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H O W T O M A K E I T, H O W T O K E E P I T, H O W T O S P E N D I T



America looks good Is it time to buy US property? page 16

“MoneyWeek is packed with enlightening views for informed investing.” Michael Betesh, EFG Private Bank

A “green” firm poised to rocket WHO’S TIPPING WHAT


Don’t bet on the rally going much further

Gold is past $1,000 an ounce – so what now?





from the editor How Newton’s law holds true in the economy “To every action there is always an equal and opposite reaction: or the forces of two bodies on each other are always equal and are directed in opposite directions.” – Sir Isaac Newton

18 SEPTEMBER 2009 ISSUE 112 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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18 September 2009

Sir Isaac Newton was an English physicist. Along with Albert Einstein, he made the biggest impact on modern science. His work on gravity and his “laws of motion” became the cornerstone of classical mechanics. And although you probably associate Newton with the “discovery” of gravity, you’ll often run into his name when anyone mentions his third law of motion, quoted above. A couple of days ago, we concluded Newton’s third law of motion applied as easily to economics as to the world of objects! What set us on this path, you wonder? Well – earlier this week the International Monetary Fund (IMF) published a report titled Selected Issues for the South African Economy. In this report, the IMF assessed government’s monetary and fiscal policy decisions (the actions) with the economic consequences (reactions) through the financial crisis. Each time the Reserve Bank alters its interest rates stance or government throws a few billion rand at a public sector infrastructure project, the macroeconomic environment changes. So if policymakers want a certain reaction, they must consider the possible outcomes of each decision. Before fiddling with one variable, they must determine how it’ll impact on other broad measures of the economy, such as inflation, production, trade deficits and employment!

already come to pass… What can you expect over the next 18 months? The 10th reaction will be an improvement in private sector investment in response to lower real interest rates and the ongoing recovery in South Africa’s trade counterparts. Following this, look for a recovery in domestic output, followed by an improvement in the trade balance! The July 2009 manufacturing production numbers suggest this checkbox could be filled soon. StanLib economist Kevin Lings notes that “manufacturing activity appears to be moving past the worst of the recession”. He predicts further improvements in the PMI over the next half year. If South Africa Inc keeps improving at current rates, you should see a return to economic growth by next year. The IMF predicts a contraction in GDP of 2.1% for full year 2009 before a return to positive growth of around 1.9% per annum in 2010. Whatever happens in South Africa, it’s clear the US and other Western economies are already on the front foot. With low interest rates and rather lacklustre returns on bonds, the majority of private investors in these economies are pouring into equities. But there’s another asset class that’s worth a look… property. In today’s feature – turn to page 16 – US-based investment guru Dr Steve Sjuggerud argues the case for US residential property. He believes US real estate is ripe for the picking and urges readers to consider a property or two. If residential property isn’t your cup of tea, read James Fergusson’s counter. Fergusson, a regular MoneyWeek UK contributor, warns that early bird investors could still get burned in property!

Standard Bank Economics says the IMF used its data projections to create a table of the expected path of South Africa’s economic reaction to external shocks. Of the dozen indicators on the list, all but three have

Gareth Stokes Editor, South Africa

In this issue 3 News One year on from Lehman’s

13 Briefing Why are gas bills so high and

collapse – has anything changed?

will they come down anytime soon?

6 Markets

15 James Ferguson Why new bank rules

The copper price looks

vulnerable as China stops buying.

now would be disastrous.

7 Sector Fear of new regulations has left

20 Entrepreneurs How one man made a

some insurers looking cheap.

million from mountain bikes.

11 Strategy If you’re sitting on a nice

22 Profile The secretive Irish tycoon who

profit, how do you know when to sell?

brought Primark to the British high street.

news easily and without disrupting the financial system if they fail.


One year on: What’s changed for the banks? It’s been a year since the financial system “collapsed like a botched soufflé” after Lehman Brothers went bust, said Eugene Robinson in The Washington Post. President Barack Obama marked the occasion by urging Wall Street to work with Congress to enact “the most ambitious overhaul of the financial system since the Great Depression”. He highlighted proposals including a new consumer protection agency to end misselling of mortgages, more demanding capital requirements, and greater supervisory powers for the Fed. In Britain, Alistair Darling is planning legislation to force banks to make “living wills” – a blueprint for dismantling their operations so they can be wound down

Lehman: What lessons have been learnt?

What the commentators said Lehman’s collapse was supposedly such a seismic event that nothing would ever be the same again, said Simon English in the Evening Standard. But what’s really changed on Wall Street? “Almost nothing.” Not only are bonuses back but bankers have a “new wheeze”: They’re now packaging up and selling on life insurance policies. Lehman’s fall has consolidated power among a smaller number of players intent on carrying on precisely as before. The “too-big-to-fail institutions are even bigger”. That’s the crux of it, said David Prosser in The Independent. Reform proposals on both sides of the Atlantic don’t tackle the basic problem: Banks operating with an implicit guarantee that they won’t be allowed to go under because they are too important to the overall financial system. That encourages banks to take “outrageous” risks with other people’s money, safe in the knowledge that if they go wrong, taxpayers will foot the bill, said Eugene Robinson in The Washington Post. Obama now proposes to put “more security cameras” in the casino rather than stop the gambling. And the problem is worse now, as The Independent pointed out. Banks used to gamble with depositors’ money, but now they’re taking risks with taxpayers’ money; state guarantees help them raise cheap funds. So the way to avoid further massive bail-outs is to break up banks that are

too big to fail, as Prosser points out. This week financial academic Professor John Kay suggested splitting banks into strongly regulated retail banks (handling deposits and payment systems) on the one hand, and the “casino” on the other; the latter entity would be allowed to fail. This would also encourage banks to improve customer service, said Anthony Hilton in the Evening Standard. Most banks have never cared about that because they can make much more money doing more “exciting” things.

SA economy

Hello… can I speak to the President please? Write down this number: 17737. That’s the toll-free number you can dial if you ever need to speak to the President. And when the long-awaited hotline went live on Monday, the call centre went mad – recording over 2 500 calls in the first hour. By 2pm, the Presidential Hotline had received 10 500 calls. 40 support agents fielded the line, taking calls in all of the 11 official South African languages. So what were South Africans calling about? Well, the hotline is a public service where you can call in and report corruption and service delivery problems straight to government. No more dealing with those incompetent

The bottom line (right) will earn for this Formula 1 racing season. In comparison, Lewis Hamilton will pocket £15m and Kimi Raikkonen £20m. Button accepted a massive pay cut in order to race with the Brawn team.


The amount the University of Notre Damn tipped caterer Sara Gaspar. Unfortunately for Sara, the university has cottoned on to its clerical error and is demanding its money back.


18 September 2009


This is Eskom CEO, Jacob Maroga’s, annual salary. It was his recent 27% increase that sparked outrage. But let’s face it, in light of Eskom’s R10bn loss, R5m is negligible.


What Rio Ferdinand has spent on a family holiday. The footballer took his family on a frugal holiday to a caravan park in Wales for three nights.


What chef Keith Floyd spent on his last meal, which included oysters and red-legged partridge.

R14m The estimated amount of a house about one block from President Obama’s Chicago residence. But, Matt Garrison, the broker handling the sale of the house next door won’t even put a value down. His phones have been ringing off the hook and he won’t even begin to guess what the “Obama premium” is.


The amount a lounge in New York is charging models for massages, food and merchandise. Dozens of models are flocking to the venue. Model Chanel Iman said: “All models love getting free stuff.” All we can say is: At least he’s making a profit on the food.


£3m The amount Jenson Button

news customer service agents that send you from department to department. But, be warned, only use the hotline if you’ve exhausted all your options. According to Vusi Mona, the deputy director-general for communication to the presidency, it’s “a last resort for South Africans who cannot get action elsewhere”.


Goodbye Eskom – we don’t need you anymore… Wouldn’t it be nice to finally be rid of Eskom?

Will it fix things? According to Mona, “the president will have access to the new presidential hotline and its related statistics. If he sees that certain areas of the public sector are receiving more complaints than others, he will contact the responsible people in the area to find out what the problem is”. But sceptics question whether the 36 hour turnaround time will have an impact.

Think about it… No more unnecessary power cuts in the last ten minutes of that crucial Curry Cup match. No more cold meats and salads for dinner three days in a row because the power’s out. No more annoying power surges that cost your company thousands in generator bills and new equipment. It would be heaven. And it’s a future petrochemical giant, Sasol (JSE:SOL), is getting closer to. Although the company already generates around a third of its own electricity, it’s

However, the real question on everyone’s lips is what does such a venture cost? To date, the Presidential Hotline – which has only been in operation for four days, has set us back R4m. From here on in, it should cost around R1.5m a year to run. No guesses where that money’s coming from.

Vital numbers % change

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

*5124.13 10270.77 1068.76 2133.15 3813.79 5700.26 23042.00 25579.00 10.77 12.00 7.29

**2.74 -2.31 2.36 2.36 2.91 1.89 1.01 1.04 -2.50 -4.38 -3.36

*10 Sep ** since 16 Sep

18 September 2009

According to the group’s chief financial officer, Christine Ramon, the group will spend R100m to ensure its businesses are compliant with all relevant competition laws. If you ask us, it’s about time.

The way we live now

Best and worst-performing shares Winners

% change Price


% change Price

Village (VIL)



Decillion (DEC)



Jubilee (JBL)



Palcap (PLD)






Anooraq (ARQ)






Jasco (JSC)



RAHold (RAH)



Metorex (MTX)



ElbGroup (ELR)



Mobile (MOB)






Afgri (AFR)



Comair (COM)






Eastplats (EPS)



Afdawn (ADW)



Bell (BEL)



Growpnt (GRT)



Weekly change to JSE stocks as 16 September 2009


This decision, which will cost the group around R2.5bn, comes after Sasol reported that it expects earnings to be down 30% for the year ending June 2009. This was largely a result of the drop in product demand and the whopping fines (worth R4.3bn) it received for anti-competitive behaviour in the recent financial year.

South Korea is going to great lengths to help its students do well in their exams. The army has pledged to keep the noise down, while several million middle- and high-school students take their exams next week. The army said live-fire drills would be halted and jets will be banned from taking off or landing for at least 20 minutes each day while the students take their English language listening tests. However, aircraft will be allowed to take off if an emergency arises, an army spokesman said. South Korean authorities also plan to reschedule rush hour in November in order to ease traffic during another set of important exams.


Meanwhile, back at head office the game plan is simple: “Smile when you take those calls,” Zuma told call centre staff at the launch before fielding the first few calls himself. “People can feel your mood where they are. Your attitude will speak volumes. Remember, we are doing this to improve government service delivery, and you are in the forefront of that campaign.”

looking at increasing this to 50% by 2012. Why? Because, like the rest of us, Sasol wants less exposure to Eskom’s rather steep price hikes and poor delivery.

the markets

Prescient bear is still gloomy David Rosenberg, chief economist at Toronto asset manager Gluskin Sheff and Associates, has been one of the few “voices of reason warning of the excesses” of the housing and credit boom and predicting the “unravelling” we are now seeing, says Edward Harrison on Now he says that the odds of a V-shaped recovery are “pretty close to zero”. This isn’t a normal post-war recession: the bursting of the credit bubble marked the end of 25 years of credit expansion, and having gorged on debt, the economy will take time to work it off. History shows that the impact of periods of credit contraction and asset-price deflation tends to “last for years not months”. The latest evidence shows that a sustainable recovery is miles away. The consumption outlook is grim. The economy has shed seven million jobs and counting; and with six people competing for every job, wages are plummeting. No wonder debt-soaked consumers, rattled by slumping house prices, are cutting borrowing. Consumer borrowing is 4.2% down year-on-year, the quickest consumer deleveraging since 1944. Banks, which are falling like ninepins as their losses pile up, aren’t lending either: bank credit slid by an “epic” annualised 9% in the first four weeks of August. The upshot is that with “a gaping hole in the credit system… any sort of organic rebound in economic growth” is not going to happen. Governments are currently propping up economies worldwide. Rosenberg estimates that “all of the world economic rebound” this


The dollar sell-off has gained momentum. The dollar index, which tracks the greenback against a basket of major trading partners’ currencies, slid by almost 2% last week to a 12-month low. The dollar has also hit a nine-month low against the euro. Mounting global risk appetite has reduced the appeal of the dollar as a safe haven, while the Fed’s money-printing and the towering budget deficit have also undermined confidence in the dollar.

David Rosenberg: recovery is ‘illusory’ year is due to fiscal stimuli, while the same goes for 80% of next year’s expected growth. The deflationary backdrop implies a “listless” recovery and years of “anaemic” growth in the pattern of “a series of small Ws”. Investors counting on a rapid rebound haven’t yet worked this out. They are pricing in not just the end of recession, but “two years of recovery”. The economy is usually growing by 4% by the time stocks have recovered by 50%. Once the market sees that this recovery is “as illusory and artificial” as its early 1930s counterpart, stocks will fall back. Further out, the broad trend in equities is likely to be flat or down: stocks are only half way through a secular (long-term) bear market, reckons Rosenberg, and history shows these last around 18 years.

