are only held accountable, if at all, “through indirect channels”.


Happiness: a buyer’s guide

Be careful how you spend it Problem solved? Not unless you avoid a further trap. Recent studies have found that “just thinking about money makes people more solitary and selfish” and steers us away from the right type of spending. People even chose to put more physical distance between themselves and other people after thinking about money for just a few minutes. The trick is to recognise and fight this impulse. And remember to buy a round for your friends next time you are in the pub.

Get ready for a replay of the downturn “Gird your loins,” writes Heidi Moore. A crisis in the mortgage-backed securities (MBS) market got us into this downturn. “Are you ready for a replay?” The Fed is so eager to save US banks (and the housing market) that it is taking all the related troubled loans and securities onto its own books. “The problem is the Fed may be in well over its head.” As Fed stimulus dollars flood the market – $741bn this year – prices for some residential MBS have jumped 40%. Yet 9.24% of all US mortgages are now delinquent and only 6.6% of prime

mortgage holders had caught up on missed payments by July. That compares to an average of 45% from 2000 to 2006. The Fed is in so deep that it now controls around 15% of Fannie Mae and Freddie Mac-backed mortgages, against 0% before 2009. Why complain? Banks get to dump bad assets while the Fed wins applause. And politicians get to show Fannie and Freddie – who in effect facilitate mortgage lending to their constituents – some love. But, “as we found out during the last boom, something that feels great at first can feel terrible later”.

The same goes for education. In a new book, The Beautiful Tree, University of Newcastle professor James Tooley describes discovering cheap private schools for the poor across the world. Many poor children in India are being educated free “by school owners with an eye on their standing in the local community”. Facilities are often better than at state schools and privately paid teachers are usually more committed. In Lagos, Nigeria, for example, he found some state school teachers asleep in class. “The lesson here is that a little accountability goes a long way – and feepaying customers are in an excellent position to hold clinics and schools to account.” State-run facilities need a kick, but “we must also examine how low-cost private alternatives could be nurtured”.

Celebrities give you viruses

The huge popularity of celebrity searches attracts criminals who attach malicious software to celebrity news sites. Biel’s fans – and there are many – run a one-in-five chance of landing on a


28 August 2009


Who has taken over from Brad Pitt as “the most dangerous celebrity to search in cyberspace”, according to internet security firm McAfee? asks Belinda Goldsmith. The answer is 27-year-old sitcom actress Jessica Biel (pictured), who shot to fame in the TV show 7th Heaven and starred recently in Easy Virtue. In our enthusiasm for online pictures of her, or gossip about her, we alert the attention of an army of cybercriminals. In short, the more popular the star, the bigger the threat that any site they appear on will test positive for spam, phishing and viruses. website with viruses and corrupt software. Second on this year’s list of dangerous online stars was pop singer Beyoncé. Meanwhile, more than 40% of Google search results for Jennifer Aniston screensavers contain nasty viruses.


The quest for a perfect gin and tonic a plant in Yorkshire. “It’s very important in business that you stick to your strengths. And my experience at Plymouth Gin told me that bottling is not something that you should get into on your own.” They launched in March 2005, and soon got into Selfridges and a few upmarket bars. But it was only after hiring a public relations agency that things really began to take off. After a sympathetic piece in The Times, they got a call from Waitrose, who put in an order for 6,000 bottles in autumn 2005. “That was something that never happened when I was at Plymouth Gin, that a company like Waitrose would call us.”

by Jody Clarke Once dubbed ‘mother’s ruin’, gin’s image has come a long way since William Hogarth portrayed it as the scourge of working-class London in the 18th century. These days, few things could be more civilised than a sunlit gin and tonic, and premium gin brands abound. Now Charles Rolls, 51, is doing the same thing for tonic. His company, Fever Tree, is growing at 300% a year, as drinkers take to his premium range of natural mixers – even in the downturn. The grandson of a South African immigrant “who got torpedoed off Southampton and swam to shore in his pyjamas”, London-born Rolls was chief executive at Plymouth Gin in the early 2000s. He was on the lookout for tonics to go with the 200-year-old premium brand. But when he went to New York to try some American tonics, “they were no good at all. They all tasted far too sweet, were very sickly and for some reason all had a taste of grapefruit about them.” What was the point, he thought, of companies going to extraordinary lengths to make premium gin when most of the glass was filled with sickly, syrupy tonic? So, along with Tim Warrillow, a marketing man, he set up Fever Tree in 2004, using £1m raised by Rolls and an outside investor. Their aim was to make a tonic water using only the very best ingredients. A botanist “who looks for

