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Jump-starting the consumer 16 OCTOBER 2009 ISSUE 116 ISSN 1995-4476

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16 October 2009

Recession is a tricky beast. While the economy flounders you cannot predict its turning point, nor what triggers the improvement. By the time you realise the recovery is underway your next challenge is to predict its strength. The United States emerged from the Great Depression of 1929 in the spring of 1933, from which point it took a full decade for Gross National Product to return to predepression levels. There is no consensus on the factors responsible for post-Depression economic growth in the US. Some economists point to the massive inward flow of international gold assets due to dollar weakness. Others credit the surge to manufacturing and productivity increments as the US industrial machine geared up through the Second World War.

household consumption expenditure accounts for almost a third of GDP. And you won’t see consistent economic growth until local consumers return to the fray! As we enter the final quarter of 2010 many local economists remain sceptical about consumer strength and the impetus of the recent equity-led recovery. Retails sales statistics will remain under pressure unless we see significant improvements in measures of employment, real after tax disposable income and consumer confidence.

Local consumers are stuck between the proverbial ‘rock and a hard place.’ Positive developments include the significant interest rate cuts since December 2008 and government’s recent call for cellular services providers to cut costs. Unfortunately the average homeowner’s savings are being sucked up by massive increases in administered prices. Consumption expenditure is flowing to Eskom’s coffers instead of bolstering the broad economy! The state power supplier recently approached the National Energy Regulator of SA (Nersa) for tariff increases in the 44% to Can we expect similar time frames as the current global economic contagion plays out? 66% region for each of the next three years! If Two months ago cynics were punting Japan as Eskom gets its way, South Africa’s GDP could suffer between 1.3% and 1.9% through 2010, a likely blue-print for the world economy. and inflationary pressures will return much They predicted decades of contracting sooner than expected. You’re not going to see economic growth as deflation set in. Their an improvement in the household debt-to‘outlier’ views have since proven incorrect. Today everyone is confident the world’s major income ratio of 76.3% (Q2 2009) any time economies are on the path to slow and steady soon! economic recovery. What has to happen for Spiralling power costs aren’t unique to South the economic recovery to gain momentum? Africa. Developed economies are struggling to Economists analyse hundreds of indicators in balance the demand for electricity with the their attempt to answer these questions. Among the common statistics are employment cost of providing it too. The cost of building nuclear infrastructure points to a likely numbers, inflation data and manufacturing resurgence of ‘cheaper’ alternatives. In today’s and production results. feature article David Stevenson reports says renewed dependence on the fossil fuel could If you want a single indicator of economic lead to a two-fold increase in coal demand strength you should consider real demand. over the next three decades. To find out how Modern economies are consumer driven. to profit from this energy production trend Most analysts agree that consumption turn to page 16. expenditure was behind the equity market boom of 2003 to 2009. South Africa is no Gareth Stokes exception! You live in an economy where final Editor, South Africa

In this issue 6 Markets The dollar is in trouble – but it’s not finished as reserve currency yet.

Clarke about Asia, US debt and gold.

7 Sector How you can profit from the

sense; the new wave of recession sitcoms.

boom in satellite imaging demand.

11 Strategy Four key signs of strength to look for in a company’s balance sheet.

19 Blogs Why selling the Tote makes no 20 Entrepreneurs How one ex-soldier made a million from exercise classes.

13 Briefing Why Britain’s Royal Mail’s

23 Travel

future is looking pretty bleak.

in Prague.

14 Expert view Peter Schiff talks to Jody

24 Toys

Two intriguing options to stay at

The coolest cameras out there.

news SA economy

Are we already coming out of the recession? “I do think we’re out of a recession already,” Citigroup chief economist Jean Francios Merceir told Fin24 last week. And he’s not alone. Although there aren’t any figures available to back the positivity yet, analysts across the board are airing their views that SA is on its way out of the recession. After seeing negative figures in the last quarter of 2008 and the first two quarters of this year, analysts, like Dawie Roodt, believe “third-quarter figures may show positive – albeit marginal – growth”. And that’s a definite sign that we’re moving up. Despite the fact that we’re still waiting for the numbers to confirm this, economist Mike Schüssler maintains there are “indications that the recession is near its end”. Why is he so confident? Well, he compiles BoE’s Private Client’s provincial barometers, which measure the activity levels of the provinces private sector economies, each month. And he’s just seen a sharp trend reversal in the latest August barometer readings. Several provincial indices climbed or fell

marginally on a monthly basis in August – including those for Gauteng and the Western Cape. Schüssler believes this is a sign that the provinces’ economies are “definitely turning”. Because of this, he insists the recession is likely to come to an end this month – although some sectors will take longer to recover. In other parts of the world, Australia has become the first large developed economy to raise interest rates since the crisis began. The Reserve Bank lifted the benchmark rate 0.25% from a 49 year low of 3%, saying that “the risk of serious economic contraction” had passed. Australia has avoided two successive quarters of negative growth and GDP rose by 1% in the first half of 2009.

What will happen on the markets? With the JSE All Share Index now up 18.6% for the year to date, the equity market recovery remains firmly on track too. Historically, the Alsi has returned a “healthy” 19.5% per annum for the past five years. But Jeremy Gardiner of Investec Asset Management argues the run is losing steam and we should expect further volatility and short-term weakness in the fourth quarter. Should we worry? It would seem not. “The developed world essentially had a heart attack [last year] and [it’s] going to have to walk for a couple of years before it can run again,” says Gardiner.


Pretoria court hammers the final nail into Pamodzi Gold’s coffin “That’s it for Pamodzi Gold [JSE: PSG],” reported Miningmx’s Allan Seccombe last Tuesday. This, after a Pretoria court granted a final liquidation order against the company earlier that morning. The company, whose shares the JSE suspended from trading in March, will soon be no more. “This company was almost a disaster waiting to happen from the moment it was conceived,” Peter Major, an analyst at Cadiz Corporate Securities, told reporters. “They were under capitalised, they didn’t have good management and their assets were very old and almost run to the ground.” Dubbed a “commodity bull run company” by some, the share climbed to a peak of R25.50 just two years ago. That’s 98% more than the 50c it traded at on the last day of trading. But the final chapter in this saga is far from over. The court has also ordered an insolvency inquiry into the group’s financials. This comes after the Industrial Development Corporation (IDC) (one of its largest creditors) said the company had missed

The bottom line

£1m How much Wayne and Coleen Rooney (right) have turned down for pictures of their new baby, which is due later this month.


The amount Arnold Schwarzenegger’s wife will have to pay to appease the governor after being caught talking on her phone while driving.


16 October 2009

AUS$60 The refund you’ll get after running 9.1km when you thought you’d run ten at the Melbourne running festival.

£24m How much Trinity College, Cambridge’s richest college, has invested in the 02 Arena. The college, which is one of Britain’s biggest landowners, has bought Meridian Delta Dome, the holding company for the venue’s 999-year lease.


The fine given to a man from Gloucester for being drunk in charge of a horse. William Royles travelled home from a nightclub in a pony and trap, but fell out half-way home. The pony carried on happily without him.

£1,200 What a pair of customised suede gloves worn by Sir Winston Churchill has sold for at an auction in Cirencester.


What Glen Agliotti claims it cost him for just one of Selebi’s Interpol dinners.

R2,049 The price of one large metal dinosaur egg.



The amount MTN billed Thabiso Mokgoro for calls made in Botswana, R28,000 more expensive than the same calls made from the US.


All this offsets the effect of the driest monsoon season in over a decade on agricultural production, which accounts for 17% of GDP. “India’s upswing will not be interrupted for long,” said Capital Economics, which reckons growth could be back to 8% next year.

Shareholders, meanwhile, have been sent to the back of the queue “of a long line of creditors waiting to be paid.”

Emerging economy

But the stockmarket looks a bit overheated, said Shefali Anand in The Wall Street Journal. The trailing PE has jumped to 20, a slight premium to emerging markets in general and up from 13 in the past year. India remains “vulnerable to the unpredictable mood of global investors”. In 2009, foreign institutional investors

India: Economy “back on track” for recovery India’s Sensex Index notched up its biggest daily gain in seven weeks this Monday. It jumped 2% to a 14-month high, as optimism over India’s recovery prospects grew. Industrial production rose by 10.4% year-on-year in August, the best figure in nearly two years. “There is palpable optimism here,” said Vikas Bajaj in the International Herald Tribune.

Vital numbers % change

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

*5256.10 10060.21 1092.02 2172.23 3882.67 5854.14 23372.00 26056.00 10.85 11.55 7.24

**1.97 2.32 2.49 2.27 1.99 2.41 2.84 2.07 0.05 -1.69 -1.32

*14 Oct ** since 08 Oct

16 October 2009

have brought back the $12bn or so they fled with last year amid the global panic. But if risk appetite falls because the global recovery falters, they’ll turn tail again.

The way we live now


Best and worst-performing shares Winners

% change Price


% change Price




Lonrho (LAF)



Eastplats (EPS)






Fambrands (FBR)









Simmers (SIM)



SuprGrp (SPG)






Northam (NHM)



KGMedia (KGM)



Oando (OAO)



Jubilee (JBL)



Sentula (SNU)



Rare (RAR)






Argent (ART)



Mvela Res (MVL)






Weekly change to JSE stocks as 14 October 2009


India remains vulnerable to mood of investors

If you can speak Glaswegian you could start earning up to £140 a day helping corporate visitors. Today Translations placed an advertisement in The Herald newspaper, seeking people who can speak ‘Glaswegian English’. Successful applicants must understand “vocabulary, accent and nuances”. The job would involve “assisting foreign visitors to the city whose ‘business English’ is not good enough to understand the local dialect,” says spokesman Mick Thorburn. He adds “we’re not necessarily looking for people skilled in linguistics, just candidates who can help out clients who may struggle with native Glaswegian”.

What the commentators said “After the big shock of last year, things are back on track,” said Surjit Bhalla of Oxus Research & Developments. In response to the global crisis, the central bank cut interest rates and the government lowered taxes on consumer products and imports to prop up demand. Growth accelerated to 6.1% in the second quarter,


and recent data has been positive. Car sales jumped an annual 13% in the five months to September and foreign direct investment is rising fast too.

some of its loan repayments. Pamodzi is believed to owe the group around R300m. Undoubtedly, the group’s chairman (Ndaba Ntsele), former chief executive (Peter Steenkamp) and current acting chief financial officer (Kobus du Plooy) will come under intense scrutiny when the inquiry begins.

the markets

False hope can’t save Wall St GDP without MEW Figures in Canadian Pound tops $2.40 dollars Figures in cents per pound and pharmaceuticals asNatural interestresource rates $100







‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10

Indeed, most of the market’s gains come when “manufactured surprises are revealed”, says Authers. Andrew Lapthorne of Société Générale found last year that since 2000, the S&P has gained an annualised average of 2.3% during the first-, second- and thirdquarter reporting seasons. Outside these periods, the S&P was down on average by an annualised 1.2%. And the bar isn’t high this season, with S&P profits expected to slide by 25% year-on-year. “I don’t think it’s going to be a problem” for firms to “at least match” expectations, says Peter Cardillo of Avalon Partners. The weak dollar will also help, given that S&P 500 firms last year made 48% of their sales abroad. So the rally looks set to keep going. That’s all very well for now. But the longer-term earnings outlook in the new year is troubling. Analysts expect 35% annual growth in 2010, the fastest rate in

Source: Source: The Wall Street Journal/ Standard & Poor's

Pan-European stocks are up by 55% since March, and could gain another 20%-25% over the next 12-18 months, says Citigroup. The region is on just 1.5 times book value and earnings should rise by 20% next year. But “watch out”, says Carl Weinberg of High Frequency Economics – investors have become far too optimistic about Europe’s economic recovery. The banking system remains broken and a “wave” of further losses on loans lies ahead, says Deutsche Bank’s Joseph Ackermann. The IMF estimates that only

more than 20 years, with S&P 500 firms expected to notch up a collective $73 a share, says Mark Gongloff in The Wall Street Journal. Yet a “V-shaped profit recovery” is unlikely. So far earnings have been boosted by cost cutting, which can’t go on forever. Investors will now increasingly look for revenue growth, yet analysts still expect an “L-shaped” revenue pattern, with growth of just 5%-10% next year, says Gongloff. Consumption is key to revenue growth. Yet as David Rosenberg of Gluskin Sheff points out, this is hardly going to take off with consumers deleveraging: they have paid back a record amount of debt over the past year. So if sales are lacklustre, margins will have to rise fast – a tall order as they are already near historical highs. High valuations (the S&P is on a trailing p/e of 28) also increase the scope for disappointment. Overoptimistic markets are set to land with a bump in 2010.