But there’s another reason the dollar has weakened: it is now “the big funding currency” for the carry trade, says Jonathan Clark of FX Concepts. As they did with the yen, investors are borrowing dollars at tiny interest rates, selling them and parking the money in higher-yielding currencies. That’s because the dollar’s slide is expected to continue now that panic has receded and US interest rates are unlikely to rise anytime soon. The Fed’s interest rate is near zero and the three-month interbank dollar rate has fallen below that of the yen and the Swiss franc, while the dollar has also been less volatile than the yen of late, says The short selling inherent in the carry trade puts added pressure on the dollar and reinforces its inverse link with risk appetite, says Hans-Gunter Redeker of BNP Paribas. But this also implies a substantial rebound if stockmarkets correct, as carry traders unwinding their bets by buying dollars would fuel the upswing. With risk appetite set to wane as growth weakens and the dollar looking cheap, it could recover to $1.20 against the euro by the end of June 2010, reckons Capital Economics.


The big picture: house prices have much further to fall

“It’s almost as if the biggest credit bubble in history never occurred. Investors are increasingly convinced that a sustainable global recovery is emerging… All praise to central bankers for saving the world! I’m waiting till someone writes about the return of The Great Moderation… Then I’ll know the lunatics have taken over the madhouse… yet again!”

Houses sell much faster at Auction price index (three-month moving average) auction than in the normal 120 market and so auction prices 110 should provide a clearer 100 picture of current market 90 conditions than the usual 80 gauges; auction prices thus 70 tend to be a leading indicator. 60 And the news from the auction Latest reading 50 market is hardly encouraging, 1995 2000 2005 2010 as Chris Giles points out in the Source: FT Source: Fathom Consulting/FT FT. Last month the average UK property sold at auction fetched just 70% of the price that could be expected in the conventional market, according to Fathom Consulting, and the discount has widened from 10% three months ago. That points to renewed house-price falls in the months ahead.

Albert Edwards, Société Générale


Carry trade puts dollar under further pressure

18 September 2009

the markets

Copper surge loses momentum

A key driver of the copper price surge has been record imports by China, the world’s biggest copper consumer. Imports more than doubled in the first half. But the momentum is now fading. Imports peaked in June, then fell 15% month-on-month in July and a further 20% in August. A 42% slide in the Baltic Dry Index, which tracks shipping costs, from its 2009 peak, also suggests that the Chinese have “backed off” from commodity imports, says Gavin Durrell of Island View Shipping. Nor has underlying Chinese demand been nearly as strong as the record imports would suggest; the demand for imports has been fuelled mostly by government stockpiling. Note that inventories in Shanghai jumped by 12% last week and are now at their highest level since June 2007. It’s a similar story globally: stockpiles in warehouses tracked by the London Metal


Even the “slightest hint of weather issues” can give grain markets a quick lift, says Lee Lovell of But this year there hasn’t been any sort of hint of unruly weather hampering harvests, and prices have fallen on the prospect of rising supplies. US wheat and corn futures have slid to two-and-ahalf and two-year lows respectively, while soybeans, where supply has been tighter, are back down to July levels. ©BLOOMBERG

The price of copper – traditionally a leading indicator for the global economy, given its widespread industrial use – has more than doubled in 2009 as bullish investors have anticipated a global economic recovery. A weak dollar has provided extra impetus. But the market looks “overinflated” after the rapid run-up, says Michael Khosrowpur of Triland Metals. Copper now looks vulnerable to a correction.

Stormy weather for grain prices

Red-hot copper is set to cool Exchange have jumped by 20% since July and are at their highest since May. What growth we have seen so far has been delivered largely by government stimulus programmes, which will have to be withdrawn, while weak Western consumption, notably in America, where consumers are paying down their debts, suggests any economic rebound won’t be sustainable. The “pick-up in real demand we’ve all been waiting for”, says Robin Bhar of Calyon, is set to disappoint. “We’re seeing the effects of the fiscal rescue packages and other things like infrastructure projects,” says Eugen Weinberg of Commerzbank. Copper prices have been driven by “economic optimism”, but the “difference between fundamentals and prices” has got “bigger by the day”. And the further we are from levels justified by the fundamentals, “the further there is to fall”. The copper market is on borrowed time.

The US Department of Agriculture is expecting the second-biggest American corn crop and the biggest soybean crop on record, while on the wheat front production is set to rise in all four major exporting countries. The world is “awash in wheat”, says Tom Polansek in Barron’s. Demand has fallen back amid the global recession and world stockpiles are now expected to reach 187 million tonnes, an eight-year high. In short, there are “few reasons to expect a rally in global wheat prices in 2009 and well into 2010”, says Wayne Gordon of Rabobank. Nor do the other two grains look set to bubble up again soon. Soybeans could well come under further pressure now that South America intends to ramp up supply and China has suggested it is unlikely to buy as many American soybeans as last year now that they have stocked up, according to reckons soybean futures could fall from $9 to $8 a bushel; the corn outlook is also “bearish” in the next few months.

Pakistan: back from the brink

Gold watch

Pakistan’s stockmarket “is coming out of hibernation”, says Citigroup. The Karachi Stock Exchange index has jumped by more than 50% to above 9,000 in 2009 as the economy stepped back from the brink of default late last year and stirred interest among foreign investors. The International Monetary Fund (IMF) has just approved a loan of $11.6bn, up from the $7.6bn agreed last November, to help stabilise the economy; interest rates were cut by 1% last month after inflation slid to 11% from 25%; remittances are flowing in; ratings agency S&P has just upgraded the country; and the profit cycle seems to have turned, says Citigroup. The consumer sector’s profits are up 32% year-on-year. The market is also Asia’s cheapest, on a p/e of around seven. Foreigners “are back with flows not seen since February 2008”; net inflows reached $93m in August. However, the central bank is worried that the recovery will prove “slow and painful”, while the IMF’s Adnan Mazarei notes that political unrest is likely to remain a problem with a third of the country living below the poverty line. So while stocks look set for a short-term fillip, the long-term outlook remains as murky as ever.

Gold has built on its climb back over the $1,000 an ounce level and hit an 18-month high above $1,015 as the dollar has kept sliding. It looks due a breather after its strong run, but the bull run that began in 2001 looks far from over. Metals consultancy GFMS says that central banks are set to become net buyers this year for the first time since 1998. And investors increasingly disenchanted with paper currencies amid inflationary moneyprinting by central banks should turn to the ultimate store of value.

18 September 2009

sector of the week

Snap up these ‘non-life’ bargains will be chasing the same business, so “investment returns will also fall”, reckons the Association of British Insurers. Eventually competition will suffer as firms are forced out of the market. “Prices will rise, cover will reduce and innovation will drop.”

by David Stevenson News from the insurance sector is rarely thrilling. The latest big story – yet more regulation – seems no exception. But while higher risk ‘life’ stocks have shrugged it off, soaring in the “dash for trash” market rally, less risky ‘non-lifes’ have been left well behind. And that’s giving investors a good chance to snap up some decent high-yielders on the cheap.


But it’s not all doom and gloom. “We doubt Solvency II will be implemented as currently envisaged,” says Marcus Barnard at Oriel Securities. “Even if it is, we doubt the impact will require ‘Non-life’ insurance does what it £50bn” of extra capital. Further, says on the tin: it’s insurance for as non-life firms tend to hold all types of risks bar death. A liquid, low-risk assets, the directive non-life insurer makes profits It’s far from Armageddon for storm-scarred insurance stocks will impact them less than life when its expenses (the cost of companies. And at their latest annual catastrophe cover sold to protect clients settling claims, plus administrative shindig in Monte Carlo, the world’s reagainst hurricanes and the like. expenses) are lower than the total insurers were surprisingly upbeat. premiums it receives. Divide the former “Renewal rates (next year) are likely to But life for insurers is set to get tougher, by the latter and you get the ‘combined be flat to small ‘down’ overall,” say Vinit says The Independent’s Simon Evans. ratio’. But even if this ratio is above Malhotra and Michael Huttner of JP “Where the banks had to grapple with 100% (ie, the firm is spending more than Morgan. “Re-insurers are profitable, Basel II [which dictated banks’ capital it gets in premiums) it can still make an margins are good, and capital is being levels], insurer gets the snappily titled overall profit if its net investment income rebuilt.” Hardly Armageddon. Yet fears Solvency II directive.” This EU edict is set makes up for losses on its underwriting. over capital raising mean many have to go into force in 2012, and in effect Investment income is the money the missed out on the rally, so you can buy means insurers will have to hold more insurer makes on the cash it has decent stocks cheap – as we show below. money in reserve than they do now. accumulated from prior-year premiums, after unsettled claims – which can take That sounds sensible enough, given the years to agree – have been ‘provided for’ Update: Methanex (US: MEOH) financial crisis, but the new rules also in the accounts. contain risks. “UK insurers fear they’ll be Methanol producer Methanex has had a forced to tap investors for more than Meanwhile, the level of risk that insurers good run after securing a $200m credit £50bn in fresh equity” as a result of the can take on is restricted by the amount of facility, and is now up 78% since we new rules, which they say will also “lead capital they have to set aside to satisfy tipped it in May. The price of methanol to a dramatic increase in premium rates”, regulators. So companies will often ‘lay is tied to oil, which we expect to slip says the FT’s Paul Davies. Because firms off’ some of their insured risk with a back as the global recovery falters. So will have to keep more capital on their ‘re-insurer’, such as Lloyd’s of London. now looks a good time to take profits. books, more money – at least at first – This is particularly common for high-risk

The best bet in the sector If you were actually at London’s Brit Oval, to witness England’s summer Ashes cricket triumph, you may have missed the significance of the ground’s name in all the excitement. Yet not only does re-insurer Brit Insurance (LSE: BRE) sponsor the south London venue, it will also become main sponsor to the England team for four years from 2010. But that’s not the main reason we’re tipping this stock right now.


Figures in pence

300 250 200 150 Jan 2002

Jan 2003

Jan 2004

Jan 2005

We like it because, on a p/e of below ten times current year earnings, which City analysts see dropping to 5.5 times 2010 net profits, it’s cheap as chips. Of course, with “volatility and


18 September 2009

uncertainty in claims and therefore earnings, individual years can be less relevant” than in other sectors, says Steve Scott on Motley Fool. So “instead of p/e ratios, the market focuses more on net asset value (NAV) and dividend yield, and views insurance companies more like investment trusts”. But Brit scores well here Jan Jan Jan Jan too. At 203p, with a market cap of £640m, 2006 2007 2008 2009 it’s currently selling on a 14% discount to NAV. The 2009 yield is a chunky 7.5%, forecast to climb to 7.9% next year. Having started 2009 at 220p, the stock has underperformed the FTSE All-Share by 25% yearto-date. Ben Cohen of Collins Stewart has a target price of 230p.

Brit Insurance

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.

This “green” company’s about to explode higher as product demand soars Tip of the week: “Omnia is scoring serious brownie points,” says Finweek Spring has sprung and the markets continue to look good. The recent mega rally has subsided slightly, but the general direction is still firmly upwards. With spring, comes planting season. If you’re a farmer, it’s silly season. And who directly benefits from this? Fertiliser producers of course! That’s where Omnia Holdings Limited (JSE: OMN) comes in. Founded way

back in 1953, the company prides itself on serving the South African farming community with a variety of fertiliser offerings. It boasts more than 2,000 employees and more than 12,000 customers dotted in 17 countries. It has operations in 19 centres, spanning from Nairobi to Cape Town. And that’s not all. As Shaun Harris notes in Finweek, “its income stream has been cleverly diversified into mining explosives and speciality chemicals”. So, not only is Omnia tapping in on the large agricultural market in South Africa, it’s making the most of the mines close to home too. This product line diversifies the business nicely. But, wait, there’s more! In a notso-environmentally friendly SA, Omnia is decidedly green. It’s using bucket loads of cash to turn itself into an environmentally aware company. As Harris highlights, “Omnia is scoring serious brownie points – plus some useful revenue – from selling carbon credits”. It’s achieved this through the installation of some

Gamble of the week: Pan African Resources Plc (JSE: PAN) Gold continues to trot through quadruple-digit territory. At time of writing, gold was trading at $1,019! So despite the strong rand hampering the positive effect of this for South African gold miners, they remain our focus in our gamble of the week. Besides, the rand has rallied strongly and is due for a correction. Pan African Resources Plc (JSE: PAN) ticks all the right boxes when looking for somewhere to gain South African exposure to


18 September 2009

serious equipment to filter out bad emissions at one of its plants. This investment is well worth the payoffs that result. Omnia entered into a deal with the IFC, a member of the World Bank. Through this agreement, the company can sell carbon credits (up to one million a year) over the next five years. As Harris estimates, this “should add around R60m/year to Omnia’s revenue”. Fantastic news.