MY FIRST MILLION Charles Rolls, Fever Tree plants on his holidays” tracked down bitter oranges for them in Tanzania, to which they added quinine sourced in Uganda, and British spring water. It all sounds a bit grand, but Rolls insists it was only “about getting the ingredients right”. That also involved pasteurising the tonic, instead of adding preservatives. The initial production runs resembled a bombardment at the Somme, he says, because “the pressure in the bottles went ballistic”. So they outsourced bottling to

Sales hit £100,000 in the first year, rising to £1m in 2006 as they launched new lines, including bitter lemon and ginger ale. In 2008, the company won a £750,000 deal to supply Tesco across 400 stores, with Sainsbury’s following soon after. They now have seven products, including soda water and lemonade, and sales are expected to hit £4m this year as they look for avenues into the US market. But isn’t Rolls crazy to keep launching premium brands in the downturn? “I think what’s happened in the UK over the past 15 to 20 years is that the quality benchmark has risen. We’ve proved that there really was a group of consumers who cared that they didn’t have artificial flavours in their drinks. That’s a trend we’ve latched onto.”

The MoneyWeek audit: John Cleese


• How has he made his money? John Cleese’s TV career began in 1966 with the satirical show The Frost Report. He earned £80 a week, split 50-50 with co-writer, Graham Chapman. When Monty Python began in 1969, Cleese got £240 a show. For the first series of Fawlty Towers, in 1975, he was paid £6,000 in total for 43 weeks of work. In 1988, he wrote and starred in A Fish Called Wanda, which grossed over $62m. He has also appeared in the James Bond and Harry Potter films. • How much have his divorces cost him? Cleese’s first two separations can’t compare to the cost of his split with his third wife, Faye Eichelberger. In 1978, the star parted


28 August 2009

amicably with Connie Booth; the settlement was undisclosed. In 1990, he paid almost $5m to second wife, Barbara Trentham. Lawyers were avoided in both cases. But the settlement in his latest divorce stipulates that Eichelberger will get $13m in cash and assets, including an apartment in New York, a $3.3m home in London’s Holland Park and half a beach house in Santa Barbara. Cleese will also pay her $987,000 a year for the next seven years, even though they have no dependant children.

• What’s he worth now? Eichelberger’s lawyers reckon Cleese earns £93,000 a month, and had a £16m property portfolio. But Cleese’s lawyers say those calculations were based on his 2007 income, helped by money from the film Shrek 3 and a £750,000 property deal. They say his actual monthly income was around £55,000. The divorce settlement will reportedly reduce his net worth to $16.5m. Cleese is currently writing a one-man show, A Final Wave at the World or the Alimony Tour, Year One, to fund the payout.

personal finance

Property has turned the corner… Here are our top 5 tips to get the best home loan out there by Karin Iten There’s never been a better time to buy property! This may take you by surprise – especially given how often you’ll hear otherwise – but I couldn’t be more serious. Here’s why… •

Firstly, property prices are incredibly low right now. According to Absa’s House Price Index, in real terms, “prices have dropped to levels last seen in early 2006”. Secondly, thanks to the latest interest rate cut of 50 basis points, prime is at 10.5%. That’s the lowest it’s been since October 2007. On a R1m bond, you’re saving a whopping R3,216.92 each month compared to eight months ago when prime was at 15.5%.

Despite this, it’s become harder and more expensive to get a bank to approve your bond application. Back when the property market was booming, banks would happily give you a 100% mortgage bond, regardless of the property value. These days, you can count yourself lucky if the bank only asks for a 15% deposit on a home loan. Most of the major banks now demand anything between 20% and 30%. This makes things tough for the prospective buyer and it’s why I’m sharing my top five tips to getting the best home loan out there with you.

I can’t stress enough how important your credit rating is. It shows that you take your debt seriously. And it affects the bond rates your bank is likely to give you. According to experts, the best rates tend to go to those with a credit score of 720 or higher; who have been with the same employer for at least two years; and have money for a down payment. So if you’re thinking of buying a house, apply for a free report at If you’re credit rating is less than ideal, work on raising it before you apply for a loan.