Non-euro German exports are down an annual 26% 40% of the banks’ likely losses have been revealed. Europe’s relatively high exposure to the global economy through exports means growth has fallen sharply – it will slide by around 5% this year in Germany – and now the strong euro is taking its toll, says Ian Campbell on Breakingviews. German exports to the non-euro area were down an annual 26.4% between January and August. The euro is also exacerbating the impact of deflationary housing busts in Ireland and Spain. “The eurozone’s pain is going to go on.”

Gold watch

The big picture: metals will fall back to earth

Further dollar weakness has propelled gold to a new record above $1,060 an ounce, while solid demand for gold jewellery in India, the largest gold buyer as the wedding season begins, is also bolstering sentiment. After its strong run-up, gold looks vulnerable to a short-term correction. However, with major currencies looking unappealing and jitters over future inflation mounting amid central bank money printing, the bull run is far from over. Deutsche Bank reckons prices will average $1,150 next year.

Base metals have rocketed 6m this year, but the rally has LME base metals inventories (million tonnes) 5m stalled in the past two months, says Chris Flood in 4m the FT. This chart helps 3m explain why. Industrial metal inventories in 2m warehouses monitored by the London Metal Exchange 1m have climbed to a record 0m 5.6 million tonnes, and 2007 2008 2009 while supplies are high, there is so far no evidence of Western demand coming through to compensate for an end to Chinese stockpiling. The risk of a correction is growing as metals “have overshot fundamentally justified levels”, says Eliane Tanner of Credit Suisse.

16 October 2009




hit 17% S&P 500 earnings per share


All eyes are on Wall Street now that the reporting season for third-quarter earnings has begun. Earnings surprised on the upside in the first and second quarters and it will be a similar story this season, says the FT’s John Authers. In recent years firms have become adept at lowering expectations and then surprising investors positively by beating them.

Strong euro is another headache for Europe

the markets

Dollar is down, but not yet out Last week Tim Geithner became the latest US Treasury Secretary to say he believes in a strong dollar. The dollar index, which tracks the greenback’s performance against a basket of major trading partners’ currencies, promptly hit a 14month low of under 76, not far off its record low of March 2008.

Why the dollar is sliding

US debt, increased its holding of Treasuries to $800bn in July, from $780bn at the end of June, says Capital Economics. “The dollar is still entrenched as the world’s dominant reserve currency.” A Chinese official told the FT in June that “in the short term, I don’t think we can find another currency” to replace the dollar.

US dollar index 90




And it’s no wonder. Interest rates are near zero and the Federal 70 Reserve has been printing money to prop up the economy. Fiscal policy has been expansionary too. The “worst budget conditions for 75 years”, due to the brutal recession, will result in a deficit of around 10% this year. This isn’t a short-term problem. The deficit will still be around 6.5% in 2019, says Roger Altman in the Financial Times, after which healthcare liabilities will rocket. The “lack of any clear path” to shrink the deficit fuels fears that the US will inflate its way out of its huge debt load by debasing the dollar, says Edward Hadas on Breakingviews.

Jan 2008

Apr 2008

Jul 2008

Oct 2008

Jan 2009

Apr 2009

Jul 2009

is also denting the dollar, says Stephen Foley in The Independent. “You would think we have passed into a new world economic order.” Earlier this year, China suggested that the International Monetary Fund’s (IMF) special drawing rights could be a new reserve currency, while last week Middle Eastern states and China were rumoured to have discussed trading oil in a basket of currencies rather than the dollar.

It’s too early to write it off Then there’s the carry trade. Thanks to rock-bottom interest rates, the dollar has become a popular currency to borrow and then sell, in order to park the cash in higher-yielding currencies and assets. This trend will strengthen as global risk appetite remains high: expect further dollar weakness against the high-yielding commodity currencies, says Callum Henderson of Standard Chartered. And all the recent “hubbub” about its demise as the dominant reserve currency

But all this is wildly premature. For starters, the practical difficulties are immense, says Foley. The IMF seems incapable of “having a civilised debate” on how many seats each country gets, let alone what currency weightings might be. IMF estimates suggest that the dollar’s share of global foreign-exchange reserves is falling as central banks diversify their cash piles. Dollars now comprise 63% of global reserves, from more than 70% a decade ago. But China, the main buyer of

If China, the world’s largest holder of reserves and America’s key creditor, ditches dollars, it would Oct 2009 prompt a sharp slide in the value of its huge pile of dollar-based assets and cause a recession in the US by driving up long-term interest rates. Even a weakening dollar causes difficulty, since China and the rest of Asia relies on exports to the US, a growth model that is likely to take years to change. Last year China repegged the yuan to the dollar and last week Asian central banks intervened in the foreign-exchange market to slow the dollar’s fall. As Jeremy Warner puts it on, for all the talk about the demise of the dollar, “the fact of the matter is that Asia isn’t yet quite ready for it”.

What next? And while the dollar remains the world’s reserve currency, it should benefit from demand for a safe haven when investors are rattled, as we saw early this year. Given that the global recovery is likely to disappoint, which will reduce risk appetite, the dollar may well bounce back in the next few months, as Capital Economics points out. The greenback is down, but not yet out.

Sickly sterling heads for parity with the euro Source: pacific exchange rate service

The pound looks as sickly as the dollar, if Garnham in the FT. That makes the pound Pounds per euro not more so. It’s slumped by more than 7% even more appealing as a funding 0.975 against the euro and 6% against the dollar currency for the carry trade, which is since the beginning of August, and is at a undermining it further. A budget deficit of 0.925 five-month, trade-weighted low. Britain has 12% also needs to be tackled – as this indulged in even more “grotesque moneyweek’s sell-off of government assets 0.875 printing antics” than America, says Liam highlighted – which will crimp future 0.825 Halligan in The Sunday Telegraph, with the growth. That also suggests rates will stay money supply up by 169% in a single year. low for a long time, says Garnham. The 0.775 N D J F M A M J J A S O The quantitative easing (QE) programme Centre for Economics and Business 2008 2009 looks likely to be extended further now Research expects them to stay at their that last week’s slide in industrial production suggests the current record low of 0.5% for all of next year. It also sees the recovery is faltering. So interest rates look set to be lower for pound heading back towards parity with the euro, a view shared longer than in other countries engaged in QE, says Peter by several other forecasters.


16 October 2009

sector of the week

Profit from the trend in snooping satellite (not cheap at a $500m total bill) and has committed to buying pictures from it.

Britain, we’re frequently told, is the most spied-upon nation on earth, with the average city dweller captured on closed-circuit television (CCTV) cameras around 300 times a day. The accuracy of that statistic is debatable, but there’s little doubt that Britons are being monitored more closely than ever before. However, CCTV cameras are positively old-hat in terms of surveillance technology. Today’s cutting-edge spies are orbiting the planet – and demand for their services means big profits for the companies who run them.


by David Stevenson

Big Brother’s now got his eye on the whole globe The first satellite to take snaps of Earth was the US Explorer 6, which went into orbit 50 years ago. While in practice the images were virtually useless, there have since been big steps towards developing a user-friendly product. In 1972 the US started Landsat, the largest and longest-running programme of compiling photos of the earth from space. The first real-time imagery was introduced five years later, with Landsat sending up its most recent satellite in 1999. But the biggest advances have come in the 21st century. High-resolution pictures taken from space are widely available, with private firms offering access to satellite imagery databases. “Since around the late 1970s, the US military has used high-resolution spy satellites capable of reading newspaper headlines in Red Square,” says Brian Chen in Wired

Science. “But only in recent years has the technology become available to the public and businesses, while making dramatic strides in coverage and resolution. When Google Earth launched in 2004, its imagery was low-resolution and spotty. But by March 2006, a third of the world population could get a bird’s-eye view of their own homes in high resolution.” As the firm perhaps most responsible for showing the public just how powerful satellite surveillance technology can be, Google got lots of media coverage last year for its Super Satellite images. But even though the satellite that provides these images sports a Google sticker, its key customer isn’t Google. Rather, it’s the US National Geospatial-Intelligence Agency (NGA), which analyses the output for national security. The NGA is paying half the development cost of the

“The US government has a voracious appetite for high-quality satellite imagery, to provide pictures of everything from Iranian nuclear projects to Afghan mountainsides,” says Robert Cyran on Breakingviews. “And law makers seem to want ever more pictures.” This demand “effectively underwrites new satellites”. That’s not to everyone’s taste. “The government has regulations on just how closely Google et al can look (mostly because the government itself wants to be the only one that can see really... close up on us),” says MG Seigler in The Washington Post, “but still, this is starting to get mildly creepy.” But satellites aren’t just about security surveillance and seeing what your neighbours are up to. Also in the frame are applications as diverse as mapping, ship and aircraft tracking, agriculture, energy and disaster response. It’s clearly a big growth market. In its recent report, Satellites To Be Built And Launched By 2018, World Market Survey, Euroconsult reckons almost 1,200 will go into orbit in the next nine years, about 50% more than in the previous decade. It see revenues generated growing at the same rate, reaching a total of $178bn over the next ten years. With demand showing no sign of slowing, we look at the pick of satellite owners below.

The best bet in the sector GeoEye (NYSE: GEOY) made history almost ten years ago by launching IKONOS, the world’s first commercial satellite. Its latest $35 launch, GeoEye-1, is behind Google’s Super $30 Satellite images. This deal “sparked a surge $25 in revenue, transforming the business model $20 beyond our expectations”, say Paul Coster and Mark Strouse at JP Morgan. $15 “It’s the opposite of a spy satellite”, says Jan 2007 Mark Brender of GeoEye. “Spies don’t put info on the internet and sell imagery. We’re an Earth-imaging satellite, and we can sell to customers around the world who need to map, measure and monitor things on the ground.”


16 October 2009

But while satellite operation is fast-growing, it isn’t the safest business. A collision with space debris is a nominal concern. More Figures in dollars crucially, “about two-thirds of revenues come from the government, who might try to force prices lower, or do more work in-house”, says Robert Cyran on Breakingviews. But it takes years to design a satellite and launch it, so revenues and margins shouldn’t come Jan 2009 under pressure soon. With uses such as GPS increasing, growing demand for satellite capacity, and high barriers to entry, satellite owners such as GeoEye appear well placed. The stock trades on a forward p/e of 16.9. The JP Morgan team has a price target of $34.


Jan 2008

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 banking minnow is set to give the “big four” a run for their money and lead you to profits Tip of the week: “The klipspringer of the financial services sector” – the Financial Mail When it comes to personal banking, most of us cringe about what we’re paying our banks for the general lacklustre service we receive in return. But, the landscape is finally changing! One little gem of a bank looks like it might give the big four banks of South Africa a run for their money. Referring to itself as “an innovative South African bank,” Capitec Bank Holdings Limited (JSE: CPI) seems to be

proving just that. Jamie Carr, well deservedly, has awarded Capitec his Diamond of the week in his Diamond & Dogs column in the Financial Mail. As Carr notes, “Capitec has stuck to a simple model that it knows well, and at which it is excelling”. So what’s its game plan? Well “simplicity” is certainly the right term for it. It seems that Capitec is taking the headache out of banking. It offers clients a unique way to control their personal finances. Unlike some banks, Capitec promises that its clients will know exactly what they’re paying for in fees.