gold. Pan-Af dual listed on our JSE’s AltX and on the AIM market in London in July 2007. And, despite the chaos on world markets, the counter has held up rather well. Not content with just gold mining, the company is constantly on the acquisition trail. Earlier this year, it acquired Phoenix Platinum Mining (Pty) Limited from Metorex. This now opens the company up to another precious metal, diversifying the business. Unusually, this small-cap gold miner pays a very healthy dividend! Pan-Af currently has a dividend yield of 4.73%. This should instil confidence in the most pessimistic buyer. Paying

who’s tipping what Omnia is setting a standard for all South African companies to aspire to. And with the whole globe becoming greener, emission restrictions will most likely become inevitable for all “polluting” businesses. And this should make Omnia look more attractive to overseas investors. How is the company looking on the books? Its latest set of results, to end March 2009, is impressive. Revenue surged 51% to R11bn. Net profits soared 54%. And, if that’s not enough already, headline earnings per share rocketed 54% to a mighty 1107.4c! Despite taking a dip, the share has proved resilient during these tough times. And, if I was you, I wouldn’t take too long before grabbing some of these shares for your own portfolio. The share is currently trading on a very healthy dividend yield of 4.26%. So not only do you have decent capital growth to look forward to, you have the dividend rewards too. Always an attractive bonus! Buy at its current 5750c a share and hold on tight for the strong run higher. Recommendation: BUY at 5750c Market capitalisation: R2.717bn

Turkey of the week: “The business hasn’t been the success that was expected” – Financial Mail “This has been a remarkably tough six months for the Dialogue Group.” That’s how Jamie Carr kicks off his dog of the

dividends at this early stage is a fantastic sign of things to come. It displays the company’s confidence about future earnings and profits. And it beats some of the blue chips, like Sasol, hands down. Saying this, mining shares are notoriously risky. There are so many variables that can knock a miner down at the drop of a hat. But, by carefully acquiring your holding over time, you should be onto a great thing. Just make


18 September 2009

week in his Diamonds & Dogs column in the Financial Mail. And he couldn’t be more right. So what went wrong? Well, let’s first have a look at what Dialogue Group Holdings Limited (JSE: DLG) does. The company’s a call centre specialist. Before listing on the AltX three years ago, it was the largest privately owned company in its field. Dialogue operates out of three facilities in Durban, Cape Town and Johannesburg. It boasts a capacity of nearly 1,500 seats. Dialogue’s share price hit its high in May 2007 at 245c, but, since then, the company’s been trending lower. Now it looks like it’s hit rock bottom, trading around the 17c mark. When the rest of the market started pulling its socks up and getting back on track in March, Dialogue ignored the upbeat sentiment and kept on its track south. As Carr highlights in his column, “call centres should be a sure fire winner to grow and generate jobs”. But, this isn’t the case with Dialogue. The company is limping along. So what is the company doing to rectify the shocking state of affairs it’s got itself into? For starters, a hefty restructuring has taken place. This involved mega retrenchments and moving its head office. But, this won’t reflect down to the bottom line until the second half of the year.

Now Dialogue has the rather daunting task of getting the business back on track and back into profit territory. Perhaps Dialogue is feeling the pressure from “cheap” call centre offerings in India and the like, which has decimated British call centres, for instance. The latest financials, to the end of June 2009, although unaudited, reflect the pressure Dialogue is under. Before the release of these results, the company warned the market that results would be markedly less than the previous reporting period. Across the board, the numbers were down. Revenue fell 9%. Earnings per share dropped from 1c to a loss of 5.3c a share. As it stands, buying into Dialogue would be a risky endeavour. For now, sit on the sidelines and wait. See if the restructuring pays off. If the share price starts to react positively, this share might be in contention for the number one recovery stock of 2010. But, avoid for now. Recommendation: Avoid Market capitalisation: R50.843m

sure you use a stop loss – and stick to it, just in case. Pan-Af is a screaming buy at current levels of 80c a share. This little miner looks like it’s set to soar over the coming months and well into 2010. And if the dividends keep coming – who’s to look a gift horse in the mouth. Buy.

Recommendation: BUY at 80c Market capitalisation R1.127bn

best of the financial columnists

Christopher Caldwell Financial Times

Crisis spells opportunity for lawyers Editorial The Economist

Tories must give councils tax freedom Simon Jenkins Evening Standard

Don’t hold out hope for salvation yet Jeff Randall The Daily Telegraph


If the public needs the world’s 168 million books to be digitised, why is Google doing it rather than governments? asks Christopher Caldwell. Since 2004, Google has scanned more than five million titles, many of them still under copyright. Last year, it negotiated a long, complicated ‘settlement’ with the Authors Guild and the Association of American Publishers to keep just over a third of the revenue generated, with the remainder going to a non-profit book rights registry that would seek out the authors of ‘orphaned’ books (those under copyright but out of print). Fairness hearings on the settlement will be held in Manhattan next month. Various parties, including several European governments and Amazon, oppose the deal. No wonder. The arrangement is a “usurpation” of normal property rights. And knowing people’s reading habits has a huge commercial value. Maybe the public doesn’t care, but even so, governments must create the monopoly explicitly and “not allow interested parties to a private lawsuit just to divvy up the spoils”.

Money talk

“Even the darkest cloud has a silver lining,” says The Economist. “Just ask the insolvency lawyers and other professionals raking in fees from the fast-growing number of large financial and corporate bankruptcies.” Experts could bag close to $1bn in court-awarded fees from the clean-up of Lehman Brothers, well above the previous $757m record set by Enron’s demise. “It is frustratingly hard to say how much value for money these professionals provide.” The judges who approve their fees lack the time and expertise needed to review them properly. Meanwhile, judges in America have an incentive to “go easy on fee requests”. With bust companies able to choose which state they file in, “forum-shopping is rampant” and courts know that to win new cases, they mustn’t mess with fees. One way to bring in some fee discipline is to insist that firms only file in states where they have headquarters or principal assets; another would be to force the courts to have lawyers’ bills audited. Until then “creditors have good reason to stay vigilant”.

“Understanding the value of something and then treasuring it are the best priorities a parent can give a child.” Wildlife presenter Kate Humble (pictured), quoted in The Sunday Telegraph

David Cameron and George Osborne were talking the localist talk last week, but are they ready to walk it? asks Simon Jenkins. “Like it or loathe it, many Tory London boroughs are in the vanguard of innovative public administration.” Barnet’s ‘easyCouncil’ is suggesting two tiers of service, with, for instance, extra charges for high-speed planning applications; Hammersmith and Fulham have slashed costs by 20% (and council tax for three years in a row) by shutting duplicate offices and the “judicious” selling of assets, and Kensington has private security firms policing its streets. Overall, London boroughs are cutting their budgets by 10% a year while Gordon Brown’s Whitehall is in a “paralysis of inaction”. Yet the scope for innovation allowed to London councils by central targets is still minimal and “for all their talk, Cameron and Osborne are firmly against freeing councils to taxand-spend, or save and not spend”. As long as they deny fiscal freedom to local government, “their localism is empty”.

“Walk into a bar in Parliament and you buy a pint of Foster’s for £2.10. That’s a little over half as much as in a normal London pub.” David Cameron calling for a crackdown on MP’s subsidies, quoted in The Mail on Sunday

“Profligate ministers” and “reckless bankers” are delighted to be hailing salvation’s early arrival with an improved job market, rising property prices and perky stock indices, says Jeff Randall. But in reality “a seriously sick British economy has been pumped full of anaesthetic in the form of unprecedented monetary expansion and debt-funded largesse”. Yet anaesthetics wear off. “Printing money, rather than earning it, is magic-circle economics.” In the long run, it devalues the UK’s currency and credibility. Our political leaders know budgetary discipline is needed, but with an election looming few dare say so. But they can’t abolish the day of reckoning: real, lasting recovery will only occur after we have learnt to spend less and save more. “And here’s the rub.” Talk of recovery at this stage is meaningless to most voters; what do stockmarket indices matter to the man who knows a P45 is in the post? Unemployment is what counts, and by election day few will be in any doubt about which way the wind is blowing.

18 September 2009


Google’s new book monopoly

“I’m going to have a day job and a night job – that’s the times we’re living in.” Ellen DeGeneres on becoming American Idol’s new judge, quoted in People

“Well, I’ve never been someone who myself has been interested in running up personal debts or borrowing huge amounts of money.” Gordon Brown, quoted on BBC News “Share prices may have bounced back in the past six months, but I think the rally has been induced... by the banks, stockbrokers and those that make money out of encouraging people to invest.” Sir Keith Mills, founder of Air Miles, in The Sunday Times

investment strategy

How to judge when to sell R3,000 while the rest perform more modestly and rise by R250. Time to rebalance. If your original aim was to spread your risk roughly equally over eight shares, sell, say, R1,750 of your biotech holding (to reduce it to R1,250) so that what’s left is still an eighth of the total. Never forget that a paper profit is just a promise – cash in the bank is a fact.

by Tim Bennett “I made my fortune by selling too early,” said US financier and speculator Bernard Baruch. With stockmarkets around the world on a tear since March, plenty of investors must be wondering whether it’s time to follow Baruch’s example and get out while the going’s good. So how do you know when it’s time to sell a share?

3. Hitting price targets Why losses are hard to recover

And watch out for ‘geometric averaging’. Say you invest R10,000 in year one. You make 25% on that, then 25% the year after, but suffer a 50% loss the next year. The simple average return is 0% – (25+25-50)/3. But you won’t have R10,000 at the end. That’s because after one year your R10,000 will have grown to R12,500. Assuming it stays invested, a year later it’ll have grown to R15,630 (R10,000 x 1.25 x 1.25). But the 50% loss then slashes that to R7,810. So avoiding losses is vital – and the best way to do so is by knowing why you bought in the first place.

Know why you bought If you took a punt on a company you knew next to nothing about, and by some miracle the stock has risen sharply, then sell now and be grateful. A lucky R5,000 profit may buy as much beer as a R5,000 skilful one, but luck doesn’t last. A much better approach is to keep a note of the criteria you applied to buying and react to changes before a share tumbles. Here are three sell signals.

1. Shifting fundamentals Many investors use fundamental analysis (key ratios, such as price-to-earnings and price-to-book) and a slice of judgement (the brand is good, the new management team is strong) – to spot a buy. Fine, but once you’ve bought, you need to keep an


18 September 2009

If constant rebalancing, according to portfolio weighting, sounds like hard work, then apply a simpler price target. Many investors will ruthlessly dump a stock that drops say 25%, but should just as ruthlessly take profits when a share rises. However, it’s always tempting – and often good sense – to let a strong winner run. So how can you balance the two?


There’s plenty of advice around about what shares to buy and when, but far less on when you should sell your shares. But selling is a vital skill to master. Why? Because losses are very hard to recover – the numbers are against you all the way. For example, if you pay R10,000 for some shares, which then drop by 25% to R7,500, you need them to rise by a third just to get back to evens. If the same shares had fallen in half, you would need them to double. In other words, losses are disproportionately tricky to recover.

Wise choices are based on knowledge, not chance

“Classic red flags include earnings no longer growing” eye out for signs that the stock is no longer worth holding on to. Classic red flags include earnings no longer growing, top management leaving or, in some sectors such as pharmaceuticals, a lack or new products or product approvals. But don’t stop there – monitor half yearly or quarterly updates. Watch out for asset ‘impairment’ write-downs. Acquisitive firms – in sectors such as telecoms – are especially vulnerable. Rapid growth often results in companies overpaying for rivals. Any dip in activity forces management to come clean on just how badly they overpaid, which means profits suffer. Next, a few quick checks that growth isn’t out of control. Is operating profit (mid-way down the profit and loss account) growing much faster than operating cash flow (at the top of the note that supports a cash flow statement)? Are either stock or receivables (‘debtors’) rising much faster than sales? These are unsustainable trends beyond the short term and so they’re useful early warning signs to watch for.

2. Rapid growth Let’s say you’ve picked your four favourite sectors and bought two stocks in each, spending R1,000 in each one. One of your biotech stocks races ahead and rises to

One good option is a trailing stop. Basic stop-losses are instructions to your broker to sell if a share drops by say 25%. Fine, but what about a share that’s rising? Say you buy Vodacom shares for 5320c and set a stop-loss 25% below that price (around 3990c), but then Vodacom rises to 6065c. Here’s the rub. Leave your standard stop-loss at 3990c and it won’t be triggered unless the share falls over 34%. Ideally, you want the 25% stop-loss price moved up – to nearer 4549c. Trailing stops do this – they follow your share as it rises, taking the stop-loss price up too. Unfortunately, not many brokers offer them. Some will let you set relatively small stop limits as part of their standard deal charge. Others will allow you to set bigger ones, but you may need to refresh them every 30 days. However, for regular traders, says InvestmentU’s Alex Green, there’s another option. At you can enter the stocks you own (up to 50, listed on the three biggest US exchanges, plus London and Toronto), the price you paid and the percentage trailing stop you want to apply. Tradestops will then alert you (via your email or mobile phone) when a limit is breached. A stopped stock can be replaced with another up to the 50 limit and there’s no time expiry on the service. It won’t sell your stocks for you – that’s still your job via your broker. But that at least gives you the chance to review each stop before it is activated. The service costs $7.95 a month or $79.50 a year, and there is a 30-day free trial.

personal view

It’s time to sink your teeth into these 3 resource shares What I would invest in now

This week, Stephen Meintjes, head of research at Imara SP Reid tells MoneyWeek where he would put his money.