Tip#3: Shop around According to, a “30 year loan is your best choice if you’re looking for a long-term stable loan. It’s usually the safest home mortgage you can get.” Remember this when you’re shopping around. You’re also likely to get a better rate if you bank with the loan provider. For example, a Standard Bank customer will get a 95% loan on a house worth R1m. But a non-Standard Bank customer may only get a 75% loan. This isn’t a guarantee though… so shop around to make sure your bank’s giving you the very best rate.

Tip #4: Limit your credit applications Your level of debt can affect the amount you qualify for. So think twice about applying for any other lines of credit if you’re applying for a home loan. The bank will just get the wrong impression of you. They’ll think you’re the type of person who shops ‘till they drop. It might compel them to turn you down.

Tip #5: Give a good down payment The higher your down payment, the less you’ll need to borrow from the bank. And ultimately, the more you’ll save on interest. So if you want to keep your debt to the bare minimum, add extra cash to your down payment. If that’s not an option, try to pay a little extra (even if it’s just a few hundred rand) into your bond every month. You’ll soon see the benefits. Getting the best loan, all comes down to that age old Scout mantra: “Be prepared!”

Tax tip of the week

Tip #1: Start planning 6 months in advance

Gear up for a 20% hike in travel allowance tax

If you’re thinking about buying a new house, do the work upfront. Approach your bank. Find out how much they’re willing to lend you and ask them to pre-approve your bond.

Earlier this year, the Minister of Finance announced that in the 2010 tax year, SARS will tax our travel allowances very differently... starting with the scrapping of the deemed business kilometres rule. The 2009 draft Taxation Laws Amendment Bill, currently under review, gives us some details.

According to Ooba, “getting yourself prequalified before putting in an Offer to Purchase should be the first step you take. The National Credit Act stipulates that monthly deductions, e.g. income tax, monthly living expenses and debt need to be taken into account.” Just remember, pre-approval is only valid for 90 days.


Tip #2: Keep an eye on your credit score

28 August 2009

One of the big proposals in the Bill sees the taxable portion of your monthly travel allowance increase from 60% to 80%. That means the tax-free portion of your travel allowance drops from 40% to 20%... increasing your employees’ tax bill by 20%! This change is likely to come into effect on 1 March 2010, so you and your employer must start reviewing your travel allowance now! Remember: With the deemed kilometre rule falling away, get into the habit of keeping a logbook now. From next year, you’ll have to base your business travel deduction on actual business kilometres travelled. Matsika Vengesa, TaxConsulting,

profile This week: Erik Prince

The adventure seeker and conservative true believer who made $1bn in Iraq

The latest – that Blackwater was secretly contracted by the CIA to arrange the (unrealised) assassination of al-Qaida leaders – follows a series of damning personal allegations made earlier this month by two former employees in a Virginia court. Testifying anonymously as “John Doe 1” and “John Doe 2” (for fear of reprisals), the two men claim Prince “views himself as a Christian crusader tasked with eliminating Muslims and the Islamic faith”, reports The Nation. They also claim that Prince “may have murdered or facilitated the murder” of individuals who were co-operating with federal authorities investigating the company. Lesser allegations include smuggling “illegal” weapons into Iraq, racketeering and tax evasion. The firm has so far dismissed all such claims as “anonymous, unsubstantiated and offensive”. Erik Prince, meanwhile, is keeping schtum. But these developments only add to the aura of intrigue and menace surrounding the secretive security

company founded by the former US Navy Seal (special operative) in 1997. Prince, 40, has always been “an adventure seeker and conservative true believer”, imbued with strict values inculcated by his father, Edgar, a self-made Michigan autoparts billionaire, and influential Republican, says Newsweek. “Hard work, family and God were the elder Prince’s core beliefs.” An “intense and dutiful” son, Erik got his pilot’s licence aged 17. In 1990, he served as an intern for George Bush Snr at the White House. Respected for his toughness in the US Navy, Prince was posted abroad but saw no action. He started Blackwater after his father’s death in 1996. Prince’s big commercial break came with the September 11 attacks and subsequent Iraq invasion. Beginning with a $27m nobid contract to guard the US administrator, L Paul Bremer III, Blackwater “metastasized into a central component of the US presence in Iraq”, says the LA Times (see box). Its operatives gained a reputation as “triggerhappy and ruthless”. In September 2007 they opened fire in Baghdad’s Nisoor Square, killing 17 civilians, says The Guardian. The Iraqi government has since banned the firm from its territory. Blackwater reportedly made $1bn from its contracts in Iraq. However, Prince