Gamble of the week: Steinhoff International Holdings Limited (JSE: SHF) After the recent run up in the market, it’s hard to know where you should be looking for the next sector rally. One share that’s already had a bit of a run behind it after the market meltdown is Steinhoff International Holdings Limited (JSE: SHF). But it’s looking good for more. Despite its share price taking a wallop along with the rest of the market over the past year, this company looks like it’s set to charge further. Steinhoff has emerged from the market chaos relatively unscathed. It managed to increase its profits 10% to R1.6bn during the financial crisis. A feat not many companies have managed under the same conditions. Steinhoff is a South African furniture distributor. This is a proudly South African entity. Bruno Steinhoff founded the


16 October 2009

When you apply for an account with Capitec, you can forget spending hours over reams of paperwork. This bank has a completely paperless application process. One card is all you need to manage you accounts. Not only that, but Capitec aims to give the customer what he wants. Minimum banking hours are 8am to 5pm, with branches also having extended operating hours from 7am to 7pm. So, if you bank with Capitec, long gone are the days of

company in 1964, distributing furniture between Eastern and Western Europe. Then in 1989, the company started producing its own furniture and speedily moved into distributing that too. In 1998, it became Steinhoff International Holdings when it debuted on the JSE. But despite it now being a publicly listed company, Steinhoff is still very much family controlled. Along with its household goods offering, it also has a motor retail business; provides distribution and warehousing services to mining, manufacturing and industrial services; and provides transportation and fuel logistical services (Unitrans) to the petrochemical, gas, sugar and agricultural industry. One of the secrets to the success of Steinhoff is acquiring raw materials and producing the final product in low cost labour countries, such as Poland and here in South Africa. Lucrative markets like Germany and the UK are the recipients of the finished goods. The only disadvantage of this is the

who’s tipping what spending your lunch hour in the bank. And if you’ve seen the latest array of TV ads, you’ll know that you don’t have to worry about identifying yourself at the counter. Biometric verification, along with a few other “high-tech” goodies, do the trick. This bank has quietly crept up from nowhere and is starting to make a name for itself. The company’s in good health. Despite a negative economic environment, as Carr notes, it managed to improve its loan book. “Arrears have dropped from 9.9% a year ago to 7.6%.” Despite being a relatively “new” bank compared to some of the more established establishments in SA, the company already pays dividends. If you get into the share before 27 November, you’ll receive a 55c interim dividend, payable on 7 December. Capitec’s currently sitting on a dividend yield of 2.75%. Capitec just released its unaudited financial results for the six months ending August 2009. According to this statement, income from banking operations alone soared 27%. Earnings per share also impressively increased nearly 50%. This bank is definitely emerging as a bank to contend with. Could it be that finally a bank has sat up and taken notice of what its private clients want?

“All the numbers indicate an institution in the rudest health,” Carr states. This is an excellent buy at its current price of 6000c. It certainly looks like Capitec is set to go from strength to strength. Great news for those who bank with them and, of course, shareholders. Buy. Recommendation: BUY at 6000c Market capitalisation: R4.979bn

Turkey of the week: “Lower target,” says Finweek Despite Capitec being awarded MoneyWeek’s tip of the week, all may not be rosy for some stocks within the banking sector over the short-term. Colin Abrams highlights the short-term dip expected with Standard Bank Group Limited (JSE: SBK) in Finweek. Abrams states that Standard Bank may “still be vulnerable”. Not that Abrams is expecting Standard Bank to go crashing through the floor, but over the shortterm, he predicts that Standard Bank is going to experience a pullback. And if you’re a short-term trader, this week’s turkey could be some cash in the bank for you! Standard Bank is now a global entity. It’s South Africa’s largest bank after surviving over 140 years operating in the country. It has extended its operations into 17 other African countries. It also has exposure in 16 countries external to

currency risk the company has to take on in return. But, by looking at the accomplishments of the company, this has paid off handsomely so far. In its latest results to the end of June 2009, the company came out with positive news again, despite this period covering the bear market. Revenue improved 13% to R50.868bn. Earnings per share came in 3% better than the previous period. And, thanks to a weaker rand in the reporting period, it gained 15% in its currency rate conversions compared to the previous period. Operating profit was also positive, with a 12% gain. In addition, Steinhoff is a company with a heart. It’s continued to be a socially conscious counter, and that all began way before it was a requirement in South Africa. It has many initiatives underway. These include university


16 October 2009

SA. It’s listed on the JSE and the Namibian Stock Exchange. The Group employs over 50,000 people. Standard Bank consists of three main sectors: Personal & Business Banking, Corporate & Investment Banking and Investment Management & Life Insurance (made up of Liberty Life and Stanlib). You can “expect more short-term downside before looking to buy at lower levels”. Abrams advises of a short trade with take profit levels starting at R89.50 to R86.70. So if you’re a shorting type of guy – this might be worth a play. If not, and you’re looking for an ideal entrance point into Standard Bank, wait for the share to retreat down below R90 before getting in. Avoid until the share trades below R90. It’s currently trading at 9959c. Recommendation: Avoid Market capitalisation: R155.245bn

and technical bursaries, and bridging and literacy programmes. This provides Steinhoff with a large, well trained workforce to boot. Even though the share’s had a healthy run up over the past few months, this is a share you should accumulate on pullbacks. You won’t be disappointed as the global economic situation improves. Lower interest rates will continue to fuel spending and this will continue to have a positive effect on Steinhoff. It’s currently trading on a modest PE of 7.24. When consumers are more cash flush, they dip into their pockets to splash out on nice new gear for their homes. Buy at 1830c.

Recommendation: BUY at 1830c Market capitalisation R26.106bn

best of the financial columnists

Bobby Lane The Times

Britain needs £200bn to secure energy Jeremy Warner The Daily Telegraph

The true cost of cheap bananas Felicity Lawrence The Guardian

Tories miss vital point on schools Anders Hultin The Spectator


16 October 2009

Talk of recession and redundancies hardly instils an entrepreneurial spirit, says Bobby Lane. But “there has never been a better time” to start a business. Finance for start-ups is improving: banks are starting to lend and the government-backed Enterprise Guarantee scheme was extended this October to help with cash flow difficulties. At least a year of probable low interest rates is leading would-be investors and business angels to look for “returns better than the banks can offer”. There are other incentives. With one in eight high-street shops empty, landlords are open to negotiation. And suppliers – from lawyers to stationers – are in a mood to be bargained with. The Centre for Economic and Business Research reckons discounts will save the retail industry £6.1bn this year. Lastly, it is easier to find good staff in this climate and to convert fixed costs to variable ones by outsourcing. Let’s not forget, IT giants HP and Microsoft were both born in recessions. “Today’s start-ups could be tomorrow’s superbrands.”

Money talk

British energy policy, as reports from Ofgem and the Committee on Climate Change confirm, is a mess, says Jeremy Warner. Chronic underinvestment and collapsed carbon prices mean our emissions and our dependence on imported gas are likely to grow. Ed Miliband proposes this is a market failure, but in fact it’s a failure of “policy ineptitude”. “Only an idiot would think the market capable of delivering long-term, low-cost, environmentally friendly and secure sources of energy supply without the right policy incentives.” Energy security is a matter for governments; and Labour’s approach to energy policy has been one of “deliberate neglect”. Our “North Sea oil has been largely squandered on a decade of rampant consumerism”, while underinvestment has deprived us of storage facilities that would have allowed us to take advantage of low gas prices. We now need £200bn of new investment over the next decade – a cost that will be borne directly by you and me. Once again, this government has “ended up mortgaging our future”.

“The taxes are too high, there aren’t enough incentives to work hard and our politicians have put me off. We’re paying through the nose for everything.” Artist Tracey Emin (above) on why she’s moving to France, quoted in the Sunday Express

A supermarket price war – started by Asda – has erupted over bananas, says Felicity Lawrence. Asda says it will take the cost of the price cut to its own margins rather than passing the pain down the supply chain. So “surely consumers can only benefit” as stores battle for market share? No. For one thing, what supermarkets give with one hand, they’ll take with the other by raising the cost of other products. And in the middle to long term, selling bananas below the cost of production hurts the industry. Aid organisations say that, in the past, working conditions have deteriorated with each “banana war”. That’s led to low wages, long hours and poor health and safety standards. Most British shoppers don’t want to be part of this exploitation – a third of banana sales are now ‘fair trade’. But even fair trade producers fear the downwards pressure a banana war will put on their prices. The supermarkets will eventually find another loss-leader. “But by then the damage to other people’s livelihoods may have been done.”

For us Swedes, it is “gratifying to see David Cameron put our free schools model at the heart of his reform agenda”, says Anders Hultin. In a few short years, the voucher system has transformed our education system and led to the creation of almost 1,000 new schools. “But Cameron has failed to grasp a key aspect of their success. To flourish, these schools must be allowed to make a profit.” Of our new breed of ‘free schools’ (anyone can set one up and be paid the going state school rate), 75% are profit-seeking. Why? Because if they succeed and become over-subscribed, they have an incentive to open a new school rather than start a waiting list. Innovative and entrepreneurial teachers are rewarded; children, parents and society benefit. If the Conservatives keep their schools profit-free, they’ll create a small number of very good schools with long waiting lists. “Is that really the education revolution Cameron has planned?” The Swedish left are relaxed about the profit motive. The Tories should be too. Profit is not a dirty word.


It’s a great time to start a business

“I want to see fewer champagne bubbles and more bubbling activity.” Party Chairman Eric Pickles at the Tory conference, quoted in The Mail on Sunday “Money doesn’t buy happiness, but it does buy a very pleasant sort of misery.” CNN business presenter Richard Quest, quoted in The Sunday Times “I went from nothing to a millionaire in 24 hours.” Lord Archer on the success of his first novel, Kane and Abel, quoted in The Daily Telegraph “Fish see the bait, but not the hook; men see the profit, but not the peril.” Chinese proverb quoted on “If any other employer did this, he would be up before a tribunal.” Ann Widdecombe on Sir Thomas Legg’s demands for MPs to repay expenses

investment strategy

Four ways to test balance-sheet strength cash and R1bn in new loans, and the target has net assets worth R1.4bn, then goodwill is R600m (R2bn – R1.4bn). This represents a payment for intangible assets, such as the target’s reputation, market share, or key staff.

by Tim Bennett In these uncertain times, investors keep being told to look for strong balance sheets before buying a stock. But what does a strong balance sheet look like? Here are four things to watch out for.

Here’s the rub. A firm with lots of goodwill on its balance sheet has usually been very acquisitive. Purchases made during a bull run often turn out to have been expensive once the market weakens. RBS found this out to its cost, having paid an eye-popping £63bn for ABN Amro. The result is asset write-downs, or ‘impairments’. When these are large or recurring, they are another sign of future balance-sheet weakness. A ‘goodwill and other intangible fixed assets note’ will tell you all about them.

1. Low debt In a bull market, debt can be very useful. Say you take R200 of your own money and R800 borrowed from a bank to buy an asset worth R1,000. It doubles in value to R2,000. You could sell it, repay the R800 and pocket R1,200. So you have multiplied your opening stake of R200 six times.


But in a recession the downside becomes apparent. Suppose that a R1,000 asset falls to R500. You still owe the bank R800. Sell the asset and you’ll wipe out your R200 of equity and still owe R300. So firms with high net borrowing to equity – ‘gearing’ – are vulnerable if loans are called in. They’re also unlikely to be able to afford to buy cheap assets in a slump. So while some sectors, such as utilities (where firms have substantial assets and good cash flows), can stomach high debt, as a rule of thumb, low gearing is best. 2. Control over working capital British retailers such as Tesco or Morrisons are lucky – they are paid by customers well before they have to pay suppliers. But in other sectors a survival skill is managing stocks, debtors (‘receivables’) and creditors (‘payables’). Buy too much stock, give customers too long to pay, or pay suppliers too soon, and even a profitable business can run out of cash. So check the length of the ‘working capital cycle’. Say a firm’s average stock level (opening + closing stock from the balance sheet divided by two) is R500m and the cost of sales R3.50bn. That means the stock cycle is 52 days (500/3,500 x 365). If the average owed by debtors is R400m and turnover is R5bn, then debtor days are 29 (400/5,000 x 365). Lastly, if the average owed to creditors is R750m, then creditor days are 78 (750/3,500 x 365). So on average it takes the firm 52 days to turn stock into sales, 29 days to collect


16 October 2009

Is the firm’s balance sheet as strong as it looks?

“Failed firms are often brought down by what’s hidden off balance sheet” cash from customers who used credit and 78 days before suppliers are paid for stock. Thus the average length of the working capital cycle is just three days, ie 52 + 29 – 78. That’s the gap between cash leaving the business to pay for stock, and being received from customers. Three is very short – in an aerospace business, for example, it could be much higher (100 days or more), but still be fine. The trick is to benchmark firms against their sector, then watch for sudden changes. If the working capital cycle gets longer – perhaps because unsold stock levels are rising, or customers are taking longer to pay, a balance sheet can quickly weaken. 3. Low impairments In the good times, acquisitive firms snap up rivals using cheap debt to finance deals. Whenever a premium over and above net assets is paid for a rival, an asset called ‘goodwill’ appears on the predator’s balance sheet. For example, if a firm pays R2bn for a rival, using R1bn in

4. Few hidden surprises Failed firms, such as energy giant Enron, are often brought down by what’s hidden off the balance sheet. The problem arises because accounting rules do not require firms to record all of their risks on the face of the balance sheet. Uncertain obligations – perhaps to settle litigation claims – can be described in a ‘contingent liabilities’ note instead. Also, relationships with ‘connected’ parties – loans to directors, for example – may not be clear from reading the balance sheet, but show up in a ‘related party transaction’ note. Finally, major spending the board may have authorised, but not committed funds to as yet, often shows up in a short ‘capital commitments’ note. So it’s worth flicking to the back of the accounts to see what’s in these notes to ensure the firm isn’t at risk from big hidden liabilities. What to buy Unlike banks, consumer staples firms and big pharma have survived without a state bail-out thanks to strong balance sheets – yet they’ve been rather left behind in the stockmarket surge. SmartMoney’s Jack Hough likes household goods firm Reckitt Benckiser (LSE: RB.) and food producer ConAgra (NYSE: CAG). Barron’s tips solid but cheap pharma stocks, such as Sanofi Aventis (FP: SAN) and Novartis (VX:NOVN).

personal view

As markets sober up, you need to take a more defensive approach What I would invest in now

This week, Ester Harper, a portfolio manager as PSG Konsult tells MoneyWeek where she would put her money.

