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

THE BEST OF THE INTERNATIONAL FINANCIAL MEDIA

23 OCTOBER 2009 SOUTH AFRICA EDITION 117

Cash crop Profit from the new agricultural revolution, page 16

“I read MoneyWeek to pick up all the vital things I’ve missed elsewhere.”

Justin Urquhuart-Stewart, Seven Asset Management

Jim Slater picks his favourite gold stocks

Why the rich are scared of inflation

The death of a Wall Street legend

SECTOR

GLOBAL VIEW

OBITUARY

7

14

20

from the editor

Blackout by stealth 23 OCTOBER 2009 ISSUE 117 ISSN 1995-4476

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

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23 October 2009

How can you tell when an economic recovery is underway?

Economists look at an array of macroeconomic indicators – market analysts focus on share price movements – but you probably take a quick peek at your personal financial statements. If there’s more money left at the end of the month and your debt is declining the last thing you’re thinking about is recession.

It appears Eskom has found a backdoor to switch South Africa’s lights off. Instead of mismanaging the country’s power production facilities to create countrywide blackouts the state electricity supplier has plans to price its product out of the market. If their latest multiyear tariff application is approved you will have to foot an annual increase of 45% for the next three years. These increases will wreak havoc on your monthly budget and inflict untold damage on small business and the economy! Can South Africa absorb these electricity price hikes?

In a 2009 study titled Aggregate electricity demand in South Africa: Conditional forecasts You can learn a great deal about an economy to 2030 economists say a 30% increase in by looking at daily newspaper headlines. electricity prices will cut real economic growth Earlier this week the nation was more by 0.85% per annum. Higher electricity concerned with football coaches and charges will filter across every sector of the extravagant police ministers than share prices economy. The study predicts a 2.25% decline and sales statistics. If you don’t already know in unskilled employment, a 1.85% reduction in the national football coach was sent packing skilled wages and a 1.23% dent in household by the South African Football Association, but consumption expenditure. The kicker is a you’ll have to wait a while to read about his massive 6.67% fall in fixed investment. handsome severance package! And opposition Compound these negative effects over three parties are up in arms over police minister years and the country could be brought to its Nathi Mthethwa’s massive accommodation knees. Will commonsense prevail when Nersa bills. His stays at five start hotels in Cape meets to discuss the multi-year tariff proposal?

Town and Durban cost taxpayers R850 000!

You will have to wait until February 2010 to learn your fate!

There are economic stories sending ripples through the country’s economic fibre too.

Without cheap and reliable power modern You’ve probably heard that resources giant economies practically grind to a halt. There are Rio Tinto pulled the plug on its much numerous African countries where businesses anticipated aluminium smelter investment at rely on rationed power of only one or two Coega in the Eastern Cape. Public opinion is hours per week. Who knows – two decades divided. There are those who lament the loss from now you might be living in an economy of foreign direct investment and job dominated by agriculture! In this week’s opportunities. Others welcome the decision, feature article Eoin Gleeson discusses the saying South African taxpayers cannot second green revolution. He looks at various subsidise another aluminium smelter. trends in the agriculture sector and tells you Whichever faction you support you should be how to profit from them. If you want to know concerned about the reason for the company’s more about the Doomsday vault, genetically decision. They pulled out of a multi-billion modified crops and the influence of bio-fuel on rand investment because Eskom couldn’t food crops, then turn to page 16. provide satisfactory guarantees on electricity Gareth Stokes supply.

Editor, South Africa

In this issue 3 News China and African trade; SA

out of cash – why?

cellphone costs 1000% higher than India.

5 Markets

15 Investing in property Why invest in property at all asks Gary Booysen?

8 Who’s tipping what There’s still time

22 Profile The rise and fall of hedge fund billionaire Raj Rajaratnam.

Why Dow 10,000 means nothing; one benefit of the weak pound. to profit from the Soccer World Cup.

11 Strategy

How to profit from options without taking big risks.

13 Briefing

Al-Qaeda seems to be running

23 Travel Use the recession to slash the cost of your December holiday.

28 Last word Bill Bonner on why Ben Bernanke should look up Warren Harding.

news SA economy

China accounts for the lion’s share of African trade The value of trade between Africa and the BRIC countries (Brazil, Russia, India and China) could soar to more than $4trn by 2030 “thanks to rapid growth of those economies and the mutual advantages of their relationships with Africa,” reports The Business Day. That amount accounts for around 10% of the BRIC countries’ global trade and more than 45% of Africa’s current global trade. And it’s rising rapidly…

According to Standard Bank economists for Brazil and India, Simon Freemantle and Jeremy Steven, “the story has only just begun”. In fact, they believe the BRIC trading bloc needs Africa just as much as we need them. And that means we should leverage our position to negotiate better with them. To date, the four countries have become Africa’s largest trading partner with China accounting for about two thirds (or $100bn) of total trade.

This time last year, local analysts predicted China would end up as the biggest victim of the global financial crisis. A year on, the country’s witnessed a strong recovery fuelled by an aggressive

programme of monetary and fiscal stimulus. At 8% growth, the economy has remained strong during the worst global economic slump in 80 years. And it’s certainly taking advantage of this upswing…

These days, hardly a week goes by without us hearing about some type of deal between SA and China. Earlier this month, China officially overtook the United States as our biggest export destination, according to South Africa's Trade and Industry Department figures.

These figures also show China replaced Germany as South Africa's largest trade partner.

But China’s not the only country looking to Africa to boost its economy. Out of the remaining three BRIC countries, India has invested in more than 130 projects worth $192m each this year, followed by Brazil – with $10bn – and Russia (at $9.3bn).

Companies

SA cell phone calls cost 1,000% more than they do in India After weeks of robust political debate on current interconnection fees, major cellular groups Vodacom (JSE:VOD) and MTN (JSE:MTN) have denied allegations of anti-competitive behaviour. Despite this, the Competition Commission has announced that it’ll be “widening an antitrust probe” to

investigate possible collusion between the groups reports the Business Report.

These allegations go all the way back to 2001 when both operators increased their interconnection fees 500% from just 20c to the current rate of R1.25.

That’s over 1,000% more than fellow emerging market, India. And now government has told them to cut it – fast.

It ordered both group’s to cut rates to “60 cents a minute” before the Christmas holidays and continue to cut them “15 cents every year until 2013,” reports The Times.