When Erik Prince stepped down as chief executive of Blackwater in March, he claimed he would stay on as chairman, but take a back seat. Some hope, says the Los Angeles Times. Blackwater changed its name to Xe Services LLC “to escape the notoriety that followed a series of bloody incidents in Iraq”. Yet the explosive allegations keep on coming.

has always angrily denied running a mercenary force, says the Daily Mail. He claims that his operatives are “loyal Americans” and denies having any Christian supremacist agenda. Yet Prince’s language often hints at a “restless search” for “martial and religious purity”, says Newsweek. Describing Blackwater’s activities in Iraq, he once remarked that: “Everyone carries guns, like Jeremiah rebuilding the Temple in Israel, a sword in one hand, a trowel in the other.”

Blackwater: a Fedex for “CIA-type services” Blackwater’s training arm operates the “largest private technical training facility in the US”, says The Washington Times. So a tour of its operations based in 6,000 acres adjoining North Carolina’s Great Dismal Swamp is quite an eye-opener. Amid “life-size replicas of Navy ship hulls” and “bombed-out vehicles”, some 35,000 individuals are put through their paces annually. As well as American police and military and navy personnel, the company trains foreign forces, including Pakistani soldiers and Afghan border police. Prince likens Blackwater’s emergence as a private force to Fedex, which “evolved due to the lack of capabilities and responsiveness” of the US postal service. And if Blackwater was involved with secret CIA missions, as alleged, it “will not surprise scholars of the Bush-Cheney strategy in Iraq”,


28 August 2009

says The Independent. As one unnamed intelligence official told The Washington Post: “Outsourcing gave the agency more protection in case something went wrong”. The company’s Total Intelligence Solutions arm now offers “CIA-type services” to both governments and Fortune 1000 firms. Despite the controversy, Prince’s empire continues “to benefit under Barack Obama’s presidency”, says The Guardian: the number of private military contractors has increased in Afghanistan by almost 30%. “Consider the numbers,” says the LA Times. In 2007, Blackwater had two-thirds as many operatives in Baghdad as the US State Department had global diplomatic security agents. It would take years for the State Department to recruit, vet and train a force to take over its work.

Spending it Travel

America’s most luxurious jail By Ruth Jackson

And you can even stay in a hotel with a colourful past. The Liberty Hotel has provided a place for people to sleep for over 150 years. But up until the early 1990s, the guests weren’t there voluntarily – the building was Boston’s notorious Charles Street Jail from 1951 until 1990. Nineteen years ago the last prisoners left when the jail, deemed inhumane due to overcrowding, was shut down. A lot has changed since then. Gone are the tiny, cramped cells and dark, dangerous, communal areas. In their place are light, airy rooms and the most impressive lobby I’ve ever seen. On arrival you’ll be served a glass of champagne, which you can sip while you take in the magnificent surroundings. The lobby is situated in the prison’s central 27m-tall rotunda with walkways circling the walls high above the heads of guests. Large windows and elegant lighting help to banish any lingering sense of confinement. As for the rooms, most are newly built, but a few are within the former prison itself, many with great views of the Charles River. If you’re looking for the authentic experience, these are the ones to go for. They include exposed brickwork and the original windows, which are surprisingly large and ornate.


Few parts of the United States boast a sense of history to rival Europe’s big cities. Boston is a notable exception. From the Tea Party to Harvard University, this city has plenty of history and culture to keep visitors busy.

The Boston Liberty Hotel’s impressive and airy lobby Although luxurious, the former cells are slightly cramped – but what do you expect from a prison? If you’d prefer a more spacious room, those in the new building fit the bill. The bathrooms in particular are enormous.

many of the city’s historic buildings. Or if you’re feeling lazy, you can also hop on one of the city’s tram tours. Just head to the visitor centre in the middle of the Common to buy your tickets.