Although the big picture remains extremely positive, the JSE recently broke support to the downside. This shows that the equity rally is entering a more challenging phase and we’re beginning to see earnings take over as the key driver of market value. For prices to remain stable, earnings will need to be sustainable. We expect prices will consolidate over the next few months. For this reason, it would be a mistake to overlook defensive shares in this uncertain climate. Here at PSG Konsult, we are bullish on the likes of tobacco giant British American Tobacco (JSE:BTI). Before I tell you more about what the group does and why its defensive position is a must for any portfolio, let me share our key reason for selecting this share as a “strong buy”. Analysts expect global growth to be around 5% during the next year. In the same period, BATS should bring in growth figures of between 10% and 15%. And this in a highly “unpopular” market frowned upon by many countries around the globe. As one of the world’s largest leading tobacco groups, BATS sells its brands in more than 180 countries. Its portfolio consists of over 300 brands including the four “Global Drive Brands”, namely Dunhill, Kent, Lucky Strike and Pall Mall. In its recent set of interim results for the month ending June 2009, the group posted

commendable figures. The group continued to gain market share, despite difficult economic and trading conditions. Revenue ran up 24% to £6.8bn. Operating profits jumped 22% to £2.1bn. Adjusted diluted headline earnings per share grew 27% from 59.9 pence to 76.2 pence. And an interim dividend of 27.9 pence per share was declared, up 26% from 2008. The group also maintained healthy cash generation for the year under review. During the period, the group acquired PT Bentoel Internasional Investama Tbk (Bentoel) in Indonesia. The business has a 7% market share in Indonesia, the world's 5th largest tobacco market. The group believes this offers a good opportunity to penetrate this market, as well as provide a sound platform for further growth. Management remains confident that BATS’ innovative ability and geographic diversity should enable it to withstand the current economic headwinds. It also expects strong earnings growth for the full year. The group offers a traditionally defensive product in times of economic slowdown. BAT boasts an above average return on equity, strong cash generation, healthy margins and is a good hedge against any weakening in the rand. And, although the view is that the rand’s strength may last until 2010, in the longer-term the rand should slide and this will benefit the group. The share offers value trading at a historical PE of 8.15 times. In addition, the share is underpinned by a solid dividend yield of 5.48%.

The share Ester likes: British American Tobacco

12mth high

12mth low





*Prices as at 14 October 2009


16 October 2009

investment briefing

What’s behind the postal strike? Britain’s postal strikes are about to get worse as the union votes for national action on 22 October. What’s the dispute all about, and how will it affect business? Simon Wilson reports. What’s happening?

automated. Europe manages 95%. Worse, ‘walk-sequencing’ (putting the letters in the right order) is 85% automated at leading European organisations, but is done entirely by hand in the UK.

So costs are high?


Barring a last-minute peace deal, UK postal strikes are set to begin as early as Thursday 22 October. These are likely to come as a series of rolling strikes affecting different parts of the country. The action comes on top of 15 weeks of co-ordinated stoppages affecting at least 230 different Royal Mail (RM) facilities. The result is an emerging mail mountain estimated at up to 30 million items in London alone. Ominously for any settlement, the Communication Workers Union’s (CWU) Billy Hayes and RM bosses can’t even agree on what the dispute is about – it centres on a flexible working and pay deal in 2007 that has now unravelled. RM wants to introduce more flexible working alongside automated processes. The union wants guarantees limiting job losses and protecting pensions.

The 2007 strikes cost £300m in London alone

Astronomic. According to Hooper, RM labour costs are 66% of revenue, higher than everywhere in Europe except Spain. It is also weighed down by a crushingly expensive defined-benefit pension scheme (now closed to new members, but with 452,000 legacy pensioners). The scheme has a confirmed deficit of £3.4bn (R39.37bn), although a revaluation is expected to show that ballooning to £10bn (R115.78bn). What makes wage costs truly tough to control is a long tradition of irregular, expensive working practices. These include inflexible roles and generous overtime rules.

Are these issues new? The Post Office has always suffered from “public-sector unions being out of control”, says Edward Heathcote Amory in the Daily Mail, but at least it used to “deliver our letter and parcels around Britain cheaply, quickly and frequently”. But due to “a government greedy for funds, a failure to understand the impact of private-sector competition and interference from unthinking bureaucrats in Brussels”, the service has deteriorated and morale among staff and management has hit new lows. So much so, says Ian King in The Times, that the two sides have been reduced to an unedifying public scrap over whether or not the CWU has a mandate for its action. The union claims a 76% ‘yes’ vote (on a 67% turnout of its 120,000 members) endorses its stance. RM, meanwhile, claims the strike has only minority support. Either way, the planned industrial action is set to cost UK businesses dear. According to the London Chamber of Commerce, the 2007 strikes cost £300m (R3.47bn) in the capital alone.

Is Royal Mail inefficient? Very. In even its own accounts for 2006/2007, the group estimated that it is 40% less efficient than competitors. Sir Richard Hooper’s 2008 report into the future of Britain’s postal services identified several reasons why. He claims RM has done nothing to restructure or trim its network of mail centres and delivery offices. Plus levels of automation are far lower than comparable European businesses. For example, ‘walk-sorting’ (getting letters together for one postman’s round) is 70% 13

16 October 2009

Can all this be solved? As Amory notes, “as a private-sector firm management could have forced through changes without constantly having to look over their shoulders at the political backlash”. But as things stand, RM made a lowly £58m (R671.55m) profit in 2008 on a turnover of some £6.7bn (R77.58bn), its many structural problems remain, and it faces commercial threats (for example, the advent of email means mail volumes are currently falling 10% a year). Frustratingly, the Hooper report was embraced and then abandoned by Britains Labour government.

Despite several big criticisms, it concluded that RM had a potentially bright future. But it also warned that unless it modernised, it would not survive without emergency government support. Hooper’s solution, adopted by the business secretary, Peter Mandelson, was to sell off a 30% stake in the wholly state-owned business to bring in outside cash and commercial know-how. The aim of this move was to create a diversified, modernised, Are Royal Mail’s rivals celebrating? profitable postal service on the Not in the short term. Private delivery businesses such as TNT German or Dutch model. and DHL will also be hit hard by the strikes. That’s because practically all mail is delivered to the customer by RM postmen, regardless of who collected and processed it. The regulator Postcomm defines ‘mail’ as items weighing less than 350 grams or costing less than £1 (R11.58) to send – an astonishing 99% of this mail is put through letterboxes by RM staff handling the ‘final mile’ of the delivery chain. So during a strike, all mail (other than special deliveries) arrives late. When it comes to parcels, online retailers have more scope to make alternative arrangements, and many are. Longer term, however, rivals such as Business Post may have cause to celebrate should this strike prompt the regulator to break RM’s monopoly.

But Labour MPs, afraid of upsetting the unions, forced Mandelson to kick that plan into the long grass in June this year, after some 140 of them opposed it. The Tories, if elected, may well pass similar legislation, but have yet to announce their plans. Meanwhile RM limps on as a “parable of failure”.

expert view

Buy Asia, currencies and gold In the second of our series, Peter Schiff of Euro Pacific Capital tells Jody Clarke what he’s investing in now. Can government stimulus save the global economy? The stimulus plans will have a negative impact. Rather than allowing the underlying economic imbalances to be resolved in a stable way that will lead to long-term growth, stimulus delays that process. The government refuses to let the markets function because they’re afraid of the immediate consequences of market forces on employment and asset prices. So they try to mitigate that and end up causing more long-term damage. Japan’s a great example. Government stimulus protracted a process that would have been completed more rapidly had the government stayed out. But America is the same – we stimulated the economy in 2000 and 2001 with low interest rates, rather than letting the recession run its course. The result was the housing bubble and the disaster of 2008.

borrow too much, the rest of the world has in effect been subsidising our lifestyles. That subsidy exacts a cost on the global economy. As these imbalances are resolved, the cost of that burden will shrink, and the rest of the world will benefit from the end of those subsidies. I know it’s going to happen because the world isn’t going to finance us forever, just like the housing bubble couldn’t go on forever and Bernie Madoff couldn’t run his Ponzi scheme forever.

Should investors avoid equities? No. We’re 100% invested – just not in the US. What’s happening beneath the surface is a movement away from the US consumer. The conventional wisdom is that by spending borrowed money on imported products, US consumers are somehow the driver of global economic growth. My point is that we have in fact been a drag on global economic growth. Because we don’t produce enough and we


16 October 2009

What’s your strategy for picking stocks? I focus on value and have a buy-andhold strategy. I look for dividend yields, lows p/es and good growth rates and I look for companies that are earning their revenues in solid foreign currencies that are appreciating. One of our biggest positions is Skyworth (HK: 751) which makes components for mobile phones in Hong Kong. It hit $3 a share about a month ago. Last year we were buying it at 30 cents a share on a dividend yield of 16%. We’ve been buying Vitasoy (HK: 0345), a Chinese beverage brand, too. I’ve also been buying some Norwegian stocks such as seafood producer Leroy Seafood (LSG: OSE) and fertiliser group Yara International (YAR: OSE).

Have you been buying gold? Find your fortune in Asian currencies

So have you been buying Asian stocks? Yes, and currencies. The countries that have borne the highest proportion of the US subsidy have the most to gain when that subsidy ends. The Japanese have said a strong yen is in the national interest. So

Who is Peter Schiff? Peter Schiff did a better job than most of predicting the financial crisis. As far back as 2004, the Connecticut-based economist was warning of the dire consequences of America’s debt-fuelled economy and the housing bubble. Born into a Jewish family in Connecticut, New England, his father was an anti-tax campaigner and “a big influence in that he gave me books to read at a young age that really explained how economies grew and how wealth was created. That gave me an appreciation of capitalism.”

if I was just going to buy one currency it would be yen. If the Chinese back away from their dollar peg and let the renmimbi rise, or if China removes the Hong Kong dollar from the US dollar and floats it, the Asian currencies will be strong. The same goes for the Gulf, and currencies such as the Saudi riyal.

It also got him into trouble at school. “I argued with my teachers constantly. The conventional wisdom in the US is that a big government is a good thing – that government spending and regulation is what makes the economy grow, and if it wasn’t for that the country would have collapsed in the Great Depression (all the Keynesian nonsense), so I talked a lot in class. I didn’t argue with my maths teachers or my English teachers. The only time that I argued was if I had an economics or history course with teachers who were completely clueless.”