But the groups have argued that such rapid cost cutting would negatively impact their business models, earnings and investment plans. They told parliament that “revenue from interconnection fees – estimated at nearly R3bn for both operators – has provided the fund for the investment in infrastructure and the achievement of SA’s high penetration rate in the rural community”. For this reason, they’ve asked government not to “guess” these figures. Instead, they wish to determine the new cost on the basis of sound methodological analysis. Only then will they agree to slash costs. In fact, Vodacom went as far as to warn MPs that government's plan to force a rate cut could see nearly a third of the company's “marginal” customers cut off.

But these protests haven’t helped their cause. In fact, it’s one of the reasons why

The bottom line $15,000 What a clump

(right) rumoured pay for a two-week stint as the genie in New Wimbledon Theatre’s Aladdin pantomime this Christmas.

of hair believed to have been cut from Elvis Presley’s head when he joined the US Army in 1958 has sold for at an auction in Chicago.

£5,000 How much a retired oil-rig worker spent on more than four million matches and glue to build a 12ft tall replica oil rig.

3

£35,000 How much singer Amy Winehouse is reported to have spent on a boob job.

$440 000 The cost of

£611,000 What Kylie Minogue

setting up a “women only” taxi service. Each car comes equipped with GPS, makeup kit and alarm button.

was paid to star in Blue, the most expensive Bollywood film ever made. The film has been panned by critics.

23 October 2009

R700,000

The value of two diamond rings that were stolen from a V&A Waterfront jewellery store last weekend. The two woman involved made off with the loot by disappearing into a crowd of weekend shoppers.

R24m

The voluntary cap India’s richest man has placed on his own salary this year.

$9 The price per pound of alligator meat.

$2 000

The reward for returning the human lung stolen recently from Bodies: The Exhibition.

©THEO WARGO/GETTY IMAGES

£50,000 Pamela Anderson’s

news

the Competition Commission has embarked on its investigation. Although we’ll have to wait for the Commission’s outcome to discover if anything untoward has been taking place, it’s clear the news has worried investors.

News of the investigation pulled the shares down dramatically. MTN fell 1.3% in morning trade on Monday only to see the share close at R122.50.

Vodacom, on the other hand, shed 2.2%.

concerned, there’s no reason for oil to be shooting up. “Demand in the developed world is still sluggish while what we see in China is impressive. Overall demand is a bit better than last year but that’s faint praise,” said Bill O’Grady of Confluence Investment Management.

“There’s still a lot of oil out there.” So much, in fact, that there are 125 million barrels of oil being stored on ships waiting to come to market, as Abdallah Saleem el-Badri of Opec noted: “When we see that floating storage eliminated it means demand is coming.”

Indeed, this rally is “really about risk appetite”, said Jonathan Kornafel of Hudson Capital Energy. Interest rates are near zero so the wave of liquidity created by loose global monetary policy is seeking out a return in riskier assets. “If the liquidity keeps flowing, one result is likely

Crude oil 140

Figures in dollars per barrel

120

100

80

60

40

Jan 2008

Jan 2009

to be triple-digit oil,” said Edward Hadas and Una Galani on Breakingviews.com.

That’s bad news as oil is already almost “too expensive” for the world to cope with. The developed world’s economies are “too fragile” to deal with $100-abarrel prices, agreed Jeremy Warner on Telegraph.co.uk. If it happens, “a doubledip recession in advanced economies would seem a virtual certainty”.

The way we live now

Commodities

Sweden has come up with an ingenious solution to the problem of finding renewable energy sources – rabbits. The bodies of thousands, culled each year in Stockholm’s parks, are being burned to fuel a heating plant. The rabbits – many of which are tame pets turned loose by owners who no longer want them – are culled to protect the plants and trees they eat and 6,000 were killed last year alone.

Their corpses were then frozen and sent to the special heating plant in Karlskoga in central Sweden where they are burned to help heat the homes of the people of Värmland. Almost needless to say, animal rights activists are up in arms.

US oil futures edged over $80 a barrel early this week, marking a 12-month high, before retreating as the dollar sold off. Having fluctuated between $65 and $75 for a few months, oil has now broken free of this range, gaining 10% in the past three weeks.

What the commentators said As far as the fundamentals are

Vital numbers % change

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

*5257.85 10333.39 1081.40 2150.73 3873.22 5833.49 23926.00 26565.00 11.13 12.24 7.38

**0.67 0.93 -1.38 -1.04 -0.27 0.05 1.72 1.46 2.53 3.27 1.93

*21 Oct ** since 15 Oct

©BERND VOGEL/CORBIS

Oil price a threat to world economy

Best and worst-performing shares Winners

% change Price

23 October 2009

% change Price

Afprefinv (AFP)

21.50%

729c

Cenmag (CMG)

-25.00%

300c

Kiwara (KWR)

20.37%

650c

Compclear (CCL)

-20.69%

230c

Fairvest (FVT)

19.00%

119c

SovFood (SOV)

-19.84%

1010c

Dorbyl (DLV)

15.38%

450c

Sephaku (SEP)

-19.05%

340c

Grindrod (GND)

14.40%

1819c

CIC (CCI)

-9.68%

140c

Platmin (PLN)

13.40%

1100c

Eastplats (EPS)

-9.58%

538c

Afro-C (ACT)

12.58%

170c

Amaps (AMA)

-9.25%

157c

Zeder (ZED)

11.38%

186c

Ellies (ELI)

-8.82%

155c

PNR Food (PFG)

11.18%

3580c

Imperial (IPL)

-8.45%

7800c

Illovo (ILV)

10.15%

3635c

Trnshex (TSX)

-7.83%

365c

Weekly change to JSE stocks as 21 October 2009

4

Losers

the markets

“No other index has Dow Jones index captured the imagination of the public to the same 14000 degree” as America’s 13000 Dow Jones, says Ravi 12000 Nagarajan on Seekingalpha.com.

11000 Dating from the 1890s, it 10000 is the oldest index in the 9000 world’s leading 8000 stockmarket. Throw in people’s fascination with 7000 round numbers, and it’s no wonder bulls were ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 excited by the Dow’s Source: Source: The Wall Street Journal/ Standard & Poor's close above 10,000 last week. But it’s hardly the event, says Nagarajan. At present, notes first time. It first hit 10,000 in March Authers, IBM comprises 9% of the index.