The hotel is in a great location just below Beacon Hill, one of Boston’s most exclusive residential areas. Here you’ll find wonderful restaurants and shops, while a short stroll will take you to Boston Common – America’s oldest public park – and the main shopping district. This is another of Boston’s attractions – as a relatively small city it can be explored easily on foot. The well-signposted Freedom Trail is a four kilometre walk that takes in

The Museum of Fine Arts is also worth a visit. This huge building houses a vast art collection, so if you are pushed for time, focus on seeing works by American artists. Boston is also home to one of America’s best baseball teams, the Red Sox. If you’re a sports fan, it’s worth trying to get tickets – but do try to book early, as they sell out fast. Rooms from $259 (R2,000) per night; visit

Prison hotels: the best of the rest Malmaison, Oxford Plush rooms hide behind heavy cell doors. Rooms cost from R2,300.


28 August 2009

Langholmen Hotel, Stockholm This hotel houses one of the city’s best restaurants. Rates start at R660.

Four Seasons Hotel, Istanbul This prison featured in the film Midnight Express. Rates start from R4,400. istanbul.


Toyota’s innovative Prius just got better It’s the most powerful car in Hollywood (celebrities keen to show off their green credentials like to be seen driving it) and the latest model is even greener than its predecessor, says Piers Ward in Top Gear magazine. That makes the Toyota Prius the “closest thing you can get to guiltfree motoring this side of a hydrogenpowered moped”. The Prius is a ‘hybrid’ car, which means it uses a combination of conventional engine power and an electric battery to get the best compromise of efficiency with performance and practicality. The most important numbers for this car, then, are not so much the top speed (180km/h) or the 0-100km/h sprint time (10.4 seconds), but the fuel

consumption (30km/L) and the CO2 emissions (92kg/km). And these are for the top spec T Spirit model; for more basic models, the green figures are even more impressive. New features on this Prius include a smaller and yet more powerful battery, a bigger more powerful engine (now 1.8 litres), solar panels to power the ventilation, and lower emissions (down 14%). It’s not the greatest car in the world to drive, and although performance is improved, it’s still sluggish, but that’s unlikely to matter to those buying it, and the new model is an improvement in all areas, says Ward.

But it’s perfectly inoffensive and acceptable if you just want to get from A to B. You may be tempted by the Honda Insight, but don’t be. The Prius is the better buy, beating the Honda on ride quality, performance, refinement, and interior quality. What Car agrees. It tested the new Prius against the Honda, and the greenest diesel offerings from Volvo and BMW, and the Prius came out on top. Not only is it an “eco-friendly standard bearer”, it’s now also a “proper family car”. It’s “clean, practical, cheap to run and delivers a comfortable, easy driving experience” – like the old Prius but “without the compromises”.

True, it’s not going to rival a BMW as a driving machine, says Ben Barry in Car.

Wine of the week: from one of the great female winemakers in the industry. Wine: Domeya Samara 2005 R85 at most retailers

by Marilyn Cooper

Rianie Strydom, previously of Morgenhof estate, is a great winemaker. She also happens to be a woman. Her specialty is red wine and I can’t wait for her two new, single vineyard, Shirazs. She’s releasing them later this year under the Haskell Vineyards label at around R450 per bottle!

In the meantime, here’s a bargain – an elegant Bordeaux red blend, made up of Cabernet, Merlot and Malbec. Domeya Samara has a double gold from the Michelangelo and ranks in the top ten in the Calyon Trophy Bordeaux blend competition.


28 August 2009

The Morgenhof estate has a nononsense, eye catching, approach to labeling – simply three dots in the O of Dombeya to represent sight, smell and taste descriptors that appear on the back label. This same label, describes the wine as a layered, complete wine with chocolately, intense dark fruit flavours and a dry, balanced finish. What more can I add? I thoroughly enjoyed it with a perfectly barbequed rare fillet.

Marilyn Cooper is a Cape Wine Master and Managing Director of the Cape Wine Academy.

blowing it

What John Cleese’s divorce tells us about markets Markets on both sides of the Atlantic took a wobble last week. Most commentators seemed to think it was a nasty American consumer confidence report that did the damage. But it wasn’t – the blame lies with John Cleese.

back in style, many will be emboldened by Faye Eichelberger’s example and push for the big payout. Now that would make markets jumpy. Want to know when this rally is really going to end? Look out for a rising divorce rate.