Following the huge collapse in production we saw in the fourth quarter of 2008, we can now safely say the global recovery is in full swing. Economies in the developed world will continue to stabilise as cost cutting initiatives and higher inventories improve the earnings of these countries. The world has spun into such a positive frenzy that, on Tuesday – exactly one year after the collapse of Lehman Brothers – Ben Bernanke, head of the Federal Reserve in America, declared that it’s likely the US recession is over. Despite this vote of confidence, Bernanke warned investors that it's still going to feel like a very weak economy for some time. Large unemployment figures and the high savings rate are just two of the headwinds the American economy will need to overcome to improve consumer spending again. And we’re not just seeing positive news come out of America. China’s GDP expanded 7.9% in the second quarter of this year. With this in mind, it’s safe to assume the nation is the first major economy to rebound from the global recession. And when China grows, so too does its insatiable appetite for commodities. According to, China’s recovery has helped support a 66% surge in metal prices this year. And, as you know, an increase in commodity prices is a good thing for our resource-laden market. As developed markets begin to stabilise, we’ll see commodity prices shoot even higher. Yes, the stronger rand may hinder earnings to a degree, but savvy investors would be remiss to pass up this opportunity. And when it comes to commodities, you’d be silly to overlook commodity one-stop shop BHP-Billiton (JSE:BIL). BHP-Billiton is without

a doubt, in terms of commodities mined and geographical footprint, the most diversified company available on any market in the world today. And since it’s also one of the largest locally listed shares (by market capitalisation), you’d be foolish not to include a healthy chunk in your long-term portfolio. From an SA point of view, its external production (in countries like America, Canada and Australia) means that, unlike other SA mining counters, the stronger rand won’t negatively affect earnings. Speaking of commodity giants, at R259.00 a share – down 37.84% off its 12 month high, Anglo American (JSE:AGL) is good value. Yes, diamond subsidiary, De Beers’ results hit the share price hard, but demand for polished diamonds is growing briskly in China and India. This is sure to boost Anglo’s profits. And lastly, have a look at Pallinghurst (JSE:PGL). The group recently announced a rights offer to raise R800m to grow its platinum and gemstone platforms. The offer gives investors the chance to buy 228m new shares at a price of R3.50. That’s a 12% discount to the average 30 day share price. And it represents a great time for you to benefit from the world’s growing demand for platinum group metals (PGMs) if you get in before Friday – the last day you’ll be able to trade the Nil Paid Letters (NPLs). But why a PGM miner, you wonder. Because, in America the “cash for clunkers” scheme and a reduced inventory of unsold cars has boosted vehicle sales. And when the car market is happy, PGM miners make money. So, you see, now’s a great time to get into shares with exposure to PGMs.

The shares Stephen likes: BHP-Billiton

12mth high R225.35

12mth low R119.80

Now R212.50

Anglo American








*Price as at 16 September 2009


18 September 2009

investment briefing

Why aren’t gas prices falling? While the price of natural gas has fallen, the energy giants have not cut their tarrifs for British gas supplies. And further price rises look likely. David Stevenson reports. What’s going on with gas prices?

wholesale prices were much higher. They’re also likely to stress that the ‘non-gas’ aspects of gas prices, including transport costs and government environmental measures, have risen by 44%. “Customers have been protected from the massive rises in wholesale prices last year that weren’t fully passed on at the time, while companies are investing billions of pounds in new generation capacity to ensure an essential, reliable and safe energy supply to their customers,” says the Energy Retailers’ Association. And regardless of who’s in the right, the whole issue may soon get kicked back into the long grass yet again.

Why’s that? ©BLOOMBERG

Natural gas prices have tumbled. By early September, the wholesale gas price in the UK had collapsed to 34p (R4.11) a therm, roughly a third of its level a year ago. So you might expect consumers to have seen the benefit. Yet UK gas prices have hardly dropped. What’s more, it seems gas customers won’t be getting a better deal anytime soon. The ‘Big Six’ energy giants – British Gas, npower, Scottish Power, Scottish & Southern, EDF and Eon – “will defy growing public anger and the demands of the energy regulator by refusing to cut gas prices at least until the spring”, says Tom McGhie in the Daily Mail. By that time, it might be too late – natural gas prices have started rising again.

Because natural gas prices are heading up again. Natural gas futures prices on the New York Mercantile Exchange have Haven’t suppliers cut prices at all? bounced by 40% from their 4 September A bit… but not by much. From February Prices are likely to stay hot for some time lows. Stephen Schork of the Schork to early July there were ten price cuts or Report argues that this is just a dead cat bounce – storage new tariffs, typically claiming a reduction of about 10%, says tanks are almost full and “gas is cheap for a reason – there’s Neil Faulkner of But companies haven’t cut the too damn much of it”. But other analysts reckon prices could cost of their cheapest tariffs, just the expensive ones. Earlier this have bottomed. “I’m 99% certain the doomsday prophets are month one energy company, First:Utility, said its online tariff wrong,” says Calgary energy analyst Peter Linder. “Gas is would be cut by 14.5% due to the wholesale price fall. recovering as people recognise prices can stay so low for only But Faulkner says a full-blown price war is unlikely: “downward so long.” And another factor could push prices higher. price movements have been more playful than significant”. Regulators across the globe are looking to crack down on volatility in the commodity markets by limiting the size of What’s the regulator doing? trading positions. So any hedge funds that have been selling Alistair Buchanan, boss of British industry watchdog Ofgem, “is natural gas ‘short’ (speculating that the price will fall) are now under pressure to get tough because the industry is perceived to more likely to buy back these contracts, which would create have successfully undermined his role as a consumer more pressure for prices to rise. champion”, says McGhie. Buchanan wrote last month to all the gas suppliers to say that continued high prices don’t seem justified, and demanded they explain why they weren’t cutting What does this mean for British consumers? their prices. The industry’s response is expected before the end As the time nears for US consumers to start putting the heating of the month, when Buchanan will set out his course of action. on, Linder reckons natural gas prices will keep rising for the But his powers remain limited. He could refer the industry to rest of 2009 and into 2010. Further, low drilling levels in the Competition Commission, North America, and the but only last year the resulting drop in production, commission cleared the Big Six will mean higher prices longerof anti-competitive behaviour. term. That would give gas Why isn’t competition working better? And his plans to “name and suppliers in Britain another Because of the way suppliers handle their customers, reckons shame” the companies that excuse to avoid a real price war Faulkner. The number of people who actually switch energy refuse to adjust tariffs don’t – and maybe even raise costs provider is pretty low. There are enough of them around to look like they’ll cut the again. The Energy Retailers’ give energy firms an incentive to make the effort to rank highly mustard. Association is already hinting at on comparison site tables. However, they don’t want to offer increases: “the wholesale such bargain deals that they encourage more and more people market still remains volatile and Aren’t gas suppliers making to consider switching. For one thing, “if one provider slashed a challenge for energy suppliers a mint? prices wildly they’d all have to do so, meaning they’d all make coming up to the winter”. They claim not. In their replies less money”. For another, if a customer switches once, they’re Indeed, says Faulkner, with to the regulator, the energy more likely to switch in the future, which would make the Ofgem largely powerless, firms are likely to argue that market more competitive, and less profitable in the long run. “there’s a 50% chance of a big the gas consumers are buying In other words, gas firms – like banks – profit from consumer increase in gas prices for this today was bought by suppliers apathy. winter”. up to two years ago when 13

18 September 2009


This rally does not spell recovery – it’s a hopeful shot in the dark What’s the best company in Britain right now? You could make a case for Tesco, the sleek juggernaut of the retailing sector, now pushing aggressively Matthew Lynn into financial services. You could make just as persuasive a case for BP, the oil giant holding its dividend steady despite falling oil prices, and making big new finds in the Gulf of Mexico. You could equally well make a case for any one of a dozen retailers, miners, drugs or telecoms giants.

Global view

But the market has a different answer: Lloyds Banking Group. The bombed out, debt-laden, strategically muddled combination of Lloyds TSB and the wilfully mismanaged train crash that was HBOS is rated, by the market anyway, as the company to back. Take a look at the performance chart for the British stockmarket rally of the last six months (top right). It has been led by banking stocks, such as Lloyds, and the equally debt-riddled Royal Bank of Scotland. Much the same is true in America: the S&P has been driven up by such paragons of financial reliability as Fannie Mae and Freddie Mac, as well as banks such as Goldman Sachs, which may be minting money right now but were on the brink of insolvency only a year ago. It is impossible to put a sensible valuation on most of those banks. So the fact they are leading the upswing perfectly illustrates how the markets have lost touch with reality in the last few weeks. Nowhere is that clearer than in the companies that have been leading the FTSE 100 index back up to the 5,000 mark. Take Lloyds, for example. Its shares have recovered from slightly less than 25p earlier this year, to more than £1 now, quadrupling in value. Likewise, RBS went all the way down to 10p a share, but is now back above 50p. That


18 September 2009

matters for the index – the banking sector, even in its much reduced state, still accounts for 16% of the FTSE. The rally has, to a large extent, been about the recovery of the banking stocks.

UK banks vs FTSE 100 260 240

FTSE 350 UK banks index

220 200 180 160 140

100 = 9th March 2009

Much the same is true in 120 America. The two FTSE 100 100 wholesale mortgage lenders, Freddie Mac and 13 31 15 30 15 29 15 30 15 31 14 28 15 Fannie Mae, probably the Mar Mar Apr Apr May May Jun Jun Jul Jul Aug Aug Sep 2009 two firms most exposed to the whole sub-prime to which both Lloyds and RBS are debacle, saw their shares triple in value in heavily exposed. the last month. The shares of the big Wall Street players, such as Goldman Sachs, Nor does anyone really know what kind have done just as well. Goldman is up of regulatory structure may emerge. from less than $60 at the start of the year It isn’t clear whether the European to more than $170 now. Morgan Stanley Union’s competition rules will allow has recovered from less than $8 to almost Lloyds to control more than 30% of the $30. Just as in Britain, the rally is largely British banking market long-term about the recovery in the value of (hopefully it won’t). Or whether rules financial stocks. And yet how can we preventing unfair state-aid will be applied rationally come up with any meaningful to RBS. Exactly the same doubts valuation of companies that are, in effect, surround the American and European wards of the British state? banks that have been soaring in value over the past six months. In reality, the Let’s focus on the two big British banks. value of these companies is a complete The future of Lloyds and RBS is so mystery to everyone, including the people cloudy that it is very hard to take any in charge of them. It is certainly a rational view of what the future might mystery to investors. hold for them. What, for example, will the government do with its stakes? True, there is a big element of bounceWill the state-owned shares eventually be back. The banks aren’t closing down and sold to the public, in a re-run of the the global economy has averted a re-run mass-marketed privatisations that marked of the great depression. The fears of the last Conservative government? earlier this year have turned out to be Will the state hold onto its shares exaggerated. That accounts for some of indefinitely, gradually turning the banks the recovery. But markets are meant to be into utilities, or instruments of social forward-looking. And while the future is engineering? Will more radical options, always to some degree unknowable, most such as turning the banks back into companies can at least have a rough idea mutually owned societies, be considered? what their sales and profits might be in Right now, no one has the foggiest idea. two or three years’ times. The banks have none at all. No one really knows what kind of losses might still be racked up either. The creditThe trouble is, many of the prices being rating agency Moody’s reported this week set in this rally are quite literally a shot in that the British banks were only half-way the dark – and one probably made by a through reporting the losses they were blind man aiming at a black cat. And that likely to suffer as a result of the recession. isn’t much of a basis for continuing They’ve already chewed up £110bn in strength. The rally may well continue. losses. But another £130bn is still to But so flimsy are its foundations that come, it reckons, as the downturn there is little reason to assume it will. ravages the value of commercial property,


G20’s plans for banks would be a disaster for the real economy In a classic case of stable-door bolting, the recent G20 meeting saw US Treasury Secretary Tim Geithner sign the world up to his vision for a stronger, more robust and less risky banking sector. Finance leaders agreed that banks, especially the big ones, will need betterquality capital, and more of it – especially in good times. They also agreed that they won’t be able to ignore assets by zero-risk weighting them (which is when banks pretend an investment can’t go wrong). Furthermore, banks will be restricted in terms of liquidity.

James Ferguson

What this last bit means is that banks won’t be able to lend more than their deposits. What the rest means is that banks won’t be able to lend as big a multiple of their capital bases. And what the whole lot together means is that banks must cut lending on a structural basis – in other words, from now on they simply won’t be able to lend at the levels we once saw.