1999 and has lost 23% since then in real Meanwhile ExxonMobil, which is six terms, says John Authers in the FT. times bigger than IBM in terms of market capitalisation, has a lower weighting And investors should note that the index thanks to its lower share price. is a narrow and “highly misleading” gauge of US market performance because So the US index to watch is the S&P 500 it is calculated in an “antiquated way”, where “the rally continues to move says Nagarajan. It contains just 30 further away from the fundamentals”, stocks chosen by a committee, and rather says David Rosenberg of Gluskin Sheff. than being weighted by market Banks worried about further losses aren’t capitalisation (the number of shares in lending. And with loan losses unlikely to issue multiplied by the share price), as peak until well into next year, the credit most indices now are, it is weighted by squeeze will endure, says The Economist. share price. So a firm with shares worth Consumers, with debts worth 129% of $100 has far more impact on the Dow disposable income, have only just started than one whose shares trade at $10. retrenching given unemployment is still on the rise. Even in mid-September the This makes little sense. In February five S&P’s p/e ratio (taking a ten-year average major firms in the Dow, including of earnings) was 35% above the longGeneral Electric and Citigroup, were term average. For now, easy money and trading at under $10 a share. Had they government spending are giving markets become worthless, the Dow would have momentum, but investors won’t be able fallen by just 200 points – vastly to ignore the poor backdrop forever. understating the actual impact of such an

While the overall market has rocketed, high-quality defensive stocks have been left behind. And there’s now another factor boosting their appeal: the renewed down trend in sterling, which has fallen to a fivemonth low in trade-weighted terms and a four-month low against the greenback.

Sterling matters because the market, as represented by the MSCI UK Index, receives just 35% of its revenues from Britain, according to Morgan Stanley’s Graham Secker. He also notes that stocks that report in dollars comprise 47% of market earnings and 45% of dividends. So a weak pound implies a boost to profits and payouts. In 2008 the pound averaged

Pharmaceuticals are looking cheap and cheerful $1.85, compared to $1.55 so far this year.

This 15% depreciation to date implies a 7% rise in UK earnings and dividends this year, says Secker. Major dollar reporters or earners include many of the defensive stocks MoneyWeek has highlighted this year, such as BP, Shell, GlaxoSmithKline and AstraZeneca. Pharmaceuticals are still looking especially cheap, says Tim Price of PFP Wealth Management. Meanwhile, Astra and Glaxo are on yields close to 5% and low price/earnings multiples.

Viewpoint

The big picture: public debt points to inflation

“[We] are unable to believe that the global crisis is but a painful memory… we expect trouble ahead… markets are back to picking up the proverbial nickels in front of steam rollers… If you pump enough liquidity into a corpse, it will get up and walk – pump in more still, and it will dance; that does not mean it has Fred Astaire’s career before it.”

Government debt across the Government debt (% of GDP) world is far higher than official Official Germany estimates suggest, says Dylan Unofficial Spain (including Grice of Société Générale. unfunded obligations) France Official figures don’t include the “eye-watering” cost of future Italy pension and health benefits UK they have promised their EU populations, for which no US money has been set aside. With 0% 250% 500% 750% population growth now Source: FT Source: Societe Generale/Jagadeesh Gokhale/OECD slowing, there are fewer workers per pensioner and these social programmes will cost multiples of expected tax revenues. Factor in these unfunded liabilities and public debt rockets, according to the Cato Institute’s Jagadeesh Gokhale. Expect governments to default by allowing inflation to let rip.

Eric Kraus of the Russia-based Nikitsky Fund

5

Weak pound boosts defensive stocks

©BLOOMBERG

Dow 10,000: why the fuss?

23 October 2009

the markets

Indonesia: from basket-case to solid Bric

©AFP/GETTY IMAGES

That bodes well for the long Just over a decade ago, term, and there are further Indonesia was considered “a reasons for optimism. Indonesia basket-case”, says The is resource-rich, with exports Economist. It faced economic including palm oil, cocoa, collapse after the Asian crisis coffee, coal and oil. Exposure to hammered companies regional heavyweights India and overexposed to foreign-currency China is increasing rapidly; in debt and caused the banking the first half of 2009, these system to implode. Meanwhile, countries accounted for 17% of political chaos also appeared on its total exports, compared to the cards. But now Indonesia 10% for the US, notes has become a “stable, largely Christopher Wood of CLSA. peaceful” democracy. It is also widely seen as an extra ‘I’ in The demographic outlook is the Bric (Brazil, Russia, India excellent too, with 44% of the and China) group of fast240 million population under growing emerging markets.

24. Further, more than 90% of Along with rising global risk The Jakarta Composite is Asia’s best-performing market this year these are literate, compared to appetite, this helps explain why 61% in India. And there is ample scope for Indonesia’s growing the Jakarta Composite index is Asia’s best-performing market middle class to boost consumption, not least because household this year, up 123% in dollar terms. debt is still just 11.4% of GDP, as Morgan Stanley points out.

President Susilo Bambang Yudhoyono has, helpfully, just been On the debit side of the ledger, corruption remains a major re-elected with a large majority, which gives him a mandate for headache, with Indonesia ranked behind Nigeria on further reforms. Since 2004, he has “managed to preserve Transparency International’s 2008 list, as Hutchinson notes. tranquility and pursued mostly free-market policies”, says “Petty protectionism and restrictive labour laws” are still driving Martin Hutchinson on Breakingviews.com. After rising by more too many firms away, says The Economist, and the than 5% a year in 2003-07, economic growth has dipped but is infrastructure is still very patchy – although now there is at least still expected to reach 4% in 2009 and climb next year. Indeed, plenty of money available to spend on it. only India and China are growing faster.

Indonesia is helped by the fact that, unlike in most Asian countries, growth is propelled largely by domestic demand – exports comprise just 25% of GDP. This appears to be picking up again, with bank loans up 14.6% year-on-year in July. Sound management over the past few years has also put the economy on a more solid footing. Keeping a tight lid on spending has helped lower debt quickly: public debt has fallen from 80% in 1999 to just over 30% by the end of last year. Companies have trimmed borrowings too: corporate debt is down from almost 50% of GDP to 15%. Lower debt has also reduced interest rates across the economy, cutting the cost of borrowing to invest.

But as David Stevenson points out in the FT, “there’s the prospect of sustainable long-term growth that is not reliant on monetary easing and low interest rates”. The local market is far from cheap, however, with forecast PE’s in the high teens. Like all risky assets it is vulnerable to a slide in Western indices if the recovery proves disappointing. Given this, Aberdeen’s Indonesia Fund looks the best of the few ways into this potential Bric country. It is listed on the US market (US: IF) and concentrates on companies with “Western-style” corporate governance, says Stevenson; top holdings include Unilever Indonesia. The fund is still good value on a 6% discount from its net asset value.