I’m still buying gold and silver. It’s hard to time the market, so I don’t try because I think the moves will be so big. Whether someone buys gold at $900 an ounce or $1,000 doesn’t matter if it’s going to hit $5,000. I’m just looking at how much money is being printed relative to how much gold is being mined and I think it’s going to be even higher than $5,000. As foreign governments back away from financing our debts, I don’t think the response in Washington will be “let’s cut the deficit”. I think there will be more pressure on the Fed to buy the debt. I don’t think our politicians see any downside – they think that money is money. They don’t see a difference between the Fed printing it to buy our debt and China buying it with their surplus, so I think you’re going to see massive inflation. I think interest rates in the US are going to stay low for a longer period of time, which means you’re going to have very high negative interest rates. If you have a negative rate of -5% or -10%, no one will want to hold dollars. So what do you do? You hold gold.

investing in property

Listed property funds... It’s the Reit way to go! by Gary Booysen that proves the rule might be Tottenham Hotspur, it is worth getting hold of the financials. Any property fund listed on the JSE’s main board must give you their audited results. Use them! You should be able to find this on the Stock Exchange News Service (SENS) or

The recovery in the housing market will be slow, claims Jacques du Toit, senior property analyst at Absa's home loan division. Du Toit expects a decline of around 2% this year as a whole, and growth of 2% to 3% in 2010. But while the big banks cling to their defensive strategy, savvy investors are cleaning up. On the ground, mortgage originator ooba CE Saul Geffen says: “This is the fourth consecutive month that the oobarometer has reported rising house prices and is clear evidence that the market is on the road to recovery." He also notes the increases in the value of approved bonds for the past five consecutive months. If you look at the September oobarometer price index, it actually recorded a year-onyear increase in house prices of 1.8%. But the most powerful evidence that the property market has turned the corner – and that people can sleep easy knowing there won’t be another dip next year – is the massive rises in the price of property funds. The market is one of the most reliable leading indicators available to the forecaster and “SA’s real estate investment trust (Reit) equities managed to return a stellar 41.9% as an asset class last month,” says Business Day’s property editor, Thabang Mokopanele. He reckons this is “thanks largely to the stronger rand and a rise in real estate equity prices”. Plexus Group Chairman Prieur du Plessis says, “with the major sell-off in global equities in the fourth quarter of last year and the first quarter of this year, Reit equities fell to large discounts to net asset value [NAV] due to forced fund liquidations.” A lot of these funds are now looking much healthier even


16 October 2009

though they are still trading at a discount to their underlying NAV. South African real estate companies and funds have been strong throughout the financial crisis and there’s no reason to expect them to fail now that the market begins to turn. In fact, Reits are an easy way to gain exposure to the property market without having to precariously perch all your eggs in one basket. With the rand as strong as it is, it’s also a good time to take a little money offshore. For those who have yet to use up there R2m allowance, there are plenty of rand denominated funds with offshore exposure. Du Plessis likes Fortress Reit Fund, Grindrod Global Property Income Fund, Marriott Global Real Estate Feeder Fund and the Oasis Crescent International Property Equity Feeder Fund. But let’s face it. With all the Reit’s out there how do you pick the right one?

3 ways to make the most of your Reit Tip #1: Check out the annual report: The past is the window to the future or as Winston Churchill said: “The further backward you look the further forward you can see.” And, while the exception

Tip #2: Variety is the spice of life The real beauty of investing in a Reit is that you have the ability to diversify away some of the risk associated with a property investment. Make sure you look at what assets the property fund is holding. The best diversification will come from having exposure not just too different geographic locations but to different property sectors. There’s a lot to choose from: Residential, commercial, industrial... even self storage. Right now, all sectors are due for improvement. Tip #3: Overall management or management über alles Make sure you know who’s running the show. The current performance of any fund is likely to be the result of previous management whereas future performance will be down to the current management. Information on the current management is freely available. Make sure you check out the Chief Executives CV. Redefine Income Fund is in the process of merging with Madison Property Fund Managers and ApexHi Properties. When the dust settles they’ll have the combined expertise of Marc Wainer and Wolf Cesman as chief executive officers. Directors will be Mike Flax, David Rice, Brian Azizallahof and Janys Finn. But with these guys as your benchmark, you’ll be hard pressed to find a better Reit.

cover story

Why Old King Coal is set to take back his throne Coal was reckoned to be on its way out just a decade ago. It’s making a big comeback. How do you cash in? David Stevenson reports. “A couple I know experienced a rude interruption on a recent Saturday night,” says Rich Karlgaard in Forbes. The two were at the local cinema, enjoying the latest thriller, The Taking of Pelham 123. But they never got to see the end of the film. Halfway through, “the cinema lost its electricity. The cause: a ‘rolling brownout’ caused by California’s heat wave and excessive use of air-conditioning.” To put it another way, there just wasn’t enough power to go round. Rolling brownouts are short-term voltage cuts used by energy providers as emergency measures to stop complete blackouts. They’re a growing headache in the Golden State. And the problem would be far worse, but for US power suppliers being able to rely on that most basic of fossil fuels: coal. Old-fashioned, and often viewed as the dirtiest fuel on earth, coal has a faintly Dickensian image, conjuring up visions of grim factories with grimy chimneys churning out smog.

Yet coal is still the key raw material for US power generators. Coal accounts for almost 50% of the country’s electricity production, more than twice the amount derived from natural gas and nuclear combined. And despite talk of ‘renewables’, these supply just 9% of America’s needs, with hydro providing the vast majority of that. Volatile oil prices and nuclear energy fears have further reinforced coal’s stranglehold over US power production. “In terms of cost and energy security, coal has all the advantages, its proponents argue,” says Elizabeth Rosenthal in The New York Times. “Coal reserves will last for 200 years, rather than 50 years for gas and oil. More importantly, dozens of countries export coal – there’s no cartel – so there’s more room to negotiate prices.” And on top of that, a quarter of the planet’s coal reserves lie within US borders. America is mulling over ways to lessen its coal dependence. In June, law makers passed the Waxman-Markey bill, which

would tax harshly US utilities relying on coal, nuclear and natural gas. The money raised would subsidise the 9% of power supplied by renewables. But while this may sound good on paper, in reality it’s just a recipe for more brownouts. The alternatives just can’t provide enough power. Hydro is mostly tapped out – just about every dam that could be built has been built, says Karlgaard. “At best, solar, wind, batteries, geothermal and cellulosic ethanol combined will meet 20% of our needs by 2025. The smart money would bet on 10%. Coal gets a bad rap, but walking away from clean coal technologies while chasing windmills will be economic suicide. There’s no way the US economy can enjoy future prosperity without the big three electrical energy sources of natural gas, nuclear power… and clean coal.” It’s not just America. Coal is the most widely used fuel for electricity generation in the world, responsible for 42% of global production. What’s more, outside the US, the percentage of power generated by coal will rise steadily. For

A hot SA coal play Who can forget, or forgive for that matter, the blackouts we experienced a couple of years ago? And the root of the problem? Parastatal Eskom’s mismanagement of its coal stockpiles. Thankfully, Eskom seems to have sorted itself out in terms of providing the energy that we all pay so much for. For the time being, periods of blackouts seem a thing of the past. But why was coal so much of a problem? Well, South Africa’s energy is 77% fuelled by coal. So without coal in stock, you can see where the problems stem from. According to Eskom, SA has been dependent on coal as its primary energy source since 1880. And this isn’t going to change any time soon. You just need to look at what’s been done elsewhere in the world to see that renewable energy sources are hard work. As Stevenson notes above, the US have only managed to produce 9% of their energy needs with renewables. But with the troubles brought on by mismanagement of coal stockpiles comes opportunity. To feed the generators, we need coal. And this presents you with a great way to profit from hungry


16 October 2009

Eskom – Coal of Africa (JSE: CZA). Coal of Africa (ex GVM Metals Limited) debuted on the Johannesburg Stock Exchange at the end of 2006. And it’s been a wild ride since then. The company listed at 250c, only to rocket all the way up to highs of 3569c at the tail end of the commodity run up in mid-2008. Coal of Africa is now trading around 1500c and is offering an excellent entry point to investors. Coal of Africa’s roots lie in Australia where it listed in 1980. As well as listing on the JSE, it has a further listing on AIM (the Alternative Market) on the London Stock Exchange. These additional listings permitted further growth of the company. But, South Africa is where the company primarily focuses its acquisition, exploration and development of coal projects.

cover story double-digit levels. China gets about 80% of its power from coal and has recently been building new coal plants at the rate of 70GW100GW a year. It’s already added about 400GW of new coal generation capacity since the start of 2004. That’s about 25% more than the combined total of all US coal power plants, which took 60 years to build.

Thermal Coal Spot price 200 180

US $ per tonne FOB

160 140 120 100 80 60 40 20 ©PHOTOLIBRARY

Aug 2001

Aug 2002

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Europe spot (Richards Bay)

example, last year, Italy’s main electricity producer, Enel, said it was converting its plant at Civitavecchia, near Rome, from oil back to coal, so providing half the company’s overall generation needs. By 2014, Italy is set to increase its reliance on coal from 14% to 33%. The International Energy Agency (IEA) reckons Europe’s electricity needs will rise by 15%–36% by 2030, which means 400GW (one gigawatt = a billion watts) of new EU power plant capacity is required. Across Europe, up to 50 coal-

Aug 2005

“Coal use will double in the next 30 years” fired plants, each with 50-year shelf lives, are expected to be built during that time. The IEA also expects that in 20 years’ time roughly 60% of EU-generated power will be derived from fossil fuels. And that’s the ‘old’, slow-growing economies. Emerging economies are even more demanding. Between 2002 and 2007 Chinese power output grew at

In its final results for the year ending 30 June 2009, everything is looking good. Coal of Africa is well on its way from transforming itself from a pure explorer and developer into a fully fledged coal miner. From a successful 2008 year end, the company used the cash raised to develop its Mooiplaats thermal coal project in Mpumalanga. The project successfully produced its first coal in November last year. Add to that, last month, Coal of Africa began exporting its wares to the Matola terminal in Maputo. And the company signed a lucrative deal with Transnet regarding rail allocation. The company just completed its first BEE deal at the end of September. This results in Coal of Africa issuing 50m options, the equivalent of a 10.85% share of the company. So it’s well on its way to having a 26% BEE holding by 2014 in terms of SA

16 October 2009

Aug 2007

Asia spot (Newcastle)

South African coal is ideal for mining. It lies horizontal at shallow levels, making it easy to mine in comparison with finds elsewhere. And we know what that means – better profit margins! And MoneyWeek isn’t the only one keen on the company. As of April this year, Arcelor Mittal SA Limited (JSE: ACL) owns 16.3% of Coal of Africa.


Aug 2006

Yet future power demand in China and Aug Aug India is still set to climb 2008 2009 strongly. In the long run, says the IEA, this all adds up to coal use doubling in the next 30 years. In short, it may be old-fashioned, but coal is here to stay. So how do you cash in?

The cheapest coal miners There are plenty of quoted miners, and while the ‘spot’ (ie, market) thermal coal price has dropped sharply from mid-2008 (see main chart), many of the producers’ stock prices have picked up recently. For example, four months ago we tipped lowcost US coal producer Peabody Energy (NYSE: BTU) at $30. The price has since Continued overleaf

legislation. This, in turn, paves the way for success for the company in SA. Revenue increased a whopping 50% from A$35.8m to $53.774m. Interestingly, employee expenses dropped just over 2%! A good sign in these crunch times. The company is currently trading on a PE of -60.24. But this is nothing to be concerned about. With exploration firms in particular, negative PEs are common. It’s all down to the money the company is pouring into its ventures, which are sure to pay off over the coming years. Coal of Africa is well placed to benefit from Eskom’s insatiable hunger for coal. With the expertise the company brings with it, this “dirty” miner is set to roll on higher as demand for its commodity soars. And you don’t have to worry about the coal mines “running dry”. South Africa has almost 200 years of supply left in it! With the economic recovery appearing to be well underway, electricity demand will increase. This will result in an increase in the demand for Coal of Africa’s product. So it’s in a win-win situation. It’s a buy at current levels of 1500c.

cover story The only trouble is, CCS is pricey – very pricey. It cost $100m at Mountaineer to process just 1.5% of the plant’s annual greenhouse gas emissions. And the energy needed to operate CCS for the whole plant would cut efficiency by about a third and raise costs by 50%.

Continued from previous page

risen to $38. On a forward p/e of over 16 times, Peabody’s clearly not as good value now as it was then. While we wouldn’t put you off topping up your holding, there are better plays out there.