25% 20% 15% 10% 5% 0% -5% -10% -15%

That might sound a good plan to some. But at a time when the private sector is paying down debt (where it can), banks are restricting new lending, and broad money-supply growth across the western world is either anaemic or negative, such ideas are dangerously ill-conceived. Forcing banks to boost capital now would actually increase the risk of a global double-dip recession. Here’s why. Banks have already written down the value of their securities. Next, they will take provisions against losses on their loan books. Of the £110bn in losses reported by UK banks so far, just 30% (£33bn) is directly attributable to losses on loans they’ve written. That equates to just 1.3% of peak UK bank loans. Yet loan losses reached over 4% in the early 1990s recession and this recession is already cumulatively more than twice as deep as that one was. 15

18 September 2009

Moody’s Investors Service estimates that British banks are less than half way through the whole loss recognition process – they’re £110bn (R1.4trn) down, but still have as much as £130bn (R2.7trn) to go. Yet even another £130bn would take this recession’s loan loss ratio up to just 6.6%. The 1990s experience might suggest that 8% is more realistic; in Japan, losses reached 15%. Since summer 2007, British banks have topped up their capital bases with £125bn (much of which was our money). But they’ll need the same again if Moody’s is right. The good news for banks is that, unlike with securities, they don’t have to realise loan losses all at once.

bank lending, leads directly to broad money supply shrinking – and that’s the true definition of deflation. And the lower asset values fall, the less money the banks can recover if a borrower defaults. That means banks have less to lend out in future. So cap all this off with regulatory demands from the G20 for higher capital ratios, and you have three very powerful headwinds forcing bank lending growth into negative territory.

US quarterly bank lending (see chart) is falling at a more than 15% annualised rate, breaking all records in the process. That’s taken the last three months of broad money growth (M3) to -5% annualised. In Britain, broad money growth is only positive Figures in dollars Figures in pen because of quantitative easing Quarterly bank lending growth and public sector bank in the US, (annualised) borrowing. UK bank lending to industry went negative in the second quarter, after lending to individuals started shrinking early in the fourth quarter of last year. We are in grave danger of following the Americans into a potential debtdeflation spiral. We aren’t past the worst – we are on the lip of the whirlpool. And the leaders of ‘59 ‘64 ‘69 ‘74 ‘79 ‘84 ‘89 ‘94 ‘99 ‘04 ‘09 the G20 seem completely unaware.

Instead, they can hang on to borrowers who are willing and able to keep paying the interest, by extending the maturity of the loan. But for the rest of us this policy is a disaster. Banks that are forced to keep rolling their existing loan book over will be in no mood to make new loans. This does two things. It stifles the next generation of would-be entrepreneurs, as they can’t get access to financing. And it also accelerates asset-price deflation – banks won’t lend to the bidders at foreclosure auctions, so prices offered for repossessed assets plunge. As asset prices fall, borrowers’ loan-tovalue ratios rise. So banks entrench themselves even deeper, while firms fret that they will become insolvent if their assets shrink below the level of their liabilities, so they pay down debt. Debt repayments, combined with shrinking

In short, as noted above, banks trying to make their balance sheets stronger create deflationary forces. Firms trying to delever then make things worse. So G20 regulators demanding the banks shore up capital could easily force the economy back into recession. It’s crazy but true. There is a tiny light at the end of this tunnel. This is the G20 we’re talking about. ‘Impact assessment’ won’t be completed until early next year, ‘calibration’ of the appropriate ratios not before end-2010. Then measures will only come in at a rate that “does not impede the recovery of the real economy”. Given this exercise can’t do anything but impede the economy, potentially fatally so, perhaps actual implementation will remain on the regulators’ ‘to do’ list for some years to come. Let’s hope so.

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It’s a perfect time to buy a house or two in the sun Is it time to buy into US property? US investment expert Dr Steve Sjuggerud of the True Wealth financial newsletter reckons there are bargains galore. Regular MoneyWeek columnist James Ferguson isn’t so sure. Here they make the case for and against investing in US housing. I’ve lived in Florida for most of my adult life. I’ve never seen bargains like I’m seeing right now. Last month, I attended an auction for two properties less than a block away from the beach in St Augustine, Florida. They were empty building lots in a residential neighbourhood, 200 steps from the sand. You could build your dream house here – your second home in Florida exactly the way you want it. What would you have bid – R2.5m, R2m? What’s the least you’d be willing to pay?

auction? I was only willing to bid about half that. Why? Well, I didn’t need these lots. And I expect I will find even better opportunities. They’re everywhere. The median price of a home in Florida today is less than R1.25m. That’s a home – and in Florida, median probably means at least three bedrooms, two bathrooms, a garage, a yard, and more.

Both lots sold for less than R300,000 each.

For one thing, you’re looking at a ‘halfoff’ sale in many desirable places. Home prices have fallen by a third nationwide, peak-to-trough in dollar terms (according

Would you believe I didn’t even win the

It’s an extraordinary time to be a buyer of US real estate in general, and Florida real estate in particular. You may never have such a great opportunity to buy here in the rest of your life. Here’s why.

to the Case-Shiller home price index). But in some ‘bubble’ cities, such as Las Vegas and Phoenix, prices are down by more than 50%. Meanwhile, in Florida, property prices in Miami fell 49% peakto-trough – and many smaller beach towns here fell by even more. Secondly, financing is very cheap. Mortgage rates are currently the cheapest in history (or certainly since the Federal Reserve’s records began in 1964). As a personal example, I have a 2.74% interest rate from Bank of America on a home equity line of credit – Bank of America will lend me up to $500,000 at 2.74% interest. I haven’t tapped it yet. But if I bought those St Augustine Continued overleaf

Maybe, but investors risk getting burnt

by James Ferguson

Is it time to get back into US housing? On many measures the answer is yes. The Case-Shiller house price index has risen for two months in a row, the first gains since July 2006. Consumer sentiment is improving and unemployment at least rising a little less rapidly than it was. Meanwhile new orders for manufacturers have bounced strongly as customers rebuild inventories, so much so that GDP may well grow surprisingly robustly in the second half of 2009.

And as Steve notes above, houses look good value. Nearly half of all existing home purchases made recently have been at foreclosure auctions, where the average drop has been around 45%. And affordability – boosted in part by tax rebates – is at levels not seen since the 1970s. On top of this, the type of buyer has changed for the better. Before the recession, roughly half of all US mortgages qualified as ‘prime’, meaning they would be insured by the government-backed mortgage agencies Fannie Mae or Freddie Mac. That proportion has risen to 80%. So four


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mortgages in five are now plain vanilla, owner-occupied, bluecollar, middle American loans. In other words, the speculators, flippers and developers are out and ordinary American families dominate the market once again. That has to be a good sign. And with Fannie and Freddie daring to lend where others fear to tread, the US has managed to keep the level of home sales up at almost pre-bubble levels. The average number of existing home sales over the last year is down a third from the peak. But it’s still only 6-7% below the norms of 1999-2000, before the bubble took off. This in turn has enabled US house builders to clear their record inventory overhang at a phenomenal rate. Completed new houses for sale peaked at 200,000 in early 2008, 60% higher than any past cycle peak. Yet that inventory has fallen by 80,000 homes in just 18 months; an unprecedented feat. So, houses are cheap again, the economy’s looking up and the overhang of new homes has improved more rapidly than anyone could have dared predict. It must be time to plough back in, right? Well, unfortunately not – at least not if you’re an investor looking to make money. For starters, there’s a big difference between a new Continued overleaf

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mortgage rate (as these two determine your monthly payment); and your monthly income. All three are in favour of the US homebuyer now. So we’ve seen the average house price cut, in many cases, nearly in half. Beyond that, the cost of financing has been cut by a third during this decade alone. Meanwhile household incomes have held up reasonably well. So it’s no surprise that the NAR Housing Affordability Index (which goes back to 1970) shows that housing is more affordable than ever in the US. So US housing is now easily affordable. But why is now the right time to buy? There are four good reasons. Waterfront building lots in Florida can now be snapped up for less than R300,000 Continued from previous page

properties with that money, I believe I could have sold them for significantly more than they went for at that barely advertised, distressed-sale auction. The return on my own money would have been near infinity. My only ‘out of pocket’ expense would have been the lowly cost of the 2.74% interest for a couple of months. Thirdly, US housing is more affordable than ever. Affordability is a simple concept. But most people get it wrong – they often quote a ratio of house prices to

income. This comparison is near-useless. It’s not apples to apples. For example, the interest payments on my parent’s 20% mortgage from the early 1980s were an entirely different situation to my 2.74% Bank of America interest rate today. The actual price of a home isn’t people’s main concern when they buy a home – it’s the monthly payment. So affordability isn’t about the house price to income ratio, it’s about the payment. “Can I afford that monthly payment?” That’s the big question. That question can be answered by knowing three things: the price of the house; the

1. Record low building activity: Housing starts are at their lowest level in recorded history, and a shortage of new homes has historically always led to a rise in prices. It’s simple supply and demand – when home builders build too many homes, prices peak soon after. And when they don’t build any for a while, prices start to rise again. You can guess when the most recent peak in new homes started – January 2006. Prices peaked within six months. Before then, building activity (housing starts) bottomed out in 1991, 1982, 1975, 1969. And following the rules of Economics 101, prices started rising (often dramatically) soon after. Continued overleaf

Another issue is that the rising trend in homeownership in the US went into reverse even before the peak in prices. There are two main reasons why this will continue. 1. Lending will be restricted in coming years: Few Americans seem to be aware that Fannie and Freddie were always going to need rescuing by the state one day, because they offer two things that no private lender ever could. They allow 30-year fixed-rate mortgages to be refinanced at a lower rate and for no early repayment penalty; and they give ‘non-recourse’ loans; so if house prices fall, Americans are used to being able to simply hand back the keys without being pursued for the debt. That means that Fannie and Freddie were always going to go bankrupt just as soon as either long-term rates rose or house prices fell.


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Continued from previous page bull market and one that simply isn’t falling any more. Consider what happened last time. Most housing market measures troughed at the end of 1990. By 1992, house prices were rising again and for the next six years averaged growth of 2.9% a year. Over that same period, the average inflation rate was 2.8%. So for the seven years following the 1990 trough in US house prices, there was no gain in real terms. Remember it’s only a very recent conceit that houses are investments rather than quite useful, sometimes slightly leaky, things to live in.

They’re cheap, but will they make you money? The fact that neither of these things happened between 1982 and 2006 is what lulled everyone into such extreme complacency. But there’s a new determination, shown at the G20 meeting two weekends ago, to start addressing the lack of bank capital and the excess of risk that fed the credit bubble. Fannie and Freddie serve a purpose right now, with so few alternate lenders around. But Continued overleaf

cover story Steve’s top buying tips

Continued from previous page

Housing starts are now at their lowest level in recorded history. 2. Banks are desperate to sell: “Just make any offer,” my friend – a US bank chief financial officer (CFO) – told me recently. “Chances are, the bank will take it.” Banks are in the business of making loans, not owning property. But they made tons of bad loans, and now they’re stuck with thousands of properties. They don’t want to be in the property business, they want out of it. With so few buyers, they have to be willing to consider any offer. As my bank CFO friend says, “Chances are, they’ll take it.” It’s easy to find bank-owned properties and government-owned properties. Just type “REO” into Google, and you’ll find plenty of banks and their listings. Pick your place and price.

much bigger than this – you could argue that the whole government bail-out is about saving homeowner equity. 4. US property is hated: As an investor, I’m seeing what I love. It’s a rare situation, but incredibly important if you can recognise it. It’s when people’s emotions are clearly at odds with the reality of the numbers. The numbers for housing are great right now. But after three years of losses, people are sour on housing – it’s perfect. I prefer to be a contrarian. Three years ago, everyone in the US said: “You can’t go wrong in real estate.” Now everyone thinks you’ll never make money again. I’ll take the opposite side of both of those trades.

“People are sour on housing – a perfect time to buy”

3. The government wants higher prices: You wouldn’t believe the effort the US government is putting into propping up the housing market. Undoubtedly, it will succeed. If housing falls, Americans will feel broke, they’ll blame their politicians, and those politicians won’t get reelected. The incentives are comical: government-guaranteed mortgages, tax credits of up to $8,000 for first-time home buyers, tax-free capital gains of up to $500,000; and many more. But it gets

David Dreman is a legendary contrarian investor. In 1980, he literally wrote the book on the topic. It’s called Contrarian Investment Strategy. In it, he recommended going heavily into stocks. Today, Dreman recommends US residential real estate: “If inflation hits hard, the chief culprit of the bear market – real estate – is likely to be one of the best investments in the years ahead. Buy a home if you don’t already have one or a second home if you can afford one.” Time to buy a house (or two!) in America – preferably in Florida.