Diamonds regain lost lustre Diamonds are “the ultimate luxury good”, says Garry White in The Daily Telegraph. So it’s no wonder demand plunged when the global recession struck. Polished diamond prices fell by a third as world retail diamond sales fell by a similar amount. Rough diamond prices slid 65% in the six months to March. But the market now seems to have hit bottom.

According to De Beers, the largest rough-diamond producer, demand is rebounding; Rio Tinto has felt confident enough to raise prices recently. Meanwhile, polished prices have flattened out. Longer term, the outlook for diamond prices is positive. There have been no major diamond-mine discoveries since the 1990s and the easiest pickings are closest to the surface, so supply is constrained. Demand from industrialising Asia will rise along with the region’s wealth. For now, however, “it is America that counts”, because it consumes around half of the world’s polished diamonds, says Idexonline.com. Until the US market “heats up”, it’s hard to see much of a “catalyst” for higher prices. What’s more it’s likely to take US consumers some time to get back to their spending ways given their scant savings and heavy debt loads. So the likes of DiamondCorp (JSE:DMC) look worth tucking away, but may not tick up much for some time.

6

23 October 2009

Gold watch The dollar is “the main driver fuelling the run in commodities”, says MF Global’s Edward Meir. So it’s no wonder gold has stayed near last week’s record above $1,070 an ounce.

Jewellery buyers entering the market on dips are also helping gold to establish a new, higher trading range.

Only higher interest rates can prop up the dollar, and they won’t come soon, says Leonard Kaplan of Prospector Asset Management. Meanwhile, oil’s renewed uptick also points to inflation and is thus good news for gold.

sector of the week

Why you should bag junior gold miners Jim Slater, author of The Zulu Principle, says buy miners to profit from gold. prefer gold-mining stocks. After the financial crisis, gold benefited from its ‘safe haven’ status, but gold miners fell substantially as hedge funds were forced to sell mining shares to fund redemptions. So the gap between the gold price and gold-mining stock valuations (which are usually correlated) is wider than usual.

First, the US and UK authorities are printing money as if there was no tomorrow, so it is little wonder that both sterling and the dollar are weakening.

Although the immediate outlook is deflationary, this is likely to be followed by gold-friendly inflation as the moneyprinting continues. Unlike paper money, the supply of gold is very limited. All the gold ever mined could easily be fitted into two Olympic-sized swimming pools, and its supply can only increase as rapidly as miners get it out of the ground. That is becoming harder – most of the easily found high-grade gold has already been extracted, so future production will be more difficult and costly. Relative to paper money, gold’s value should keep rising. The world’s biggest gold miners agree with me. They have stopped hedging their forward production because they believe they will be able to command a better price in the future.

On the demand side, the Chinese are being actively encouraged by their government to buy physical gold and silver. China has only 1,054 tonnes of gold, accounting for just 2% of its foreign exchange reserves. It is very likely to buy more. In fact, central banks across the world, previously a major source of

©BLOOMBERG

I am not a gold bug, but I believe that, while there will be the occasional setback, the gold price is likely to keep rising.

Gold has been trading above $1,000 an ounce supply, are likely to become net buyers this year. While jewellery demand has slackened and scrap sales are up, this has been dwarfed by the 1,700 tonnes of gold purchased so far by investors through exchange-traded funds (ETFs). This strong investment demand should continue. Low interest rates mean that gold’s carrying cost (the cash return you sacrifice for holding it) is low. While at $1,060 an ounce the gold price may seem high, remember that it was $800 in 1980.

Since then, compared with copper, zinc and tin, it has been a laggard.

So how do you invest in gold? You could buy physical bullion, or use ETFs, but I

Also, gold miners offer leverage. A mine producing gold for $500 per ounce would double its profit if the gold price rose from say $1,000 to $1,500. Gold miners’ share prices outperform gold both on the way up and the way down.

A final reason for preferring gold mining stocks is that the market capitalisation of all of them put together is about the same as Wal-Mart’s. Most investment funds have only a very small percentage of gold shares in their portfolios. Imagine the effect if they raised this by even 1%.

So which mining stocks should you buy?

Junior gold miners are by far the best bet.

A company capitalised at say R100bn will find it much harder to double than a minnow. While a significant find might push a major’s share price up a few cents, a junior will often turn into a multi-bagger – many have already risen more than tenfold this year. Because of their size, juniors are also much more likely to be taken over. You can read about my favourite junior miners below.

The best bets in the sector Small companies are under-researched, so you are more likely to find a hidden gem. An excellent example is Norseman Gold (LSE: NGL) in western Australia, in which I have an interest of more than 4%. It has A$35m of cash, no debt and a very attractive price/cash-flow ratio (PCF) of about a third of the average of its peer group. Norseman has a mill working at only 60% of capacity with plans to bring two further mines on stream during the next two years, which could increase production from 80,000 oz a year to an eventual 140,000 oz. This would result in a reduction in costs of A$100 per ounce – A$14m a year. The higher production would also provide 75% more revenue. As Norseman already has such an attractive PCF this should bring about a significant rise in the share price.

Mistakes can be made with junior miners, so a spread is essential. I helped to found the Junior Mining Fund administered

by Marlborough and managed by Angelos Damaskos. It is

7

23 October 2009

investing 70% in gold, 10% in other precious metals, 10% in uranium and 10% in base metals. I have a 35% share in the management firm and a £3.5m stake in the fund.

Two further core holdings in the fund are Medusa (LSE: MML) and Centamin Egypt (LSE: CEY). Philippines-based Medusa has a very high-grade mine with enormous cash flow. The deposit is open to further discoveries and the company also has substantial copper deposits with hopes for Chinese involvement.

Centamin is about to be listed on the main market and should then compare very favourably with other fully listed companies.

I find it reassuring that the American investor, John Paulson, who anticipated the credit crunch so well, has 13% of Centamin in his fund, which is heavily invested in quoted gold-mining stocks. I like the company of very savvy investors.

You can read more from Jim at www.jimslater.org.uk.

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.