For example, Alan Heap and That could change as the Alex Tonks of Citi have just technology improves. US upped their forecast for next Energy Secretary Dr Steven year’s hard coking coal price Chu has channelled $3.4bn from $140/tonne to into CCS research. And $200/tonne, but they reckon Brussels could soon hand out Australian coal export growth New technologies to capture carbon dioxide offer hope for the climate “hundreds of millions of “will be constrained by the euros of EU funding” to slow pace of port and rail develop the technology, says infrastructure growth Reuters. But the only listed development”. That gives an pure play on commercially opportunity to get into Aussie ready, large-scale carbon capture is the coal stocks. Two that still look cheap are raising global temperatures? Won’t extra tiny Canadian TSX Venture Exchangethermal and coking coal producer coal burning mean ecological disaster? traded HTC Purenergy (TSX: CN), with Centennial Coal Company (AU: CEY) Maybe not. “Coal accounts for over 40% a market capitalisation of just C$31m. and its eastern Australia rival Gloucester of all energy-related CO2 emissions Coal (AU: GCL). worldwide, with the US and China HTC provides CCS solutions and churns together responsible for half,” says Centennial, operator of the Cook Colliery, out CO2 capture research, “including Armond Cohen of the Clean Air Task exports worldwide. Despite rallying over Force. “Fortunately, recent evidence of a breakthroughs in designer solvents, the last few months, the share price is still willingness jointly to develop and deploy absorption efficiencies and heat duty lower than a year ago. At A$3.13 and a new technologies that reduce carbon reduction”. Furthermore, HTC says it market cap of A$1.18bn, it sells on 11.3 emissions offers real hope.” has “licensed, internationally developed, times forecast earnings for the year to and acquired a range of CO2 June 2011. The prospective yield is set to Carbon capture and storage (CCS) technologies to create a world-leading, rise to 4.5%. Gloucester is smaller, with a technology allows carbon dioxide to be carbon-capture product offering”. market value of just over A$500m, but it’s separated from fossil fuels, liquified and The company has a Global Licensing also cheaper. The consensus view for the stored in underground reservoirs. Indeed, Agreement with Doosan Babcock year to June 2011 is a p/e of eight and a it could represent the future for coal, Energy/Doosan Heavy Industries, the forward yield of 6.2%. Again, while the says Hsi Chan on “Dirty world’s largest boiler maker, under stock has rallied in 2009, it’s only up 10% fossil fuel power plants may be a thing which Doosan has a licence on all HTC’s on a year ago. of the past, as researchers race to technology for commercial-scale, coaldevelop cost-effective CCS technologies fired power plants. Indonesia is another big coal supplier to to reduce CO2 emissions. According to consider. The Citi team reckons that “at At C$1.68, the shares are clearly high the Intergovernmental Panel on Climate current prices, Indonesian material is risk. The firm has no debt and C$8.7m in Change, current CCS technology could likely to be more attractive to Chinese cash, with net tangible assets of nearly reduce emissions from coal power plants buyers”. The Indonesian Coal Mining C$19m – but so far has racked up by 80%-90%.” Association sees national coal production C$8.7m in development losses. Yet “the rising 8% next year, while the country’s company offers the most cost-effective The third-largest utility in the US, Duke second-biggest producer (which has a version of large-scale CO2 capture Energy, has became the nation’s first listing in Germany as well as Indonesia), electricity producer to announce a joint available today”, says Khurram Malik at PT Adaro Energy (GR: A64), is looking CCS project in China with Huaneng Jacob & Company. He has a 12-month to buy BHP Billiton’s local Maruwai coal Group, the biggest Chinese utility. ‘speculative buy’ target of C$4. We mining project. On 13.2 times next year’s Furthermore, “the 30-year-old coalwouldn’t bet the house on it, but as forecast earnings, Adaro isn’t as cheap as burning Mountaineer generating station long as you only invest money you can its Australian rivals, but is worth in West Virginia has just become the first afford to lose, HTC could end up being watching as a long-term bet. commercial power plant to capture and a very profitable play on the future of bury some of the carbon dioxide it coal. spews”, says Peter Gorrie in the Toronto Profiting from clean coal Star. “The experiment is a tiny step with But as a South African investor, you That’s all very well for coal miners. giant implications for what we’re need a share which you can exploit But hang on, you say, what about the 18 increasingly told is the only technology closer to home. Julie Brownlee looks at billion-plus metric tonnes of CO2 already that could save us from the worst of the South African coal market and how entering the atmosphere every year from climate change.” to play this commodity on page 16. using fossil fuels, trapping heat and

“HTC Purenergy could be a profitable play on clean coal”


16 October 2009

the best blogs What the bloggers are saying “Anyone who spends any time inside football soon discovers that just as oil is part of the oil business, stupidity is part of the football business,” write Simon Kuper and Stefan Szymanski in their new book, Why England Lose and Other Curious Football Phenomena Explained. Indeed, adds David Goldblatt, the book reveals that “it is swimming in the stuff”. Take the transfer market, where scouts regularly over-report blonde players “who stand out and stick in the mind – irrespective of their actual performance”. Clubs also overpay for teenagers, players of fashionable nationalities and recent stars of international tournaments without properly assessing their likely course of development, or how they’ll fit in with the country’s football culture. “In fact, almost every mainstream football homily is revealed by the authors of this book to be hokum.” Which leads them to explain the England team’s perceived underperformance. The side is in fact doing about as well as it should, given its players are drawn from a much smaller talent pool than similarly sized countries. That’s because there is an industry bias against talented but educated staff. Out of 34 England players over the last three international tournaments, only five came from anything approaching the middle class. “English football nationalists should worry less about a flood of foreign players and more about... class apartheid.”

Selling the Tote makes no sense The British government’s sale of the Tote doesn’t make sense, writes Chris Dillow. Take fellow betting company Ladbrokes as a point of comparison. It has a market capitalisation of £868m and made profits of £257m last year, a multiple of 3.4. If the Tote were sold for the same multiple of its £16.4m profits, the UK government would get £56m. Gilts yield 4.3%, so by using £56m to pay off debt, it gives up £16.4m to gain £2.4m.


Why England loses at football

Don’t bet on a good deal for the taxpayer That’s bad enough, but the government doesn’t even get all the Tote’s profits. Last year, £10.4m was given to the racing industry, so the “Tote’s profits after this handout were just £6m”. Because the government promised to give half the proceeds of any sale to the racing industry last time it touted the Tote for sale, the proceeds dwindle again. In short, it would make more sense to keep the Tote based on its current valuation. But that may cut no ice with the seller – Gordon Brown “is a deficit fetishist, obsessing about the current deficit, and forgetting future ones”.

‘Green’ policies do more harm than good “That human well-being has advanced with economic development is clearly true for industrialised countries,” writes Indur M. Goklany. But the developing world has benefited too. The proportion of the developing world’s population living in absolute poverty (on less than $1.25 a day) halved from 52% to 26% between 1981 and 2005. Similarly, the proportion of people suffering from chronic hunger declined from around 30%-35% in 1969-1971 to 16% today. Meanwhile, life expectancy has gone from less than 30 years in 1900

to 69 today, while the use of child labour in low-income countries has declined from 30% of workers to 18%. Yet environmentalists will insist that the underlying fossil-fuel-based economic growth is bad for the developing world – it causes global warming. But the diversion of crops to use as biofuel has caused far more harm. The higher food prices that result from this policy have pushed over 130 million people into absolute poverty since 2008. So the real problem faced by the developing world is not climate change, “but ill-considered climate-change policies”.

The return of the sitcom

Does this reflect a brave and public-spirited attempt by the TV networks to cheer up US households? Not exactly. The move is driven in no small part by economic necessity – sitcoms are relatively cheap to make and “those that succeed can be easily sold to syndication”. So it’s hardly a coincidence that the last time there were so many sitcoms on TV was during the recession of the early 1990s. Still, tight budgets are not all bad


16 October 2009


In hard times, people need a laugh or two. Or at least that’s what American TV networks are hoping, writes Sarah Hughes. Over the coming months, everything from dysfunctional families to cannabis-smoking detectives will be filling the airwaves.

news – many viewers remember fondly that era’s comedy shows “that also redefined the sitcom”. Think Frasier, Seinfeld, Roseanne and, the “biggest hit”, Friends (pictured).


How I brought military fitness to Civvie St bit of a psycho in a smart uniform”), but in the days that followed more and more people appeared. Other than the annual £100 licence fee payable to Hyde Park, there were very few overheads, and within the next year he opened similar classes in Battersea Park, Greenwich and Guildford. “Not having any business experience, it was all a bit ‘suck it and see’”, but it seemed to be working – BMF made £10,000 in revenue in the first year.

by Jody Clarke Like any other British army officer, Robin Cope, 53, could have gone into the City after retiring. But then Cope, the son of a US Air Force general, has never quite fit in with the stereotypical image of a major in the Royal Anglians. Now openly gay, the founder of £5m-a-year British Military Fitness (BMF) says that, in his army days, “I was so afraid of anyone getting an inkling, that I made sure that I ran further than everyone else and that my platoon was better than everyone else’s.” Over a decade later, he’s brought that same precision and hard work to Civvie Street, where he runs one of the UK’s most successful fitness companies. After retirement in 1991, Cope spent several years as “a travelling nomad”, first organising security in Africa for British American Tobacco, and later working as a military adviser on the set of films such as Saving Private Ryan and Gladiator. But it wasn’t until 1999, while jogging through Hyde Park, that he hit on the idea for BMF. “It just kind of came to me.” Dismissive of existing fitness regimes on the market, Cope wanted to bring some of the motivational and group dynamic of military training to civilian life. “People work a lot harder when they are with others. And if you make people feel like they’ve achieved something and make sure they have fun doing it, they’ll keep it

MY FIRST MILLION Robin Cope, British Military Fitness up.” What’s more, he would do it in public parks with ex-soldiers as instructors, a novel change from the fitness regimes of the day, which “were mainly in gyms, and meant doing aerobics and wearing lycra.” So with £10,000, he built a website and put a half page ad in the London Evening Standard. “That generated a huge amount of interest.” On the first night, just three people turned up (“two overweight nurses from Australia and a

“We then made a big mistake. We tried to get too big too quickly.” He spent a lot of money on marketing and opened venues across Britain, from Southampton to Newcastle. “We brought in managers to look after them, so our payroll ended up being higher than our income.” By 2001, the group was on the verge of bankruptcy. So Cope pulled back, consolidated the business and took things more slowly. By 2004, BMF was making a profit, and in 2006 it hit £1m in turnover. This year, it did £5m in sales and £600,000 in profit, and it’s heading for the £1m profit mark next year. It now has 82 venues across the UK, which should hit 100 in 2010. So what’s the secret of his success? “I really believe we’re providing an excellent service because we’re not out to con or trick anyone. It changes people’s lives and is great value for money. I don’t have any sleepless nights, unlike a banker or an estate agent. We have a good product which people enjoy.”

The MoneyWeek audit: Sarah Ferguson • How were her finances after her marriage ended? Sarah Ferguson married Prince Andrew in a lavish ceremony costing £200,000 (£440,000 today) in 1986. Her dress alone was said to have cost £30,000. However, after ten years of marriage and four years of separation the couple divorced in 1996. Ferguson left the marriage with a divorce settlement estimated to be between £300,000 and £500,000. But she also reportedly owed £4.2m to Coutts, the private bank. • What has she earned since then? Following her divorce, Ferguson embarked on a whirlwind of


16 October 2009

after-dinner speaking and sponsorship deals in order to clear her debts. A £2m-a-year deal with Weight Watchers, which ended last year, and several other endorsements, helped her get back into the black after just two years.

• Why is she experiencing financial troubles now? In the past few weeks several stories about Ferguson’s finances have emerged. Last month it was reported that she was being sued by three firms over unpaid bills. They were collectively owed £21,999, but are reported to have all subsequently been paid. It has since emerged that the company which controls Ferguson’s US business interests went bust in January with debts of over $1m. She is reported to be making every effort to clear the debts, but once again her ability to manage her own finances has been called into question. But the good news for the Duchess is that a US film company has signed a deal, reportedly worth millions, to turn some of her ‘Little Red’ series of children’s books into films.

personal finance

Worried about your golden years? Try our 5 step retirement booster plan by Karin Iten

Iona Smith, you need to take every opportunity to boost your retirement contributions. “Windfalls, extra cash and SARS rebates should all go into your retirement kitty. Your chances of making it to 90 have never been better; in fact, many financial planners now use 95 as their default life expectancy.”

According to personal finance journalist Charlene Clayton, only 6% of South Africans are financially independent at the time of their retirement. That’s a scary figure. So if you make up the other 94%, listen up. It’s not too late to boost or even start planning for a comfortable retirement. But, time is of the essence…. That’s why I’ve put together a five step retirement booster plan to help you achieve your goal. And if you’re in your 40s or even your 50s with no substantial nest egg to your name, you can use these steps as a starting point to help pave the way. Remember, if you’re 50 and plan to retire at 65 you only have about 180 more salary cheques left. So get started today.

Step #1: Do the maths Your first step is to work out how long you’re likely to live and how much money you’ll need during your retirement years. A ballpark figure is a good starting point and you’ll be able to get this from any of the numerous retirement calculators online. If you want a non-product linked calculator, visit and click on the site’s nest egg calculator. Now that you have an idea of your expected lifestyle and income, put together a budget that encompasses your projections. This will help you work out if the amount you expect to live on is realistic or not. Handy tip: Most financial planners will tell you that to retire in the style you’re accustomed to, you’ll need to ensure your retirement plan pays out about 80% of your current salary each month.