2. Avoid Miami. You want to pull off the highway to fill up your car and worry if you’ll make it out of that neighborhood alive? Then move to Miami! 3. If you want a cheap home near the ocean, try the southwest coast. Ft. Myers, Naples, anywhere over there – that’s where the most real estate speculation and overbuilding went on, so it’s where the biggest bust has been. That’s where to get a super deal – just find the town you like (personally, I prefer the Atlantic Coast, but I’m a surfer, and that’s where the waves are). 4. If you want a great deal, get on a plane. Do all the homework you can from home. But for the real deals, you should spend time here. Figure out which towns you actually like. And talk to realtors about foreclosures and other special deals. Nothing beats doing this in person.

having been rescued by the taxpayer at vast expense, their futures in their present form must be in doubt. Trouble is, it’ll be years, literally, before the banks want to lend for residential mortgages again, so any constraints on Fannie and Freddie, now they control 80% of the market, will make a real impact. This leads us to a more fundamental problem. The US banks, by my estimation, have already stored up $150bn or so of unrealised losses on their loan books. This is bad news for the economy. The recent upbeat economic data has been driven by one-off inventory re-stocking. Once that’s run its course, there will be precious little follow-through. Why? The correlation between the growth in private sector credit and GDP is long and strong. So if banks aren’t lending, you can’t expect the economy to grow, nor the price of assets which rely on credit.

and 12% of everything they earned in the 1960s, 1970s and 1980s, the savings rate dipped as low as 1% during the housing bubble. Already it’s back to 5% and rising fast. Yet some Americans can’t save more even if they’d like to. The recession has already claimed almost seven million jobs, a new post-war record, yet it comes after the jobless recovery of the 1990s and early 2000s. After a while, unemployed people drop off the official statistics because they no longer qualify for unemployment benefit. Although unemployment has just hit 9.7%, the true percentage of un- and under-employed in America is now put at more than 16%. It’s small wonder that homeownership, which had risen from 64% throughout the late 1980s/early 1990s to top 69% in the wonder days of the NINJA mortgage (no income, no job or assets) has now sunk below 68% and is still falling. This fall could prove to be more than just cyclical as America’s position on the world stage is gradually eclipsed by Asia.

2. Americans don’t want to borrow any more – or can’t: On top of this, households don’t want to borrow. For the last few years, Americans convinced themselves that taking out a mortgage to buy a house was the best long-term investment; that borrowing was somehow saving. The crash put paid to that notion. They’re now putting money in the bank again. From saving between 7%

A cheap US residential property will not necessarily lose you much money. The problem is that the absence of a negative is not a positive. I can’t see what will drive house prices higher for a long time to come. Indeed, I believe it’s a mistake even to consider residential property as an investment until the banking crisis has been resolved – and that’s a good five years away.

Continued from previous page


1. Don’t buy north of Orlando if you want to be warm in winter. Most foreigners don’t realise that Florida temperatures vary so much from north to south. Palm Beach County and South? Great. You’ll need a sweater just a few days in winter, and you can get in the pool nearly every day. But Jacksonville? It’s way colder than you think! You won't get a suntan, and you can't use your bathing suit.

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the best blogs What the bloggers are saying

US should open its borders to nerds Over 52% of Silicon Valley start-ups were founded by people born outside America, writes Farhad Manjoo. Think Sergey Brin of Google, or Jerry Yang of Yahoo. That’s why America should ease its immigration rules, which are “the biggest constraint on the number of new start-ups that get created in the US”, reckons Paul Graham of venture capital firm Y Combinator. Google alone spends $4.5m a year on “visa administration” to The US economy needs him shepherd the best and brightest to America, as only 85,000 skilled workers are allowed to enter the US legally each year. This means many smart start-ups are forced to relocate back to their home countries. A new visa programme could solve this. Allowing for 10,000 ‘nerds’ a year, these people would not be allowed to join existing companies. Rather, they would only get visas if they started their own companies. “In other words, they wouldn’t be ‘taking American jobs’” – they’d be creating them.

It’s time to walk away from Royal Mail A series of 24-hour walkouts by UK Royal Mail workers that began in June has hit small businesses hard, says Richard Tyler. Firms complain of missing sales because stock hasn’t turned up at important trade fairs, or because products haven’t been delivered on time. Well, “the best punishment for any organisation that abuses its position is for its customers to walk away”. The good news is that increasingly, businesses can walk away from the Royal Mail. Letters and marketing can be sent by email, says Tyler. If you need a physical

copy for legal reasons, there are options, such as, although “they are still hampered by having to use the Royal Mail’s posties to deliver the mail directly to people’s doors”. For invoices, there is electronic invoicing firm OB10 (, while banks such as Royal Bank of Scotland offer similar services. When it comes to sending parcels, couriers such as DHL and Parcelforce can easily do it for you. “Union staff at the Royal Mail need to know that a pay freeze when inflation is close to zero is a darn sight better than no job at all.”


We need efficiency, not ‘green’ fuels As the world looks anxiously for an alternative to oil, energy sources such as biofuels, solar and nuclear “seem like they could be the magic ticket”, writes Michael Grunwald in Foreign Policy. “They’re not.” Take nuclear. No Western country has more than one nuclear plant under construction, while scores are set to be decommissioned. “There’s no way nuclear could make even a tiny dent in electricity emissions before 2020.” And the cost of constructing power stations has quadrupled in less than a decade. Biofuels are no better solution, as they destroy vegetation that would normally soak up CO2. Indonesia now ranks as the third-largest emitter of CO2 gases in the world after it destroyed so many of its lush forests and peat lands to grow palm oil for the European biodiesel market. So it looks like there is only one answer: “efficiency”, using less energy “to get your beer just as cold, your shower just as hot, and your factory just as productive”. That doesn’t mean making sacrifices. “More efficient appliances, factories, and vehicles could wipe out one fifth to one third of the world’s energy consumption without any real deprivation.” And “if that’s an inconvenient truth, well, it’s less inconvenient than trillions of dollars’ worth of new reactors, perpetual dependence on hostile petrostates, or a fricasseed planet”.

Beware this sugar rush

As in any bubble, “the first-movers get buzz and revenues, gain critical mass, and start to expand rapidly”. This encourages less-well-capitalised second movers and established firms in related industries to join in. Newcomers have tried to distinguish themselves, some by offering organic or vegan cakes. But this is unsustainable. The trend is for consumers to trade down, not up to $4-a-pop cupcakes, while a baker has to


18 September 2009


Simple, tasty, and made from cheap ingredients, cupcakes have long been a favourite of amateur bakers. So it’s perhaps no surprise that as shop rents became cheap, cupcake stores started popping up all over America. But now there’s every sign they’re in a bubble all of their own, says Daniel Gross.

sell lots of cakes to make money. If he wants to start mass production, shipping over long distances, the product becomes poor value. Cupcakes are having their moment, but “remember what always happens after a sugar rush: a crash”.


I rode the mountain bike craze to a fortune After a year, the result was the company’s first product: the Specialized Touring Tyre. It was “a breakthrough for us. Suddenly, we were more than just importers. We were innovators.”

by Jody Clarke Mike Sinyard, 59, has been riding bicycles ever since he took apart, painted and rebuilt an old girl’s bike his father bought at the local charity shop. But it was only as a student, riding the seven or eight miles into San Jose State University every day, that the Californian hit on a way to make a living from his passion. Three decades later, that brainwave has materialised as Specialized, a $500m-ayear firm whose bikes appear everywhere from the Tour de France to Scottish mountain bike trails. The son of a machinist, Sinyard paid his way through university by buying old bikes at flea markets, fixing them up and selling them through local newspapers. But “in those days it was not easy to find well-made components for my own bike, and I knew my friends wanted them too”. Quality ten-speed racing bikes and their components were easily available in Europe, but not in the US. So with $1,500 raised from the sale of his old Volkswagen bus in 1972, Sinyard bought an array of components from Campagnolo and Cinelli, two big Italian bicycle manufacturers. These he stored under an 8ft by 30ft trailer rented for $60 a month in California. He then put together a hand-written catalogue and sold the parts to independent bike-frame builders on the US west coast for a total of $1,800.

Sales grew to $128,000 in 1975 and $1m by 1978. In 1981, he developed the Stumpjumper – the first mountain bike available in bike stores – after watching cyclists equip their bikes to deal with the rugged trails of northern California. “I had never seen anything like them. Intuitively, I knew this mountain bike was going to be the next big thing.”

MY FIRST MILLION Mike Sinyard, Specialized With banks initially unwilling to finance him, he persuaded his dealer-customers to pay in advance for orders. This move paid off when a bank advanced him $1,500 secured on his trailer once he was selling to 25 shops. Sales in 1974 were $64,000, on which he just broke even. But then he began making his own tyres. “The ones we were importing from Italy weren’t very good. They’d have bubbles along the treads and didn’t last.” Sinyard started researching rubber compounds so that he could develop his own tyres.

The company grew rapidly. But during the 1990s, rather than focusing on its core customers, Specialized started slapping its name on “hastily-made bike helmets, water bottles, etc”. The result? By the end of 1996 “we had lost about 30% of the bike store business and came within a few hundred dollars of bankruptcy”. It took three years to get the company back on track. In 2001, 49% of the company’s shares were bought by Merida Bikes, Taiwan, for a reported sum of $30m, while Sinyard wrote a book emphasising Specialized’s mission and passed it out to each employee. “This was the most valuable thing I had done in my 20 years of business. It gave the company clear direction.” But he isn’t about to retire and relax: “I love what I do, I want Specialized to be here forever.”


The MoneyWeek audit: Terry Wogan • How did he get started? Terry Wogan worked in a bank for five years until, at the age of 21, he became a newsreader on Irish radio. After presenting numerous radio shows for the BBC he took over the Radio 2 morning show in April 1972. In 1985 he was given his own television chat show, Wogan. It was so successful that by 1987 he was the UK’s highest-paid chat-show host, earning £350,000 a year. Wogan was cancelled in 1993, but he kept the money rolling in with Auntie’s Bloomers, earning £20,000 an episode. • What does he earn now? Wogan has announced that he will be leaving his Radio 2


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breakfast show, Wake Up to Wogan, later this year. At present he earns £800,000 a year for the show. Last year he stepped down as the BBC’s Eurovision Song Contest presenter, a role that earned him £150,000 a year. He also earns around £250,000 from voiceover work, with his total fortune estimated at £20m.

• What about his financial controversies? Over the years Wogan hasn’t escaped criticism for his earnings. In 1988 it was revealed that Wogan was a silent partner in luxury car-hire firm, Motorvation. One of the firm’s main clients was the Wogan show, which sometimes spent more than £2,000 a week on limousines. In 2007 it emerged that Wogan earned £9,035 for presenting Children in Need in 2005, when other presenters worked on the telethon for free – he has since waived his fee. Wogan was also embroiled in the BBC expenses row when it was revealed that BBC executive Dame Jenny Abramsky put a £1,137 dinner in honour of Wogan’s knighthood on expenses.

personal finance

The 6 secrets you NEED to know to be a financial genius by Karin Iten Financial wisdom isn’t something you’re born with. It’s something you learn. I wish it weren’t so, but the truth is, those that are brilliant with their money achieved this through some type of third party guidance. Maybe they absorbed it from their parents, or perhaps they read about it in a book. Regardless, they didn’t just wake up one morning and – hey presto – all their money matters just made sense. Because it’s something you need to learn (and apply), I’m here to help you on your way to financial brilliance. That’s why, this week, I’m divulging my top six secrets to reach genius status.

Secret #1: Roll an income snowball We’ve all heard of the debt snowball – when spiralling debt gets so out of control, it rolls you all the way down the hill into a big wad of trouble. But if the “snowball” effect works so well at adding to your debt, why not reverse the approach and apply it to generating a passive income instead? So don’t start buying more after you set up a stream of passive income. Rather, roll that income into other passive income ventures – like renting an apartment to university students. Once each new venture becomes self-sustaining, it’ll contribute to the snowball. And you can reinvest added cash into yet another opportunity. Handy tip: When you start a new moneymaking venture, you probably won’t be doing it full-time at first. So make sure it’s something you can do on the side and be passionate about it. If you love something, you’re more likely to put your all into it – and the money should flow right in.

Secret #2: If you don’t have an emergency fund, start one NOW! No one can anticipate the roof caving in or your computer shutting down for good. So set aside an independent rainy day fund. The key to doing this is simple, says tips site Save little. And save often. Handy tip: Place a small amount (say R5) into a “safe place” each week. Then once a month, add a R50 note into the fund too. At the end of the first year, you’ll have R860 in the fund. If your partner does the


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same, you’ll have R1,720. Do this religiously, and soon you’ll have enough to cover just about any unplanned emergency.

Secret #3: Financial calculators are your friend – use them Why pay for a consultant to do the maths if a free calculator will do it for you? So if you need help with your budget, home loan repayments, income tax or more, use the calculators at They’re free and, unlike some bank calculators, they’re super easy to use.