A tantalising company perfectly positioned to profit from expansion Tip of the week: “Spur looks like a good investment” – the Financial Mail As much as we all try to eat “healthily” and reduce our intake of saturated fat, who can resist pizza and a steak? We all have our vices when it comes to convenient food and Spur Corporation Limited (JSE: SUR) has this base well and truly covered.

Over 23 years ago, Spur listed on the JSE. Way back then, it only had 46 franchised Spur Steak Ranch outlets. Today, this has exploded into

over 240 Spur’s, 22 John Dory Fish & Grill outlets and 50 Panarottis Pizza Pasta restaurants.

And not just content with serving South Africans its goodies, Spur has now expanded into the international market.

This arm of the company now boasts 29 Spur’s and seven Panarottis.

Larry Claasen awards Spur the Ugly Duckling award in the Financial Mail. As Claasen highlights, “selling burgers and pizza to growing families is not the most sophisticated of business models, but it is one that works well for restaurant franchise group Spur”.

Regardless of how cash strapped consumers may be, Spur’s proven it’s perfectly positioned to profit from our desire to grab a quick

Gamble of the week: Esorfranki Limited (JSE:ESR) Can you believe there’s only nine months left until South Africa hosts the Soccer World Cup? Despite heckles from the naysayers, SA is frantically getting itself ready for the onset of thousands of fans and it looks like everything is on track.

So if you thought you’d missed the boat on capitalising on the football bonanza about to hit our shores – you’re wrong!

Construction related stocks starting to run a couple of years ago as a result of the massive infrastructure spend going on in SA, but then the markets crashed. And this crash now presents you with a fantastic opportunity to get into these stocks at knocked down prices – and still benefit from the building frenzy underway.

Esorfranki Limited (JSE: ESR) is one such stock. In November 2007, the share traded up to all-time highs of over 900c, before bouncing off 200c in March of this year. The share has now

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23 October 2009

bite to eat while we’re out and about.

Spur is now firmly focused on expansion out of South Africa. And, it’s certainly the best thing to do. With the South African market becoming saturated with the company’s offerings, this is the most lucrative way for the company to grow.

SA will still provide Spur with expansion opportunities, but at a slower pace.

Increasing its global footprint should also reap rewards.

started its recovery and is trading comfortably around 450c. And with the sheer magnitude of projects that Esorfranki has on the go, you’ll reap the rewards from getting into this share now.

But what exactly does Esorfranki do? It’s a specialist in geotechnical civil engineering. This type of engineering is concerned with underground planning and built structures, including culvert and pipe jacking, lateral support, ground anchors, tunnelling, underpinning and dewatering – to name a few!

The company debuted on the AltX in March 2006 as Esor, a construction company. Through its listing, it raised enough capital to buy Franki Africa, an established geotechnical contracting company. With over 60 years of experience, Franki Africa was a well trusted name, and in April this year, the decision was taken to change Esor’s name to Esorfranki.

Esorfranki has been one of the AltX’s most successful listings.

And in June this year, the company moved its listing on the JSE’s main board, proof of the quality of this firm.

who’s tipping what In the current financial year, Spur plans to open a minimum of 18 new restaurants, of which 15 are in SA. A new Spur outlet is being opened in the oil capital of the UK, Aberdeen. And two franchised outlets are opening in Dubai and Perth (Australia).

And it appears that many of us were trying to eat ourselves happy during the depth of the credit crunch! Spur’s latest full year results, to the end of June 2009 are clear testament to that. Revenue jumped 10.5%. Profits improved 14.2%.

And headline earnings per share rose 10.5%. Spur clearly thrived during the recent tough times and it’s set to do even better now that consumers are feeling the positive effects of interest rate cuts.

With those great results under its belt, Spur is also pleasing its shareholders with its generous dividends. The share is currently trading on a dividend yield of 5.26%! It just paid out a dividend of 28c per share. And if the results keep coming in like this, dividend payments should improve over time.

It seems that this trusted South African company is more robust than many of us first thought. Spur’s a buy at its current price of 1045c a share. But don’t wait too long to get your stake, it doesn’t look like it’s headed anywhere but up.

Buy. Recommendation: BUY at 1045c Market capitalisation: R1.020bn

Turkey of the week: “Not exactly greased lightning,” says Finweek When the market pulled the rug out from all and sundry, certain companies felt it harder than others.

When business is dependent on the success of other key industries, when productivity comes to a grinding halt, so does the business.

The slowdown in economic growth brought mining, motor manufacturing and industrials sectors quickly down with it.

If you’re in the unfortunate situation of supplying these businesses, you’re up the proverbial creek without a paddle. And this is exactly what’s happened to Spanjaard Limited (JSE: SPA).

Spanjaard came into fruition back in the 1960s as a manufacturer of special lubricants and chemical products for industrial, marine and domestic use. The company became the owner of Molyslip products in the late 60s, opening it up to a lucrative domestic and overseas market. Not content with this array of product, Spanjaard focuses on research and development, and continually strives to improve its current formulations.

In April 2007, Purple Capital purchased just shy of 30% of Spanjaard. But Purple doesn’t seem to have been able to inject much life into this illiquid counter just yet. Firstly, the timing wasn’t great, but it appears that it’s done little to kick start

So what’s Esorfranki involved in? As well as being a favourite contractor of government, its expertise has been applied to the Gautrain, piling projects at three major South African airports and piling at three of the World Cup stadiums. Recent developments include work on new power station projects and Transnet’s latest pipeline. But the company isn’t just limited to SA. It has various projects underway in Botswana, Mozambique, Tanzania, the Indian Ocean Islands and Angola. So Esorfranki is perfectly positioned to profit from the African infrastructure boom.

Esorfranki has always been firmly focused on acquiring niche companies. Over the years, they’ve done just that. This has shaped them into a one-stop shop for geotechnical services. And it’s not like the infrastructure spend is going to come to a grinding halt when the World Cup is finished. We have many years ahead of us of upgrading of road networks, power stations,

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23 October 2009

this company into life.

In Marc Hasenfuss’s scathing look at Spanjaard in Finweek, he highlights a few dire extracts from the company’s latest interim results, to 31 August 2009.

“Reduced interim turnover of R40m was whittled down to petty pre-tax profits of just R200,000. More serious was the R6m that flowed out of its cash flow statement, more than halving cash on hand to R5m.” Not pretty.

The big question now rests on whether Spanjaard has what it takes to get a recovery underway. As its key dependent industries start to stutter back to life, so should Spanjaard’s revenue streams.