Step #2: Review your risk appetite If you’re starting late, remember you aren’t investing for the next quarter or even the next year, you’re investing for at least the next ten years and beyond. That means you need to balance between two conflicting goals – growing your nest egg and keeping it safe. For a good growth


16 October 2009

Step #5: Accelerate debt repayments

mix, retirement guru and senior editor of Money Magazine, Walter Updegrave suggests you invest 60% of your savings in shares and the other 40% in balanced unit trusts, property and bonds. If you’re not confident enough to make these selections yourself, why not boost your retirement capital by considering a tax-efficient annuity option like the InvestecFunds Retirement Annuity unit trust?

Smith also suggests you “get rid of your bond repayment as soon as possible. If you still have some cash left over after paying off your other debt and maximising your retirement contributions, having the house paid off will be a big chunk of money that you can save. Not having a bond in retirement means you can draw less from your retirement savings, allowing them to grow for longer.” The same goes for credit card debt, vehicle finance and any other payments you make on a monthly basis.

Step #3: Get brutal – put retirement on the front burner Retirement savings must become your priority. Everything else will have to take a back seat. One way to do this, MSN money writer Liz Pulliam Weston suggests is to “get your children off the dole”. If your kids are out of school, they should be economically independent. If they aren’t, they’re putting your financial future at risk. The same goes for the rest of your family. “If you’ve been the go-to-family member when others run into financial trouble, it’s time to shut down the Bank of You.”

Avoid these 5 common late-start blunders:

And remember, getting brutal doesn’t just apply to the money you spend. You wouldn’t let one of your employees sit around all day doing nothing, so don’t accept this when it comes to your money. Reassess your assets and investments on a yearly basis. If something isn’t performing, get rid of it.

Step #4: Every cent counts According to financial fitness expert

The most common mistakes people make when they’re close to retirement age and starting to panic about whether they’ll have enough money are: •

• •

Accepting a retrenchment package without researching other work opportunities, Choosing the wrong investments, Spending pension funds when leaving a job, Failing to plan for healthcare costs and Investing in high-risk ventures.

To overcome these dangers, speak to your financial planner or advisor. And while you’re there, ask him or her about the Discovery Life Retirement Optimiser scheme. Retirement expert, Adam Smith believes it has the ability to boost a retirement fund by as much as 41%.

profile This week: Brooke Astor and Anthony Marshall

How Brooke Astor’s son fleeced his dying mother of $200m The sad end of Brooke Astor was the “ultimate Upstairs, Downstairs story”, says the New York Daily News. What did the butler hear? Could the peeved French maid and the combative former chauffeur be trusted? If only the pet dachshunds, Boysie and Girlsie, could talk... It would certainly have made life easier for the New York jury who heard five months of often contradictory testimony before deciding last week that Astor’s son, Anthony Marshall, was guilty of fleecing her of millions. At 85, he now faces a possible 25 years in jail. The once sparkling doyenne of the Upper East Side spent the last years before her death, aged 105 in 2007, in a pathetic state of neglect: the victim of Alzheimer’s and a “rapacious” son. It was one of her twin grandsons, Philip Marshall, who blew the whistle. In a 2006 civil suit, he complained that his father had sacked the old lady’s loyal staff and stinted on her medications, notes The Daily Telegraph. That alerted the authorities to the money that had disappeared from the $200m Astor fortune. Paintings had vanished; so had the deeds to her cherished Maine retreat. Egged on by his wife, Charlene, Marshall had used his mother as “his own little piggy bank... his ATM”, buying himself a $1m yacht while refusing her a $2,245 safety-gate to keep her from falling. For New Yorkers, Marshall’s

crimes were a civic as well as inhuman affront: the Astor millions were intended for them. On his deathbed in 1959, Vincent Astor predicted that Brooke was “going to have a hell of a lot of fun” with the charitable foundation he left her. And so she did, says The Washington Post. In her Chanel suits, pearls and trademark white gloves, she became a “New York icon” and “one of the city’s most generous and discerning philanthropists”. “A world-class flirt” with dancing bluegrey eyes, Astor charmed everyone, from the city’s doormen to Henry Kissinger, says USA Today. When a commemorative medal was struck in her honour in 1976, thousands turned out to cheer her.

says The Times. In 1932, she married the love of her life, Charles “Buddie” Marshall, who gave her son Anthony, from her previous marriage, his surname. She was, at best, an ambivalent mother. Of her third marriage to Vincent Astor, she wrote: “I saw very little of Tony. I concentrated on Vincent.”

Born Roberta Brooke Russell in 1902, as the daughter of a Marine officer she spent much of her childhood abroad in Panama and China. At 16, she married J. Dryden Kuser, heir to a street-lighting fortune – “a wealthy boor who beat her when he wasn’t cheating on her”. After divorcing Kuser, she hit Manhattan in the Roaring Twenties and was soon “playing tennis with Ezra Pound, dining with Cole Porter and holidaying with Max Beerbohm”,

Anthony Marshall went on to have an eminent career as a US ambassador, CIA recruiter and Broadway producer. But it wasn’t enough to impress Brooke, who also loathed her brassy daughter-in-law, once declaring she would rather spend Christmas alone with her dogs than with “that bitch”. Indeed, for all the millions she gave to New York, and for all her talent for friendship, she never gave her only child what he wanted: “approval”.

The Astor dynasty – from trading furs to social royalty


Over two centuries, the Astor family amassed one of the world’s biggest fortunes and then feuded over it. The dynasty’s founder, John Jacob Astor, was a German butcher’s son who arrived in America in 1784 and began trading furs. The real money, though, lay in the vast tracts of Manhattan farmland he bought up, says The Philadelphia Inquirer. His faith that New York “would become the dominant port and financial centre of the new republic proved colossally true”. By 1840, he was America’s first millionaire.


The Astors swiftly established themselves as New York social royalty, says The Washington Times: Mrs Astor’s guest list formed the basis of Manhattan’s elite “Four Hundred”. But they “were essentially a frivolous family”, obsessed with building

16 October 2009

sumptuous hotels. In 1891, William Waldorf Astor headed for Britain, became Viscount Astor and bought the Buckinghamshire estate that gained notoriety as the home of the pro-appeasement “Cliveden Set” in the 1930s and later the Profumo scandal. His cousin, John Jacob IV, stayed in New York. In Britain, the Astors “multiplied like rabbits”. The US branch, by contrast, has all but “petered out”. Having courted scandal by eloping with an 18-year old, John Jacob IV went down with the Titanic in 1912; it was his son, Vincent, who became Brooke’s third husband. Her great achievement, concludes Meryl Gordon in Mrs Astor Regrets, was “rebranding the Astor image with a newfound glamour and respect” – sadly, now eclipsed by the actions of her son.

Spending it Where to stay – in Prague

A converted monastery versus a former stable block The Augustine

The Romantik Hotel Uraka Part of the Augustine is a converted monastery, while another building used to be the monastery’s brewery – where the monks brewed beer from 1352 until 1950. This former brewery now houses the hotel’s bar.

How they rate it

This feels like “the kind of monastery you’d like to stay in if you’d swapped your vow of poverty for one of – well, luxury”, says Christina Patterson in The Independent. Judging by the red-and-black sofas in the reception and the sculptures and paintings scattered around the hotel, the theme is “Czech cubism”. The hotel has revived the monks’ St Thomas beer in the Brewery Bar – this “rich, malty, dark lager” is “delicious”.

The rooms If you can, book yourself into the monastery tower. All the hotel’s rooms are different, but this one is the most impressive. The lower two floors are home to the sitting room and bathroom, with the bedroom situated up a winding staircase. The bedroom offers impressive views of Prague. The cost Rooms at The Augustine cost from €270 (R2,995) room-only. Visit for more information.

What’s so special?

The building that houses Romantik Hotel Uraka started life as a stable block. It then became a private home before the current owners bought the two derelict cottages in 1992 and transformed them into this magical hotel.

How they Staying in this family-run hotel “makes you feel rate it like a character from an eastern European fairy tale”, says Lucinda Baring in The Daily Telegraph. It’s the little details that give the hotel its magic, from the logs piled up next to the traditional wood-burning stoves to the antique furniture. The hotel is “simple, warm and welcoming, with exposed brick walls, wooden furniture and lots of lamps”. It also has a garden where breakfast is laid out in warm weather and a “charming fire-lit kitchen” where tea and snacks are served. Bear in mind that it isn’t in central Prague. Yet that means you can enjoy some peace “away from the action”, even if there’s a 20minute walk to get to sights such as the Charles Bridge.

The rooms The hotel only has six rooms and the pick of the bunch is the room with a working fireplace, which you can light yourself. Failing that, the owner will do it for you. The cost Rooms cost from €145 (R1,587), including breakfast. Find out more at

What the travel writers are saying

My dream holiday

If anyone should know where the best restaurants are, it’s a chef. So The Times asked some of the UK’s best chefs where they like to eat. For “sophisticated simplicity”, head to Le Lisita in Nimes, France, says Michel Roux Jr, the Michelinstarred head chef of Le Gavroche. The restaurant has a “huge, magical terrace with great views of the town’s Roman arena”. The food is “divine”, in particular “the salt cod and a wonderfully full-flavoured bull, that make me go back again and again”. And if that isn’t enough to tempt you, “the locally sourced wine list is phenomenal”.

Having made plenty of trips to Holland, Dame Vera Lynn recommends a stay at the Hilton in Amsterdam, in The Daily Telegraph. It’s a short walk from many attractions, including the old city centre and the Van Gogh Museum. The staff provide “an excellent first-class service”. And the view of the city is “wonderful”. Rooms cost from €169 (R1,850).

Oliver Peyton, owner of Peyton and Byrne, recommends Cibreo in Florence as “one of the city’s best dining experiences”. Or try Osteria Francescana in Modena, “probably the only truly modern restaurant in Italy”. The chef, Massimo Bottura, “breaks the rules, pushing the boundaries of Italian cuisine”. For an unusual diner, seek out Please Don’t Tell in New York, says Jason Atherton, the Michelin-starred executive chef at Maze. “You enter it through a small hot-dog shop, go into the phone booth, press zero on the phone and they let you in.” They serve hot dogs designed by top chefs.


16 October 2009


What’s so special?


Innovative cameras The Nikon S1000PJ is “a real gadget-lovers gadget”, says T3 – it’s the first camera ever to have a projector built in. You really have to see it in action to appreciate it – it can even make sitting through other people’s holiday snaps fun. Price: R4,800. See

Just a few years ago, an affordable HD camcorder would have been unthinkable, let alone a pocketsized one, says Stuff. Not anymore. The best is the Sony HDR-TG7. It has built-in GPS, is superbly engineered, and makes superior movies. Price R8,800. See

Not really a compact nor a DSLR, the Canon G11 offers the amateur-friendly features of the former without the bulk and complexity of the latter, says T3. Due October. See

A 3D camera? We were a mite sceptical, says Stuff magazine. But the Fujifilm Real 3D W1 “truly is a new breed of thing” – a revolutionary “off-the-radar chart-topper”. It’s “addictive” fun. Price: R6,500. Due December. See

Wine of the week: naughty but nice Avondale Brut R92.00 at select wine retailers If you’ve ever seen the advert with the naked girl in the vineyard – this is the estate. Unfortunately the label doesn’t show her, it’s rather conservative and classic. The group slogan is: “Wines approved by Mother Nature”. But organic isn’t just a buzz word at by Marilyn Cooper Avondale. They genuinely are returning their soil to its original, vibrant, natural state through BioLOGIC, a gentle integration of old practices with new science. And this actually means the wines are good for you! I love Cap Classique (South Africa’s word for wines made like


16 October 2009

Champagne), especially now that spring is here. Avondale Brut is made from 100% Chardonnay grapes, whole bunch pressed, kept on the lees for nearly three years. All of this contributes to a great wine. Those lively bubbles, once in the blood stream, lift the spirit, wash away the cares of the day and generally make you feel great. I couldn’t think of anything more decadent than watching the sun set with a glass of chilled Avondale, slithers of smoked salmon, an attentive partner and… Enjoy!

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

blowing it

Simon Cowell’s “orgy of self-obsession” It’s small wonder Polanski wants out. He happens to have an Alpine chalet in Gstaad, a village of 2,500 people in the foothills of Mont Blanc. The village is so pretty it’s sometimes called God’s Hand – after the legend that the Almighty rested His hand here during the arduous creation of the Alps.

I like Simon Cowell, although it’s hard to say why. He’s not especially funny or eloquent, but he’s very watchable and he can spot talent when he sees – and hears – it (a rare gift). The X Factor would be nothing without him.