Secret #4: Spending less keeps you grounded to what matters most Stop buying things you don’t need. Purchases of a few hundred rand can quickly add up to thousands. Plus, if you haven’t budgeted for it, ten-to-one, you’re probably paying for it on your credit or in-store card. And that means you’re paying interest of up to 25% on everything you spend. Handy tip: If you want to buy something expensive, sit tight on the idea for 24 hours. It’s far too easy to get caught up in the emotion of having the item. But if you wait, chances are you’ll talk yourself out of it or discover you really need it – but can find it cheaper somewhere else.

Secret #5: Dream big. It’ll motivate you to save We all want to retire early, but that goal is completely intangible. And if something’s vague, you’ll never get there. So dream big. And flesh out the idea of what retiring early means to you. Does it mean the chance to take a holiday anywhere in the world every year without fail? If it does, imagine those holidays – sitting on the beach in Zanzibar or eating a hot baguette and fresh brie under the Eiffel Tower. Now that’s what I call motivation to start saving!

Secret #6: Be open to discussing money with your partner Money can’t buy love or happiness, but it sure can tear them apart. In fact, money is one of the biggest reasons couples get divorced. So be open about money with your partner. Not only will this save you from many arguments and sleepless nights on the couch, but you’ll be able to align your financial goals, and discover where the other is spending and where both of you can cut back. Plus, it’ll give you the chance to solve problems together. After all, two heads are better than one. Always remember, financial intelligence is your most lucrative asset. So get smart today!

Tax tip of the week Ensure you don’t leave your loved ones with heavy debt when you die No one wants to think about death… let alone plan for it. But if you want to ensure all your hard work benefits those you care about most, you MUST ensure you have an estate plan in place. Here’re three tips to help you get the best possible tax outcome when you die:

Tip #1: Start with a will You can’t reduce estate duty if you don’t have a will. Ensure you draft and execute it properly so it’s valid!

Tip# 2: Conduct a liquidity analysis A liquidity analysis ensures there’s enough cash in your estate to pay liabilities, funeral costs, executor’s fees, etc. If your estate isn’t liquid, the executor will sell assets to settle your debts… or worse, your heirs will foot the bill!

Tip #3: Make provision for estate duty While bequests to your spouse may reduce or nullify the estate duty payable on your death, this only postpones the payment to when he or she dies. Make sure you’ve got enough money to cover this! Jerry Botha, Editor: 202 Tax Tips

profile This week: Arthur Ryan

The humble retailer who turned a no-frills clothes chain into a Mecca for fashionistas “They don’t make them like Arthur Ryan anymore,” was the chorus from retailers when the Primark boss retired after 40 years of piling it high and selling it cheap. From a single store in Dublin, he went on to storm the British high street with his no-frills, no gimmicks ethos. “I just like sliced ham and bread and butter,” Ryan once said. “That’s where I am. No risk.” Yet risk seems to haunt Ryan, says the Daily Express. He lives in one of Dublin’s best-protected houses, never gives interviews, and is rarely seen in public without bodyguards. His great fear is kidnap – a real enough threat for Irish retail magnates during the Troubles. In 1981, the IRA snatched department store boss Ben Dunne; two years later, they tried to kidnap Galen Weston, scion of the Canadian family behind Primark’s owner, food and retail conglomerate Associated British Foods (ABF). Ryan still takes no chances. “His daily schedule is kept secret from all but his closest aides.”

Ryan also likes to be able to drop into stores unannounced to observe the business incognito, says The Times. Indeed, many of the habits associated with his friend, Sir Philip Green (such as anonymous store visits), were practised first by Ryan at Primark. Ryan has always had a reputation for haggling mercilessly to secure the 12.5% margins that fuelled the chain’s growth. But last year, when Primark was pilloried for using child labour (unwittingly, it says), his image took a turn for the worse. He was portrayed by some as a rapacious capitalist operating from the shadows – habitually clad in a rumpled old mac. Yet this 73-year-old chainsmoker is far from a cold fish, says the Daily Mail. Married to a former Irish Eurovision star, tales abound of his bonhomie at favoured Dublin haunts. He’s a “subtle operator”, says an associate. “You’d be in the Shelbourne bar, a drink would appear in front of you paid for by Arthur, but he’d be gone by the time you looked around.”

His origins were humble. The son of a Dublin insurance clerk, he worked in London for a fashion wholesaler, Carr & McDonald, before being hired by the Westons to launch a budget clothing chain in Dublin. Ryan opened the first Penneys store on Mary Street in 1969 and, in 1974, took the model to Britain – renaming the stores Primark to avoid legal problems with US chain JC Penney. Primark ambled along for years, says The Sunday Times. Even ten years ago, its contribution to ABF’s profits “amounted to little more than a rounding error”. The turnaround came in 2005, when Primark acquired a huge portfolio of Littlewoods stores. Meanwhile, close attention to catwalk trends made it chic as well as cheap. It went from being the “shop that nobody admitted going to” to a Mecca for celebrity shoppers. It was “Primani”, darling – or “Pradamark”. Now accounting for over a third of ABF’s operating profits, Primark is a dream business for the Westons, says the Daily Express, and Ryan a dream employee. While well paid, he has no equity stake in the 191-store strong chain. Perhaps a new management style beckons. But one thing is certain: Ryan’s shoes, “low-cost or otherwise, will be hard to fill”.

Ryan’s legacy – and the challenges for his successor There’s a world of difference between Grace Brothers and Primark, but Arthur Ryan’s management style has a nostalgic whiff of Are you Being Served? about it. As The Sunday Business Post notes, Primark senior managers are still referred to as Mr, Mrs or Miss. Primark as a whole is “an extension of Arthur Ryan”: from its lean and mean sourcing policy (it cuts out the middleman and goes direct to suppliers), to its culture of secrecy and restraint. The firm has never advertised. Until recently, its entire PR budget was believed to be less than £15,000 a year. The furore following a BBC Panorama investigation into child labour changed all that, says Retail Week. Ryan left ABF chief George Weston to field the criticism. But a culture shift is underway. The group has turned its basic website into “an in-


18 September 2009

depth information portal”, with pages on its ethical stance. It’s no coincidence that Ryan’s successor as CEO, Paul Marchant, is touted as having “a deep knowledge of supply chain issues” that should help address ethical concerns. “There’s no reason why a silver-haired… septuagenarian shouldn’t run a business such as Primark,” says Damian Reece in The Daily Telegraph. “But as the company becomes more international… a more public face becomes desirable.” Let’s hope Marchant doesn’t mess with the blue-print too much. Primark may have lost its flighty Vogue following, but its “Look Good, Pay Less” motto has been a winner in recession: sales rose by 9% in the six months to September. What it needs now is not an innovator, but an operations man to scale up and grow overseas. “Next stops are Buenos Aires and Brisbane, not Brighton and Birmingham.”

Spending it Where to stay This week: Two five-star Egyptian hotels, one in Luxor and a small boutique hotel in Cairo

This “chic Nile-side bolt-hole” is perfectly located on the Nile, “on the doorstep of Karnak Temple,” says The Sunday Telegraph. Designers have made “excellent use of 150m of prime river frontage”. What’s so special?

What people A highlight is “watching the sun dip behind the say Valley of the Kings from the waterfront shisha cafe Diwan, where storks swoop and the wail of minarets echoes down the Nile,” says the Telegraph. “Luxor was a great place to chill out,” one visitor told the website, Trip Advisor. “The Hilton is right on the river, with great amenities and staff. Great pool and service. The outdoor restaurant had great food and was just the ticket after a day of travelling. Great breakfast.” “I cannot praise this hotel enough,” said another visitor. The menu The pool and Nile-side Olives bar serves “topnotch” mezze and Mediterranean food, while the “chic” Silk Road serves Asian cuisine. The alfresco Diwan serves Arabian tea in the early evening. Cost? A standard double costs from R2,000 with breakfast. Book more than three months in advance and you can claim a 30% Early Saver discount. Visit wideresorts/resorts/luxor.

Villa Belle Epoque This beautifully restored 1920s villa “has plenty of Cairo’s exotic allure yet none of its irritants” thanks to its position away from the main hustle and bustle, says Teresa Machan in The Observer. What’s so special?

What people This is a gem say of a place “where you can squander precious sightseeing hours without feeling at all guilty”. Why risk “life and limb on the Giza ring road” when you can relax “under a peach tree”? says Machan. The place is idyllic, says Paul Croughton in The Sunday Times, who enjoyed a “sumptuous breakfast of Egyptian delicacies” cooked by the hotel’s “excellent young chef”. The menu Food at the hotel ranges from “a steaming pot of Nubian-style lamb stew choc-full of velvety meat and gardenfresh okra” to a “zingy cold orange soup” all served on the villa’s shaded terrace. For breakfast you can have fattoush, fava beans and cheese pastries, scrambled eggs with sliced peppers – and fresh lemon juice. Cost? A three-night break, including return flights, transfers and breakfast, costs from R6,100 with Bales Worldwide. Visit The hotel is 25 minutes from central Cairo.

What the travel writers are saying

My dream holiday

The October issue of The Sunday Times Travel magazine contains its 2009 Readers’ Awards – here’s what was voted the best (and worst) of international travel.

Michael Aspel: Pettenasco, Italy.

● Best large worldwide hotel: The MGM Grand, Las Vegas. “It has everything you could possibly wish for,” said one reader. ● Best large UK hotel: The Dorchester, London. “It’s the most welcoming hotel in London – and it serves the best hot chocolate.” ● Most disappointing hotel: The Travelodge chain. “It barely even does what it says on the tin.” ● Best worldwide boutique hotel: Soho House, New York. “It’s worth the price tag.” ● Best UK boutique hotel: Hotel du Vin, Harrogate, thanks to its “stylish conversion of a Georgian terrace”. ● Best hotel in Europe: The Dylan, Dublin, where “you feel like a family member, not a guest”. The Hôtel Amour in Paris came in a close second even though it may not be to everyone’s taste – it’s a “funked-up former brothel” with “imaginative rooms” and a “friendly buzz”, combined with “great value”.


18 September 2009

“I’ve been going there for 40 years or more,” Aspel tells The Sunday Telegraph. He found it while on holiday with a BBC cameraman. “As we were driving along a road, I spotted some water below, went to investigate and fell in love with this pretty little jewel of a lake to the west of Lake Maggiore.” He recommends the Hotel Giardinetto (


Hilton Luxor Resort & Spa


A British rival to the Harley “If this is what a midlife crisis feels like, then all I can say is, bring it on,” says Simon Roots in SuperBike magazine. The new Thunderbird is Triumph’s latest attempt to derail Harley-Davidson’s monopoly on the mid-sized American cruiser market, and it certainly looks the part: A “stylish vision on wheels”, beautifully made, with lashings of chrome wherever you look. And with bikes like this, “the fact that the styling is right almost makes all other questions redundant”. But for the record, the bike works “sublimely”. The 1,597cc T16 parallel engine delivers “healthy performance and sprightly acceleration”. Charging through the countryside on it is an “utter pleasure”.

frame and improved suspension. In particular, the steering at low speed is very impressive: Most cruisers tend to drop in to corners, and stand up if you brake while leaning, but the Thunderbird “does neither, remaining neutral and, as a consequence, is very easy to handle”. Add this to the comfortable riding position, which is “upright and spacious”, along with the generous 4.8-gallon fuel tank, and you have a “genuinely

useful motorcycle as a well as a cruiser, a too-rare combination”. You “really can go places on this bike” and can choose from a range of accessories to turn it into exactly the machine you’re after.

The Thunderbird is superior to a Harley in just about every way you can measure, says Kevin Ash in The Daily Telegraph. The engine “does everything you’d want from a cruiser” and the handling is better too, with a stiffer

Wine of the week: a winery buying ladybirds and wasps Ondine Cabernet Franc R75 at exclusive wine retailers


recommended this last one in the past and still believe it’s good value for money.

Recently, the Cape Wine Academy did a tour of the west coast and what a surprise it was. We visited a farm called Ormonde, which is almost in the middle of Darling. Its vineyards spread around the area and benefit from the cool sea breezes. I was facinated that they by Marilyn Cooper “imported” both ladybirds and wasps from Gauteng. They’ve introduced them into the vineyard as natural preditors to control other pests and diseases.

Not many wineries make Cabernet Franc as a single variety – winemakers usually blend it with Cabernet and Merlot to make up the Bordeaux blend. This Ondine Cabernet Franc is aromatic and elegant in style, with gentle wood handling, which doesn’t dominate the fruit. It produces an integrated juicy wine for consuming now, but will also benefit from a few years in bottle.

They make three labels – the top of the range Ormonde, Ondine and the every day nice-price label Alexanderfontein. I’ve

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

18 September 2009

blowing it

Over the years, I have to confess, I’ve wasted a bit of money on wacky therapies and gurus of one kind or another: Psychics, clairvoyants, feng shui experts, reflexologists, herbalists, and the like. I’ve even telephoned an exorcism specialist who gets rid of ghosts if she knows your postcode. (I didn’t think I actually had a ghost, but I wanted to check.) But I can’t hold a candle, or a crystal pendant, to Cherie Blair. I have no idea what she’s spent on crackpots, but it must be a lot. Remember Jack Templeton, who said he could cure her swollen ankles by swinging a pendulum and feeding her a concoction of strawberry leaves?