The Minister of Silly Walks was hit with a savage divorce settlement two weeks ago. And I bet it sent a chill through the City. The US courts decreed that the former Mrs Cleese, Faye Eichelberger, was entitled to half his earnings, half the value of his nine houses and a monthly allowance of £57,000 (R730,000). Fair enough, you say – they were married for 17 years. But the total £12.5m (R160m) payout also leaves Cleese poorer than his wife. “If we both died today,” he grumbled from the court steps, “her children would get much more money than mine.”

The secret of a long marriage


How do you stop money problems from destroying a marriage? Well, Robert Charlton thought he’d found the answer. For Robert and his wife, Elizabeth, the secret of a long marriage was simple, says Luke Salkeld in the Daily Mail. You just decide what each partner values the most and indulge in as much of it as possible.

How could that stop the biggest stockmarket rally in 70 years dead in its tracks? Well, think about the devastating impact on bankers’ personal finances if a wave of trophy wives followed in Faye’s footsteps. There’s plenty of evidence that they’re itching to cut loose. According to the National Center of Health Statistics, the divorce rate in America has slumped to its lowest in 40 years. But not because couples are sticking together in a time of adversity. No, the truth is they just can’t afford to break up – low asset values and the sky-high cost of legal fees are keeping them together. For now.

How much? John Cleese must pay £12.5m (R160m) to his ex-wife Across in the US, estranged couples have packed up their stuff and moved to opposite ends of the same house. And they’re sitting there now with one ear cocked to the financial news and their divorce lawyer on speed dial – waiting to blow a fortune in the courts. As one divorce lawyer told the Orlando Sentinel, “Our clients are staying in the house together until the market improves.”

For Elisabeth, it was diamonds. For Robert, it was young women. So every time Robert cheated on his wife, he would make up for it by buying her an expensive piece of diamond jewellery. Thanks to his lack of willpower, she assembled quite a horde – 43 diamond encrusted items in total. Last week, a selection of Mrs Charlton’s jewellery went to auction, selling for nearly £300,000 (R3.8m) in all. According to her family, the couple’s arrangement meant their marriage thrived from when they were wed in 1948 until Mr Charlton died, aged 63, in 1974. “His daughter was fully aware of what was going on at the time – it was no secret to anyone.” The lessons? True love never dies. And a diamond is a man’s best friend.

Perhaps it just has. With bank bonuses

Tabloid money… Brown’s promises are just twaddle ■ Gordon Ramsay has been busy “bleating” about his “hellish year”, says Carole Malone in The News of the World. “The poor love is apparently devastated he’s only made a R5.1m profit.” Given the state of the economy and the fact that one in three British school leavers is now out of work, most companies would be ecstatic at having made a R51,000 profit – let alone a R5.1m one. Unlike companies who have collapsed solely due to the credit crunch, Ramsay has brought about his own problems with his “greed, his sexual antics and his big mouth.” But he is still blaming other people. He recently said: “The industry was getting arrogant. They forgot the customers are king.” “No Gord – YOU did.” ■ Germany and France have exited recession and returned to growth. But in Britain unemployment has hit a 15-year high and the UK recession gets worse. “So much for Cap’n Brown’s


28 August 2009

‘we’re all in the same boat and it’s all America’s fault and I’m the man to save you all’ twaddle,” says Richard Madeley in the Daily Express. “The truth is the other boats are pulling away from us and ours is going down by the stern”. ■ According to a new survey, women are less likely to buy something from a shop assistant who they think is better looking than them. If that were true, “I’d be wearing the clothes I wore in 1990,” says Sue Carroll in the Daily Mirror. Most shop assistants leave home everyday looking immaculate and spend their days dealing with difficult, indecisive, often stroppy customers. “They are unsung heroes and I salute the lot of them with the exception of the snarling harpies in French boutiques who gaze haughtily at us like we’re damage goods.” If you are too sensitive to buy anything from someone better looking than you, “get a life or go shopping online.”

shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news

PUNTS Company



Sabvest (SBV) Investment companies


“Of all the listings that fall into the broader definition of ‘investments trusts’ there’s arguably none more overlooked than Sabvest,” marvels Marc Husenfuss in Finweek. He thinks this is a solid long-term play. Firstly, it’s trading at 590c, which is a massive 40% discount on its intrinsic net asset value (NAV) of 1010c. While its textile interests could dissuade investors, it has “substantial unlisted interests, such as Flowmax and Sunspray Foods, plus a R60m holding in JSE-listed Set Point”. It also has another R60m tucked away in the likes of Datatec, Massmart and Metrofile. “No wonder astute investors such as the Ellerine brothers and Hugh Roberts are hanging in there.” Buy. 590c

Harmony (HAR) Mining

Financial Mail

“Harmony Gold is a company on the up”, says Larry Claasen in the Financial Mail. It’s turned around from a pre-tax loss to making a healthy profit and earnings are looking good. Harmony’s also decided to declare its first dividend in five years. And it’s also planning to expand production. This prompts Claasen to conclude by saying this share is “a definite buy”. Buy. 7080c

MTN (MTN) Summit TV Telecommunications Jonathan Fisher, Regional Director: PSG Konsult


Jonathan Fisher, Regional Director at PSG Konsult, likes MTN. He says there’s a lot of corporate activity going on and because of that, it hasn’t dipped to R120 yet. But when it does, he’ll “certainly be buying them on weakness”. There’s still a lot of speculation over the Bharti deal, but even if it doesn’t happen, MTN is still a great company with very good growth prospects. He’s so confident; he cites it as his “pick of the year”. Buy.

Current price


City Lodge (CLH) Travel & leisure

Financial Mail

Jamie Carr has singled out City Lodge for his diamond in his weekly column Diamonds and Dogs. He says “its numbers for the year to June underline what a classy operator it is”. Its occupancy levels remain high at 77% (a number other operators “would gladly start gnawing off extraneous body parts” to call their own. City Lodge might not be catering for the top end, but “this is an inn keeper that knows its market, has a trusted and respected brand, and is investing heavily in the long-term future of the business”. It’s opening nine new hotels and extending one. Like many of its competitors, it’s going to rake it in during the World Cup, but City Lodge will keep earning long after. Buy. 7416c

Bidvest (BVT) Supply services


Shaun Harris expounds on the chameleon nature of Bidvest in this week’s Finweek. Bidvest has proved itself a solid defensive share during “the abnormal economic environment”, losing only 1.5% on its share price. He goes on to say: “Don’t be fooled – over the coming months and year, Bidvest is likely to become a growth stock again.” With a decline of just under 14% in headline and basic earnings per share, it seems to be doing a lot better than its competitors. Not only has it proved resilient, but it’s taken the opportunity to gobble up some of its rivals in Eastern Europe, namely Nowaco and Farutex. This should immediately boost its earnings. Buy. 10940c

28 August 2009

shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news

DOGS Company


Bell Equipment (BEL) Commercial vehicles & trucks


Financial Mail

Current price

Things aren’t looking good for Bell. The company is “rightsizing”, which is nothing more than a euphemism for downsizing, which Jamie Carr describes as a “brutal pruning of expenses”. It’s a little tight on cash and is trying to secure additional loan facilities. In the last six months, its Richards Bay plant has been operating at 20%, while its German factory hasn’t produced a single unit. Jamie Carr says: “Many staff members have agreed to voluntary salary cuts to help out until the company is back on its feet. There is a real commitment to bring Bell through the current crisis, and we should applaud its resilience.” But whether these measures can hold the company together until the market turns remains to be seen. Avoid.



Current price



Northam (NHM) Mining

Financial Mail

Resilient Property (RES) Financial Mail Real estate holdings & development

Uranium One (UUU) General mining

Financial Mail

Sasha Planting writes in the Financial Mail that the good news for Northam is “the development of Booysendal, a promising platinum project”. The platinum price is still low, but sales from inventories helped Northam boost sales volumes by 21%. Hold.


Despite the recession, Resilient Property Fund has remained true to its name and its results look good. Larry Claasen, in the Financial Mail, says that although this looks like a promising investment, companies are starting to feel the slowdown in consumer spending. This one looks good but on a PE of 18.42, it’s expensive. Hold.


Uranium One wrote off $251m at its Dominion mine in SA, when it shut production down last October thanks to falling prices. Since then, prices have improved. Razina Munshi says that these better prices and an acquisition in Kazakhstan may yet improve its fortunes. Hold.