But I hadn’t realised how narcissistic he is. Perhaps you But Polanski won’t see it again have to be, if it’s your job to be any time soon. The Swiss judges famous, but his 50th birthday have so far wisely decided that, bash sounded gruesome: waiters given his track record, he can’t wearing Simon Cowell masks, be trusted to stay put unless he’s tablecloths featuring his behind bars. And as the public silhouette printed on the fabric, has been made aware of the full a giant image of Simon Cowell grim details of his case, it’s been projected 60ft high across the gratifying to see that many of Palladian frontage of the Simon Cowell: an odd mixture of showiness and conservatism the luvvies and euro-politicians Hertfordshire mansion where or shepherd’s pie (with the inevitable ‘SC’ who supported him are now making their the party took place, even a video film of carved into the potato), and a trio of excuses and retreating from the backlash, famous people singing his praises running nursery puddings: apple crumble, bread in fear for their own careers. continuously in the loos. and butter pudding and rice pudding, with custard and jam on the side. The So Polanski now sleeps in a small, cold “The stench of new money was wine sounded good, too; a white Pulignycell in Zurich’s city centre jail, where everywhere,” fumed Amanda Platell in Montrachet and a 2005 Pauillac. All in inmates are allowed into the fresh air for the Daily Mail. “Despite the recession all an odd mixture of showiness and an hour a day. It must be galling for him and the new austerity, the nine-hour-long conservatism, rather like the man himself. to think that his pine-clad chalet, with, as bacchanal proved that there is another And what would be the point of the The Times puts it, its “breathtaking view world where the rich get richer and the nouveau riche if they didn’t give us of the soaring Rulihorn peak”, is just a vulgar get even more vulgar. There is something to sneer at? couple of hours’ drive away. But it’s something deeply unpleasant about reassuring for the rest of us to see that today’s nouveau riche and the excessive having vast wealth and friends in high way they flaunt their wealth.” As for Roman Polanski’s new home places doesn’t always buy you a get-outCowell himself, the party was “an orgy Roman Polanski’s lawyers have been of-jail-free card. of self-obsession”. trying their best to get their 76-year-old client out of jail. They want the Swiss The food sounded nice, though – straight Federal court to grant him bail and put out of the nursery: a choice of cottage pie him under house arrest instead.


Tabloid money… Royal redhead goes into the red


■ Still in the midst of a recession, the rest of South Africa is tightening their purse-strings. But Minister of Presidency Trevor Manual has just cost taxpayers nearly R1.2 million. His new BMW 750i series cost R1 081 450 with unspecified accessories costing an extra R99 200. “It’s quite an indictment – while he was minister of finance, Minister Manuel was preaching austerity and the need to be aware of the economic circumstances the country is in. He is not practising that. The extras on the cars are not a necessity – they are an extension of the ministers’ ego ...” says DA shadow finance minister Dion George. George also points out that Manuel’s extra indulgence pushes ministers total spend on vehicle extra’s to about R800, 000. The total amount spent on ministerial cars is well over R42 million. Top spending minister is Free State Premier Ace with his R1.3 million

16 October 2009

Mercedes-Benz S600 closely followed by Minister of Communications Siphiwe Nyanda, who spent R1.27 million on a BMW 750i series. ■ The “debt-ridden” Duchess of York is closing her New York-based lifestyle-and-promotions business after it lost at least R15.8m in three years, says the News of the World. “The Royal redhead went into the red after failing to land any major endorsement deals...” She is now paying back creditors. “Sarah is in a huge money mess,” said a “source” close to her. ■ Tony and Cherie Blair have splashed out R15.2m on their sixth home, according to the Daily Express. They have bought a “desirable mews house” in an undisclosed street in London in the latest of a string of deals worth up to R14m.

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

PUNTS Company



Current price

Massmart (MSM) Retailers

Summit TV Craig Pheiffer, Absa Investments

“Massmart has been a terrible laggard this year, but fundamentally the business is very sound and also a very good cash generator,” says Craig Pheiffer at Absa investments. Its Builders Warehouse operations have suffered as demand for household, DIY type construction dipped. He goes on to say, “the market has taken a slightly jaundiced view of earnings on the back of lower food prices and a bit of pressure on margins on that front.” What we have here is a great value share. The market has looked at the negatives and overreacted. This is an ideal pick if you have a two year view. Buy.


Sasfin Holdings (SFN) Banks


The astute investor is picking up the big banks during the down turn but many are getting tired of waiting for the recovery to kick in. At the other end of the spectrum fear is creeping into the decisions people are making. They’re seeking the safety of the large caps and that’s exactly why Shaun Harris at Finweek likes Sasfin Holdings. Its price is up 66% over the last six months and it’s time to take advantage of the rally. Buy. 4150c

Clicks (CLS) Food and drug retailer

Imara SP Reid

Warwick Lucas believes Clicks is the way to go. “Its subsidiaries as a group comprise the country's leading provider of health, beauty and lifestyle merchandise through a network of over 500 stores in southern Africa.” It’s looking cheap at R23.62 and it’s a good option for those looking for a longer-term investment. Buy.


Sasha planting in the Financial Mail thinks Sovereign Food is hot stuff. Even through it’s currently trading under a cautionary, the “working capital was well managed and gearing has fallen.” It’s shown a return to profitability on the back of increased volumes and prices. Buy.


Sovereign Food (SOV) Farming and fishing

KAP International Holdings (KAP) General industrial

Financial Mail


Marc Hassenfuss at Finweek says, “KAP is certainly not one of the sentimental favourites on the JSE.” There are two reasons for this. First, its exposure is to automotive, textiles, meat, footwear, bottle resin, milling and towelling “that investors (these days, at least) consider very exciting”. Second, it is very

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



Coal of Africa (CZA) General mining

Vukile Property Fund (VKE) Real estate

DiamondCorp (DMC) Diamond mining

Financial Mail


Financial Mail


Current price

highly geared, to the tune of about 40%. Yet at R1.99 it’s cheap. Buy.


“Things are moving along quite smoothly for this coal junior,” says Matthew Hill at the Financial Mail. There’s even the possibility of a buyout from ArcelorMittal SA. In fact, the only real “risk is the licensing of its Vele project near Mapungubwe.” Buy.


Joan Muller at Finweek says, “Investors in listed property are now clearly chasing value, with the share price of perennially underrated Vukile surging 20% over the past three months.” The increase could also be down to its exposure to lower income consumers. Their investments in the likes of Randburg Square (old Sanlam Centre) and Phoenix Plaza (Durban) has shown surprising stability. This is possibly because “disposable income is under less pressure than that of higher income shoppers, who face crippling debt level.” Buy.


“The share price has been hammered from it highs of over R15 last year,” says Matthew Hill in the Financial Mail. DiamondCorp is desperate for financing and a buyout looks promising. The stock is very illiquid but if you can get in you’re looking at scooping up a buyout premium. Buy.


DOGS Company


Central Rand Gold (CRD) Mining

Wesizwe Platinum (WEZ) Platinum mining

Imara SP Reid

Financial Mail


Current price

The analysts at Imara SP Reid point out that “The ongoing dispute with BEE partner Puno Gold has overshadowed the recent announcement of a feasible mine plan.” Yet despite this glimmer of hope there is no reason to expect anything positive to come out of the arbitration process. Avoid.


Matthew Hill at the Financial Mail thinks it’s better to watch from the sidelines when it comes to Wesizwe. The platinum junior has put all plans for its Frischgewaagd Ledig mine near Sun City on hold. It’s had problems with financing and an eventual decision to put this mine on ice has sealed this company’s fate. Sell.



Current price



Jubilee Platinum (JBL) Platinum mining

Financial Mail

It’s a “cheap share, but risky.” These are the sentiments of Matthew Hill at the Financial Mail. Jubliee is in cash-conservation mode after buying smelting company, Braemore Resources, it. But in the end this “may prove a coup for this platinum hopeful,” says Hill. Hold.


**Closing prices as at 15 October 2009


16 October 2009

last word

Bad debt He who spends what isn’t his’n, pays it back or goes to prison. Paying off debt is painful. It’s like dying. You try to put it off as long as you can. But nobody runs an open tab forever. And just as you can’t go to heaven without dying, when it’s time to pay up someone is bound to suffer.

Bill Bonner

This week brought news that Mainebased luxury yacht maker Hinckley, which has been building boats since 1928, is sinking. The problem is neither technical nor operational. It is philosophical. No one complains of the quality of the boats. Or even the prices (if you have to ask, you can’t afford one). The firm sailed along nicely until 1997. Then the privateequity boys took the helm. The old Hinckleys who ran the shop looked upon debt as a form of sin. A little was fun. A lot was dangerous. In the 70 years they ran the place, they accumulated only $1m of debt. The new owners had a more modern view; they multiplied Hinckley’s debt 20 to 40 times (exact figures are not available).

learn is what we already knew. Borrowers are often perfidious, crises are usually insidious, and bankers are morons. Just five years ago, Ben Bernanke looked out on the calm seas of the Bubble Era and liked what he saw. “The Great Moderation”, he called it. Between the Asian Crisis of 1997-1998 and the Global Contraction of 2008-2009 no major economy experienced a banking crisis, default, or hyperinflation. Bernanke took the credit. It was due to “improved macro-economic policies”, he said. He should have said it was just luck and left it at that. His macro-economic policies

his US-backed ‘Brady bonds’. Readers of these columns can guess what happened next. Debt problems didn’t go away. Within a few years, seven of the 17 countries that had undertaken a Bradytype restructuring had about as much or more debt than before. By 2003, four members of the Brady bunch had once again defaulted and by 2008 Ecuador had defaulted twice. Even non-existent countries went bust. In 1822, “General Sir” Gregor MacGregor issued bonds from a fictitious country he called Poyais, whose capital, Saint Joseph, was described by the prospectus as having “broad boulevards, colonnaded buildings and a splendid domed cathedral”. The bonds sold at lower yields than those of Chile. But it didn’t seem to matter whether the country was real or not, all of them defaulted.


16 October 2009


As for the present slump, the authors offer no predictions, but some guidelines. Based on their comparative data, in a downturn like this one (which they call the Great Contraction), real housing prices generally fall by 36% over a six-year period. GDP, in real terms, per head typically falls by 9.3%. Unemployment rates go up for five years, with a ‘normal’ increase of For much of history, failing to repay William Hogarth’s debtors’ prison: where we’re all heading about seven percentage points. But debt was seen not merely as a breach the closest – and perhaps the only parallel encouraged all sectors of the economy to of contract, but a crime. People who to the present circumstance – is the Great borrow. We know what this did for failed to repay their debts were thought Depression of the 1930s. Then world Hinckley. Riding low in the water from to have stolen from their lenders; they exports fell by 30% in 1932. Building too much debt heaped on its deck, when were put in prison. In the Middle Ages activity fell 82% in America. the winds picked up, it took on water. even a dead debtor’s children could be sent to prison. Now, debtors routinely As the private sector sinks, government But what’s new, ask Reinhart and Rogoff? stiff creditors. Bankruptcy laws allow soon joins it. Tax revenues fall. Expenses There are more wrecks in financial individuals and businesses to wash the rise (especially when the authorities are history than on the Cornish coast. Debt slate clean. The debtor wears no scarlet ready to do ‘whatever it takes’ to stir a figures as the main culprit in almost every letter. He’s merely deprived of credit for recovery). Typically, say Reinhard and one. France defaulted on its sovereign a short time. Then he can go broke Rogoff, public debt grows 86% over a debt eight times. Spain defaulted six times again. And who cares? Neither sin nor three-year period after a financial before 1800 and then another seven times crime, debt is just business. Creditors calamity. Then come catastrophes caused later. Latin America, as the authors point routinely budget for a certain level of by too much debt in the public sector. out, would have been safer for bankers if ‘bad debt’ losses; they regard it as a cost The UK and US are now running deficits the printing press had never made its way of doing business. of more than 10% of GDP, a level that across the Atlantic. often triggers disasters. So stay tuned. But few creditors are as forgiving – or Currency devaluations, government Between hyperinflation, defaults and perhaps as forgetful – as those who lend defaults and hyperinflation are still ahead. banking debacles – over two centuries – to governments. That is the conclusion of the banana republics scammed banks, a new book by Carmen Reinhart and To read Bill’s thoughts, sign up to mainly in London and New York, for Kenneth Rogoff, This Time It’s Different. Money Morning’s free email at billions. In the 1980s, Nicholas Brady The two document the history of eight tried to rescue New York bankers with centuries of “financial folly”. What we