But, with the stock completely illiquid, it’s going to take some doing for Spanjaard to rally up some interest.

Avoid for now.

Recommendation: Avoid Market capitalisation: R31.349m

and construction of office towers, apartments, hotels, etc.

The most recent results, to end of February 2009, were impressive.

Headline earnings per share increased 20% to 61c. The company has over R130m cash and is now putting a major focus on reducing its debt significantly.

Esorfranki is trading on a modest PE of 7.29 and has a fantastic dividend yield of 3.33%. At the beginning of October, the company sent out a trading update highlighting the fact that its headline earnings per share and earnings per share would be between 75% and 85% higher than the previous corresponding period.

Wow! Results are out at the beginning of November, so prepare for fantastic news! Esorfranki is currently a buy at 450c. Buy.

Recommendation: BUY at 450c Market capitalisation R1.360bn

best of the financial columnists

Wolfgang Munchau Financial Times

US healthcare should follow Singapore William McGurn The Wall Street Journal

State will be driven to act against banks Boris Johnson The Daily Telegraph

Now’s a good time to divorce Laura Staples The Spectator

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23 October 2009

We didn’t need to wait until the Dow Jones hit 10,000 to call the market bubble, says Wolfgang Munchau. My two favourite measures of stockmarket valuation decreed the US stockmarket was overvalued by 35%-40% back in September. The single reason for this bubble is the extremely low level of nominal interest rates, which have induced people to move into all kinds of risky assets, including property. And the reason rates are low is to prevent “damage to Europe’s chronically under-capitalised banking system”. So we are left with “two scenarios, or some combination of the two”. The first is that central banks, fearing rising inflation, shift rapidly to an aggressive monetary policy, triggering another fall in the price of risky assets. Alternatively, putting financial stability before price stability, they might keep the monetary floodgates open. That could cause “the mother of all financial market crises” – a bond market crash – followed by depression and deflation.

“In short, there is danger no matter how the central banks react.”

As the debate about US healthcare rumbles on, America stands to learn much from Singapore, a nation which already has universal coverage, says William McGurn. Both systems are a mix of public and private care and financing, but while Singaporeans spend about 4% of GDP on healthcare, the US spends 17%. Operations in Singapore cost around a third of what they do in the US, and yet Singapore scores better on many international health measures. The major difference is that the US system – from state regulations down to the “bureaucratic nightmare” of insurance claims – is far more complex. In Singapore, individual responsibility is key. Prices are kept down because all but the poorest have to pay for some of their care, and most employees contribute to a medical savings account which they control. So they are careful about spending it. The system isn’t perfect, but it suggests the “Average Joe stands to gain” from a system of hospitals and doctors competing for patients, price options, and patients having to pay for part of it.

How come the bankers whose risk-taking “triggered the recession” are suddenly lashing out on more “stuccoed schlosses in Notting Hill”? asks Boris Johnson. Savills says the number of buyers from the financial sector has risen by 48% in the third quarter ahead of “yet another ginormous Christmas bonus”. The decision to hand out bonuses instead of lending money to “liquidity-starved businesses” is unbelievable. “The only reason these bankers are still in jobs is because the taxpayer bailed out the system” and now hard-working people will be asked to work even longer and harder to pay for the crisis banks helped to cause. And banks can no longer “talk glibly” about free markets and the need for competitive salaries. Their idiocy almost brought the free market to its knees. “There is a huge divide between rich and poor in London.” The banks should find a way to show they “understand their duty to the wider community”. Or else, “public anger will rightly be irresistible and politicians will be driven to act”.

“Divorce is painful, but if you’re the breadwinner, now’s a good time to file proceedings,” says Laura Staples. The reasoning is simple, according to forensic accountant, John Frenkel. “If you’re going to have to hand over 50% of your assets to your soon-to-be ex-spouse, you might as well go for a clean break now, while asset values are depressed.” And a “tumultuous job market” means the breadwinner is more likely to keep capital in the family home so changing attitudes towards assets could also work in their favour. The husband (assuming he is the breadwinner) used to take more of the risk-based assets, such as stocks and shares, and the wife most of the cash and property. But uncertainty over future values mean that assets are increasingly divided equally by type in order to share risk. “Of course the psychology of the parties remains the same” (the breadwinner prefers the riskier assets, the homemaker the house), and this puts the breadwinner in a strong position to demand a discount for keeping the ‘riskier’ assets.

Money talk

© BBC PICTURES

The mother of all crises is still before us

“I don’t have a financial adviser, I’ve got a plethora of accountants, darling.”

Strictly Come Dancing judge Craig Revel Horwood, quoted in The Sunday Telegraph “I got in a cab in Glasgow years ago, and this quite surly cab driver says to me, ‘You’re that actor, aren’t you? You get paid to lie, don’t you? That’s what actors are, aren’t they? Professional bullsh****rs.’ It had quite an effect on me.”

Clive Owen, quoted on Sky News “I can’t afford couture clothes. I don’t know who can. I wouldn’t dream of spending £33,000 on a jacket.”

Joan Collins, quoted on Sky News “You know, Gordon, I should not like you.

You are Scottish, we have nothing in common and you are an economist.

But somehow, Gordon, I love you. But not in a sexual way.”

President Sarkozy to Gordon Brown, quoted in The Times “He was the biggest tightarse. He’s like an Irish potato famine miser.”

Peaches Geldof says her father Bob Geldof never gave her pocket money, quoted in The Sunday Times

investment strategy

Use option spread trades to boost profits

by Tim Bennett How does this work? If you get this bet wrong, your initial outlay is capped at the R2,000 you pay for the R25 call, less the R500 (50c times 1,000) you receive for selling the R29 call.

So that’s a maximum loss of R1,500. But you have also capped your profits. With the share price at say R30 when you sell the first option, you’d bank R3,500. However, you’ll need to buy back the option you wrote for 50c a share, which might cost you say R1.20 a share or R1,200. So, your total profit is limited to R3,500 minus R1,200, or R2,300. But that’s a decent return on an initial outlay of R1,500 – a gain of just over 153%.

Single options offer a quick way to make money from shares, but at the risk of losing your initial stake.

However, there’s a similar, cheaper and less risky way to profit with options – the spread trade.