Why Cherie Blair likes a blast of liquid nitrogen Yukio Hatoyama. Hatoyama was once dubbed ‘the Alien’ by colleagues on account of his otherworldy manner and prominent eyes. It was an appropriate nickname – his wife, Miyuki, claims she was abducted by aliens while asleep one night 20 years ago, then whisked off to the final frontier. “While my body was asleep,” she says, “I think my soul rode on a triangular-shaped UFO and went to Venus. It was a beautiful place, and it was very green.”

As well as regaling the media with tales of interplanetary travel, says The Guardian, she Miyuki Hatoyama and Cherie Blair: Enthusiasts for New Age bunkum likes to describe another fad: Her solar breakfasts. “‘I eat the sun,’ says said: “She was absolutely lovely and Miyuki, raising her arms as if to tear what’s more she kept all our spirits up. pieces off an imaginary sun. ‘Like this: You have to keep moving or you would So it was no surprise to read in the Daily yum, yum, yum. It gives me enormous freeze and she led the singing and the Mail that she has been recovering from energy. My husband has recently been clapping as we walked around in circles the stresses and strains of her recent book doing that too.’” doing our best to cope and keep warm. I tour in China by undergoing suggested we sing Always Look On The ‘kriotherapy’ at the Champneys health I suppose there are worse things for the Bright Side Of Life, and we did. After spa in Tring, Herts, half an hour’s drive wives of our leaders to do than indulge in three minutes at minus 100°C, you do a from her new country home. New Age bunkum, but it’s not exactly 45-minute intensive gym workout. But reassuring. Or perhaps it is. We’re often before that you end up absolutely Wearing a bikini and pair of thick socks told that Gordon Brown needs to ‘lighten freezing. Even your eyebrows are frozen. to stop her toes from getting too cold, up’ a bit: If Sarah could just persuade But Cherie was wonderful. She was full she went into a room where the him to eat the sun each morning it might of life and great fun.” temperature is dropped to minus 100°C make all the difference. with liquid nitrogen. The treatment is But, wacky as she may be, even Cherie said to help with sleep problems and will have trouble competing with a recent relieve symptoms of tiredness and arrival on the world stage, the wife of the depression. Lawyer Kevin Harris-James, newly elected Japanese prime minister, who was in the ice room with Cherie,

Tabloid money… Essex police trade in fancy shades for extra bobbies ■ If you want a demonstration of how to cut waste, visit Essex, says Ross Clark in the Daily Express. In the past year Essex Constabulary has put an extra 239 officers on the beat. “How? By cutting back on waste and bureaucracy.” The force has saved £11m (R132m) through better housekeeping. Ordering officers to refuel their cars at supermarkets has saved £50,000 (R600,000). In 2008, Essex police got through 73,000 pens, some of them gel pens at £5 (R60) a time. Now they must all use 8p (R1) biros. Cutting back on laser printers has saved £80,000 (R1m), while “chopping over-generous hospitality” has saved £120,000 (R1.5m). Coffee and biscuits are no longer served in staff meetings; nor can officers buy Oakley sunglasses on expenses. The crackdown is far from finished, and recently retired Essex Chief Constable Roger Baker, who instigated the savings, reckons that if every police force in the country adopted the same measures it would save £1bn (R12bn) a year and enable 15,000 to 20,000 extra officers to be put on patrol. If only South Africa would take a leaf out of their book.


18 September 2009

■ “Generous, kind-hearted bankers at HSBC have unveiled a mortgage with a cut-price interest rate of just 1.99%,” says Fiona Phillips in the Daily Mirror. “Er, as long as you’ve got a 40% deposit to put down. And only if you’re prepared to fork out an ‘arrangement fee’ of £1,119 (R13,500). What is an ‘arrangement fee’? I’m constantly arranging things for the whole family and I’m not paid a penny. I thought the banks were supposed to have been brought into line, so they can’t con us with charges for absolutely nothing. Can the Chancellor arrange for arrangement fees to be re-arranged? And then abolished.” ■ “No fool, Prez Obama,” says Fergus Shanahan in The Sun. “His succinct character assessment of Brown after meeting him: ‘Dour, depressing.’ His assessment of Dave Cameron: ‘Energetic, dynamic.’ Most wounding for grim Gord will be news that most Americans still think Tony Blair is PM.”

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

PUNTS Company



Current price

Gold Commodity

Financial Mail

Gold’s been flirting with the $1,000 an ounce level all week. RMB analyst, Josina Oliphant says its amazing run has mostly been down to “increased risk aversion, a weaker dollar and ongoing inflationary pressure”. The only thing that’s keeping a cap on this one is “increased profit taking after its $75 jump”. Buy.


“Over the years, investing in airlines has had a certain appeal to the masochistic investor, but more traditional punters have learnt to avoid them,” says Jamie Carr in his Diamonds & Dogs column. 1time airline has grown its revenue 20% despite the travel market declining around 10%. In tough times, every company’s share price is depressed, but it’s the survivors that you look for. 1time has proved its quality and with a PE of 2.89 it’s a good deal. Buy.


Financial Mail

1time (1TM) AltX

Mvela Group (MVG) Business support services


Sikonathi Mantshantsha of Finweek says: “Shareholders in empowerment investment company Mvelaphanda Group could be in for interesting and rewarding times as the company has promised to unbundle some of its assets and return the value to the shareholder.” Ordinary shares are trading at 23% discount to its end-August NAV (Net Asset Value) of 823c. Hold. 652c

FirstRand (FSR) Banking

Summit TV Vlad Anuchin, RMB Asset Management

People have been expecting the South African banks to go the same way as their overseas counterparts, but Vlad Anuchin at RMB Asset Management thinks this is an unfair appraisal of the situation. Speaking to Summit TV he said: “The South African banks are very well capitalised. Yes, there is a threat that they’re connected to Lehman Brothers and so on – but they are institutions that have been quite conservative and FirstRand probably more so than anyone else.” When the recovery comes, FirstRand will be one of the first banks to recover. Buy. 1570c

Sovereign Food Investments (SOV) Food production


Marc Hasenfuss sings his own praises this week. He says: “Finweek punted Sovereign Food Investments last year; its price was trading at half its current level of 1000c/share on the JSE. So the easy money has been made, although it probably took a

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




Current price

fair bit of guts for punters to sap up Sovereign in light of the poor performance characteristics the poultry group was showing at the time.” Despite having run long and hard, this share’s still worth a punt. It’s expanded production and is set to increase it even further as it entertains the idea of merging with Country Bird Holdings. Buy.


DOGS Company



Current price

Rex Trueform (RTO) Retail

Financial Mail

“There is little evidence that Rex’s manufacturing arm will ever be anything but an albatross,” says Sasha Planting in the Financial Mail. Its results actually weren’t totally appalling, given lower margins and operating profit, but earnings were down 33%. Sell. 1000c

Dialogue Group (DLG) AltX

Financial Mail

“This has been a remarkably tough six months for the Dialogue Group,” says Jamie Carr in Financial Mail. It’s just gone through a massive restructuring with widespread retrenchment. The consolidation is finished but there’s a long road ahead as it concentrates on business development in 2010. Carr explains, “The worrying aspect of this is that call centres should be a sure-fire winner to grow and generate jobs, but whether due to the cost of telecoms or of employees, the business hasn’t been the success that was expected.” Sell.



Current price



Metrofile (MFL) Business support services

Grand Parade Investments (GPL) Speciality finance

AVI (AVI) Food producers

Financial Mail

Financial Mail

Financial Mail

Sasha Planting of Financial Mail is keeping an eye on this one. “Metrofile has grown modestly, expanded its services and capacity and improved its gearing this year.” This is all despite a massive restructuring and adverse economic conditions. On a PE of 11.49, it’s looking a little overbought, but let’s see how it handles itself in the months to come. Hold.


Sasha Planting in Financial Mail says Grand Parade increased its share in a number of urban casinos. The balance sheet is strong and gearing low. It brought back 27m shares in the year and is looking for more. It’s trading on a PE of 11.47 and is still quite pricy. Hold.


“The group is generating cash, has a strong balance sheet and lifted its operating margin, mainly through cost controls,” says Andrew McNulty in Financial Mail. It’s sitting on a PE of 11.33 and, if consumer demand picks up next year, this share will reap the benefits. Hold.


**Closing prices as at 16 September 2009


18 September 2009

last word

All that glitters New twists in the gold story... until inflation rates go up. They make no effort to hide it. They have as much as warned the world: prepare to be robbed. According to the popular story line, the gold market now anticipates inflation. We have told this story ourselves; we still believe it. But today, we caution readers: there may be a plot twist.

Gold is not an investment category. It is no investment at all. It is more like a religion or a political position. True believers stick with it through thick and thin. When gold goes up, they are insufferable. When it goes down, they are unrepentant.

Bill Bonner

The problem with inflation is that there is none. Consumer prices are falling in China, Europe and America. And if we look harder, we find out why. The Feds are pumping the money supply as hard as they can. David Rosenberg reports that the monetary base rose at a 141% annual rate over the past four weeks. But the money fails to reach the real economy.

The price of gold peaked in real terms in 1979 at over $2,000 an ounce in today’s money. Briefly, an ounce of gold was so loved – and stocks so despised – that you could buy all the stocks in the Dow index for a single ounce of gold. But then, gold martyrs suffered a terrible persecution – nearly two decades of steadily falling prices. Not just in real, inflation-adjusted terms, but in absolute terms. By the end of the period, it took 43 ounces of gold to buy the Dow stocks, and gold bugs were gathering in small groups praying for salvation and awaiting the end of time. It seemed as though the cult might be extinguished; few were still alive. Fewer were still solvent. Of those, even fewer were still sane. But then, like Christians huddled clandestinely in an unheated Soviet apartment, the wall fell. Gold began a comeback.

The easiest story to sell just now is the inflation story. In an effort to return to the bubble era, the Feds are adding to the money supply. They will keep doing so 28

18 September 2009

Even if consumers had access to credit, they wouldn’t take it. Consumers too almost went broke a few months ago. Instead of saving money during the boom years, they spent it – or gambled with it. When the bust came in 2008, they realised they were ten years closer to retirement with little money saved. Now they have to make up for that lost decade by cutting spending and saving as much as they can. In the absence of consumer demand, consumer prices do not rise. Of all the many miseries that man faces on his journey from cradle to grave, few can be eased by an enlightened central banker. A credit contraction is not one of them. Japan proved it. After the Japanese market collapsed in 1990, public officials went to work with their characteristic energy and incompetence. They cut the cost of borrowing to nearly zero. But did consumers take up the money and add to demand for bread and bicycles? No. They didn’t want to borrow. They wanted to save. They had speculated during the bubble years and lost money. Then, with retirement approaching, a penny saved was worth even more to them than a penny earned. They saved more than ever, and the consumer economy sank.


What inspires this little reflection, apart from a night of heavy drinking, is the price movement. At the start of the week, gold closed above $1,000 an ounce. Then on Wednesday morning it shot up. The end of the world has been delayed, perhaps indefinitely. Yet, gold – an option on financial chaos – trades as if it were coming next week. What gives? Here on the back page we keep an eye on the yellow metal. Not because we expect the end of the world. Still, you never know; maybe the gold bugs are onto something. No monetary system lasts forever. This one – an impromptu experiment, at best; premeditated larceny at worst – has already lasted longer than most marriages. The bust-up, when it comes, threatens to be nasty and expensive.

wages and their assets are going down. Who would lend to them under those conditions? Not a bank that almost went broke itself 12 months ago.

Gold’s true believers: expect rapture soon The money supply figures that relate to actual cash in people’s hands – M1, M2, and MZM – are shrinking, at 28%, 4.9% and 6.2% respectively. Why? Because banks don’t lend and consumers don’t borrow. In short, the Feds’ money goes into cool bank vaults and hot speculative trades. When it tries to find its way to the consumer, it gets lost. Why? Because, as Rosenberg explains it, the transmission mechanism has broken down. We live in a bust economy, not a boom one. In a bust, consumers can’t borrow. They have nothing to borrow against. Both their

The Japanese persisted. They lent so freely the yen became the ‘funding currency’ for a worldwide boom. Prices rose across the world – except in Japan. The land of the rising sun couldn’t seem to get up in the morning. Property investors lost money. Stockmarket investors lost money. Japanese consumers sewed their pockets shut. And now, the dollar is the world’s ‘hot money’. The world’s surviving gold bugs see their moment of rapture fast approaching. They march into the coliseum confident that the Feds will inflate consumer prices and cause the price of gold to soar. Maybe gold will rise. If so, it will be thanks to speculators and Chinese central bankers, not consumer-price inflation. The smart money – for now – is still on the lions. To read Bill’s thoughts, sign up to Money Morning’s free email at


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