**Closing prices as at 26 August 2009

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last word

Bernanke is to stay put… … so investors should take cover analogy. Becker (Nobel awarded 1992) argued that by putting out the little forest fires, the recessions of the 1990s and the early 2000s, the feds inadvertently created the conditions for an even greater conflagration. Instead of burning off the underbrush, the tinder built up until a blaze was inevitable. Bernanke bravely poured on the water, but it was too late.

This week, Ben Bernanke got the nod for another stint as head of the world’s most important central bank. Yes, he completely misunderstood the implications of the hugely negative US trade balance, believing America did the world a favour by spending its “global saving glut”. And yes, he missed the approach of the biggest financial disaster in three generations. When it arrived, he mistook it for a routine recession, until finally, panicked by the collapse of Lehman Bros, he insisted Congress pass a $750bn spending bill – or “we may not have an economy on Monday”. But except for things that really matter, he’s been a pretty good Fed chief. Besides, he has the right credentials. He was a professor of economics at Princeton and holds a PhD from MIT – just like the most recent Nobel prize winner in economics, Paul Krugman.

Bill Bonner

Few people would have more authority on the subject than the group gathered at the Beverly Hilton in Los Angeles earlier this year. Michael Milken, the Junk Bond King, gathered them thither and picked up the tab for Gary Becker, Myron Scholes, and Roger Myerson. Each of their names is preceded by ‘Nobel prize winner’. Everything they say is freighted with authority, as if they were the boss yardbird in a cellblock. With that kind of brain power on hand, you’d think you could come up with a good explanation. But the best they could do was a simple 28

28 August 2009

Friedman won a Nobel prize for his work. He drew around him a community of scholars who won so many Nobel prizes they ran out of room in the University of Chicago trophy cabinet. But it only makes you wonder about the Nobel committee. Friedman’s acolytes won their prizes for elaborating a series of mathematical proofs for things that were either self-evident or self-evidently absurd – things later proven wrong. Modern Portfolio Theory, Black-Scholes Option Pricing Model, Dynamic Hedging – the farther afield the scholars went, the more they lost touch with home. Friedman’s work itself was flawed. The free market didn’t take care of everything, at least not as people hoped. Economist Murray Rothbard explained why in 1971. You can’t expect the free market to function perfectly if you leave in the hands of the government the power to control money. Either markets are free or they aren’t was his point. If they’re not, you can’t blame freedom when they fail.


The US has just averted the Second Great Depression, say the papers. “What saved us?” asks Krugman in a recent New York Times editorial. “Big government” is his answer. Specifically, the big government of Ben Bernanke. One of the surest trades of the bubble era was the so-called ‘Bernanke Put’. Investors thought they could count on him. Buy stocks. If they went down, Bernanke would make sure you didn’t lose. He’d add liquidity until the market bounced back. That trade went bad in 2007. The market fell. Bernanke added liquidity. But so far, stocks have yet to regain 50% of what they lost. What went wrong?

The analogy worked well, largely because it shifted the blame from the delusions of the academics and the financiers to the

– increases in consumer price inflation but little additional growth. The solution was ‘monetarism’. Keep the quantity of money growing at a steady rate, said Friedman; the free market will take care of everything else.

Friedman: intellectual godfather? delusions of the government. But it didn’t explain how come the forest service – headed by Bernanke – and the timber companies and the professors of forestry became delusional in the first place. Nor did it offer investors any reason to think they weren’t still delusional. “Inflation is always and everywhere a monetary phenomenon,” said the intellectual godfather of them all. During his stint at the University of Chicago, Milton Friedman made what looked like an advance. After years as a “thorough Keynesian”, he saw that stimulus works like everything else. The law of diminishing returns applies, reducing the effect of further inputs of money and credit. You reach the point where additional stimulus produces ‘stagflation’

But free market economists are now blamed for everything. The Chicago boys are out. The MIT crowd is in. And the Bernanke Put is good for another term. It doesn’t guarantee that stocks won’t go down. It only guarantees that Big Government will get even bigger. The Fed’s balance sheet doubled under Ben Bernanke so far. It will probably double again – to $4trn – before his next term is over. And in the end, Friedman’s history of the Great Depression will be prophecy: “The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe... Far from the depression being a failure of the freeenterprise system, it was a tragic failure of government.” To read Bill’s thoughts, sign up to Money Morning’s free email at


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