How single options work

Other considerations ©PHOTOLIBRARY

Say you’ve bought a December call option when the share price was R26. An equity call option typically requires the buyer to pay an upfront, non-refundable premium, say R2 per share, for the right to buy 1,000 shares at a fixed strike price – say R25 – before the option expires. A month later the share price has hit R30. You could demand your 1,000 shares from the option seller for the agreed R25 each, then sell them on, banking R5 a share, or R5,000 in total. Knock off your up-front premium of R2,000 (1,000 x R2) and you’ve still made R3,000.

Alternatively, you could sell the option itself for say R5.50 a share and bank R3,500 (R5.50 minus R2 times 1,000). This higher profit arises because whoever buys the call option for R5.50 still has time (to the end of December) to make money if the share price keeps rising. Meanwhile, the original seller of the option is hoping you get the bet wrong, the share price falls and you abandon the option. That way they get to keep your R2,000 premium for doing very little.

Put options are similar except that the buyer pays a premium to bet on falling prices, and the seller takes the other side of the trade, hoping that prices will rise.

But – assuming you’re a bull – why not just buy the shares themselves? Well, because, for a start, it would mean shelling out R26,000 (1,000 shares at R26 a go) up front. Using a call option instead costs just R2,000 up front for exposure to the same 1,000 shares. And you can make bigger profits. Sell 1,000 shares for say R30, having paid R26, and you make R4 a share, or R4,000.

That’s a return of about 15% on your initial R26,000. By buying and selling the option you made R3,500, having invested R2,000, a 175% return.

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23 October 2009

Canny investors play one trade against another

“The spread trade is a simple, cheap way to profit with options” Of course, there’s a catch. Should the underlying share price fall, you would lose just some of your initial R26,000 if you bought the shares. But with options, you could lose all of your initial R2,000 – a 100% loss. That’s where spreads come in.

The bull call spread Let’s take the example above. As well as the R25 strike call, another option is available with a strike of R29, for a premium of just 50c a share. It’s much cheaper because the underlying share price has to rise from R26 to R29.50 before you break even (since at that price you could in theory demand 1,000 shares for R29, sell them all for R29.50 and recover your 50c outlay). So with a ‘bull call spread’ you can limit your potential losses. You still buy the R25 call option for R2, but you also sell the R29 call option for 50c a share.

Options are not just available on shares; they can also be bought or sold on indices such as the FTSE 100. But be aware that in all cases you will suffer a bid-to-offer spread on each option just as you do when you buy and sell shares. This will cut into your profit slightly. And like other forms of trading, options profits attract tax.

Also, because regulators view options as risky, you will need to jump through a few more administrative hoops to open an options trading account with a firm such as IG Index (igindex.co.uk).

Last, you don’t have to be a bull to profit from spread trades. Bears can put the same principles to work using a ‘bear put spread’. This time you pay for a put option – the right to sell shares – with a high strike price, and simultaneously sell an option on the same share (or index) with the same expiry date, but a lower strike price.

That way, should share prices rise rather than fall, you limit the initial outlay to the difference between the two premiums, and your maximum loss to the same amount. And if the underlying shares fall as you expect, your maximum profit – as a rule of thumb – is the distance between the two strike prices multiplied by 1,000 shares, less the net premium paid up-front.

personal view

British American Tobacco – A lighthouse in murky waters What I would invest in now

This week, Devin Shutte, an equities and derivatives trader at Newstrading, tells MoneyWeek where he would put his money.

With markets marching higher, valuations are currently stretched to accommodate higher prices. The market remains in two minds: Many of its proponents forecast an impending correction, while the other camp predicts markets will extend gains, albeit somewhat more cautiously. This polarity of opinion has produced heightened volatility across markets, as investors weigh up these views and attempt to forge a path forward.

Investors and traders alike are hard pressed to unearth stocks that offer value in a very trying (and unforgiving) landscape. As such, you need to make provision for as many eventualities as possible when entering a position. For example, the JSE is currently characterised by a strong rand, buoyant commodity prices and upward trending equities. Judging by the South African’s Reserve Bank’s rhetoric, we’re also at (or very near) the bottom of our interest rate cycle.

Against this backdrop, there are very few shares positioned to take advantage of the current conditions. One of them is British American Tobacco or BAT (JSE:BTI). This defensive heavyweight has huge global exposure and is one of the largest shares by market capitalisation on the JSE. BAT is well positioned to deliver value to its shareholders. Despite potential headwinds affecting its volumes, the group’s generated positive earnings momentum, with adjusted diluted earnings per share increasing 25% in the last set of interims. 60% of BAT’s income is generated from emerging markets, it’s strongly cash generative, has a solid balance sheet and has the capacity to cut costs in operations should the circumstances dictate.

These factors combine to not only give it superior prospects in the tobacco sector (which has high barriers of entry to begin with), but an ideal defensive play for investors in current market conditions.

Even in a global environment of ever tightening anti-smoking legislation, BAT has been able to grow its market share by driving its premium brands, fostering innovation and continuing to diversify its operations globally. It also stands to benefit from its greater emerging market exposure as these anti-smoking laws lag their developed counterparts.

The real sweetener though is the group’s dividend. The dividend yield on the JSE’s Top 40 companies has decreased almost 50% for the year to date. BAT, on the other hand, has doubled its distributions to shareholders over the last five years. With a current dividend yield of 5.3% and indications from forward dividend yields that this should improve when results are announced next February, this should provide investors with ample incentive to gain exposure to the company.

With its dual-listing in London, BATS also offers a hedge against a softer rand. With the local currency at its current lofty levels, the group will benefit from any rand weakness here on out.

With a price earnings multiple of 8.55 and a current price of R243.26, the company’s valuation isn’t overly demanding. BAT has strong support at the R220 level. So expect an upside break to a target of R255.

The share Devin likes: British American Tobacco

12mth high

12mth low

Now

R301.00

R197.50

R243.26

*Prices as at 21 October 2009

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23 October 2009

investment briefing

Why is al-Qaeda skint?

The US government has been attempting to starve terrorist groups of funds – with some success, it seems, in the case of al-Qaeda. Simon Wilson reports.

What does the US Department for Terrorist Financing do?

Persian Gulf kingdoms appear to be switching their investment to the more successful Afghan insurgency. The US and allies including Britain have made concerted efforts over the past year to cut off funds to the Taliban through military and intelligence-based action. But according to US government sources cited

by The New York Times this week, they have “barely made a dent”.

As the US Treasury’s David Cohen told a conference in Washington last week, “do not let my title fool you. Although I am the assistant secretary for terrorist financing, I am firmly against terrorist financing”. Cohen and his colleagues are tasked with formulating and co-ordinating the Treasury’s strategy for choking off the flow of money to terrorist organisations.

Their targets are the main sources of terrorist funding and their aim is “to put pressure on the assets of individuals and organisations” regarded by the US as suspected donors.

Who funds the Taliban?

©BLOOMBERG

As the insurgency has grown in strength in recent years, the Taliban has pursued a successful strategy of diversification.

“In the past there was kind of a feeling that all the money came from drugs,” said US special representative Richard What sort of pressure?

Holbrooke in June. But security analysts Official records show that the Treasury has now believe that foreign donations, rather ‘designated’ hundreds of people and organisations as ‘terrorist’. The prime The Taliban takes a 10% cut from poppy farmers than opium, are the Taliban’s biggest source of cash. According to intelligence objective is to bar them from the sources cited by The Washington Post last month, the CIA international banking system. By presidential order, the US estimates that Taliban leaders and their associates have freezes the assets of ‘designated’ financiers and stops Americans received $106m in the past year from foreign donors in the from doing business with them. Other governments and banks Middle East and Persian Gulf. These sources say there is no frequently follow suit. As it becomes harder for terrorists to get evidence that the Saudi, United Arab Emirates or other states funding via donations, they are forced into conventional crime – are providing direct financing for the Afghan insurgency. drugs, pirated films, music and software, extortion, arms Rather, the biggest contributors are said to be private citizens trafficking – in order to fund their campaigns. These activities from Saudi Arabia, the Persian Gulf states, Iran and Pakistan. make them more vulnerable to detection by international law enforcement agencies, who are helped by financial institutions on the look-out for money-laundering.

Is drugs money still important?

Very. Although the Koran forbids Muslims from producing or imbibing intoxicants and the Taliban even banned opiumIs this strategy successful? growing in 2000, the US-led invasion the following year resulted In the case of al-Qaeda, yes. According to security analysts, the in the reintroduction of opium in areas liberated from their rule. terror network led by Osama bin Laden is strapped for cash. So So once again Afghanistan accounts for the vast majority of the much so that it has been forced to make four separate appeals world’s opium production, and the Taliban (notwithstanding for money in the first half of this year. However, what isn’t clear religious scruples) are believed to make money at every stage. is how much of al-Qaeda’s financial troubles are down to US According to Cohen, the Taliban extort funds “from those pressure. In part, the funding crisis reflects the fact that its involved in the heroin trade by demanding ‘protection’ extreme ideology of global jihad is in decline throughout the payments from poppy farmers, drug lab operators and the Muslim world. And atrocities which often involve the deaths of smugglers who transport the large numbers of innocent chemicals into, and the heroin Muslims are widely seen as out of, the country”. A US ineffective. Further, many of its Senate Foreign Relations core leaders have been killed Could the Taliban run out of cash?

Committee report, published

by CIA officers and special From drugs at least, the Taliban’s future revenue streams look this August, says that the operations undertaken by ominously steady. According to a UN report published in typical levy on poppy farmers is Western powers. However, alAugust, opium-traffickers have stockpiled more than 10,000 10%. The Taliban collects the Qaeda’s decline contrasts with tonnes of the stuff, with a street value of billions of dollars. bulk of this through regular the fortunes of another major That’s enough to satisfy world demand for two years. So payments to leaders based in US foe – the Taliban. even if the US is successful in cutting off donations the border city of Quetta in altogether, the Taliban are likely to profit handsomely from Pakistan. Overall, the US Are the Taliban hard up? the drugs business for some time. Indeed, given the strength military thinks the Taliban On the contrary, they appear to of other revenue streams including donations, kidnapping make $70m a year from drugs – be the beneficiaries of alransoms and protection money, the Taliban – in contrast to althe UN reckons the figure is Qaeda’s decline. Traditional Qaeda – look capable of staying in rude financial health. closer to $100m. sources of terror funding in the 13

23 October 2009

opinion

The rich are spending millions on trinkets again – and that means stagflation You would tend to think that £60,000, or 726,000 Hong Kong dollars, is a lot to spend on a bottle of wine, even if it is 1982 Château Petrus, and even if the in Matthew Lynn bottle question contains six litres of wine rather than just one. Yet one buyer paid that price – a record for this particular wine – at a recent Hong Kong auction.

Global view

off memorabilia from her singing career.

Even the art market has recovered its verve. After going through a bubble as intense as anything that the banking industry experienced, it froze completely after Lehman Brothers collapsed, with sales down almost 80%. But even it has started to recover in recent weeks.

What the rich are doing with their cash is always instructive. After all, they are clever with money: if they weren’t, they wouldn’t have been able to accumulate so much of the stuff in the first place. So what does all this tell us about the world economy? Well, the booming luxury market tells us three main things.

and the banking bonus system back to its old ways, it’s not just that there is plenty of money around. Inflation is certain to make a return as well. The gold price is one clue to that.

Real assets are the one really safe place to park cash that you fear will be eroded by rising prices. Your money in the bank may gradually lose its value. But the bottles of fine wine in the cellar or the Chinese antiquities on display in the hallway will go up along with the general price level – and probably even faster. They aren’t growing any more 1982 Bordeaux and they aren’t making any more Ming vases. Like farmland, these are among the few investments where the supply is completely fixed: the only thing that varies is the demand.

And those assets survive inflation.

©BLOOMBERG

First, there is a lot of spare money This isn’t a one-off by any manner of splashing around (much of it in China, means. Right around the world, the which is where the really fancy prices are prices of rare, luxury and collectible items are starting to soar again. A Last, it tells us that the rich rare Ming dynasty Chenghua don’t have much faith in bowl sold this month for productive assets. They could $4.7m, while a large blue-andbe putting their money into white Qianlong moon flask new companies or venture went for $5.1m. An 8.74-carat funds seeding the industries of blue diamond just fetched the future. Instead, they are $5.7m, a record for a stone of bidding up the value of items that type. Classic cars are whose only real worth is their soaring in value: prices have scarcity value. risen by 60% since 2006, beating most other The world is awash with idle investments. In August, a factories. Real wages are 1938 Bugatti sold for $1.3m, stagnant in most of the and more than 15 classic cars developed world, and have fetched more than $1m consumers are over-indebted. so far this year, according to Share prices might be figures from the auction house A Ming vase is looking like a sounder investment than a factory rising for now, but it’s going Bonhams. to be very hard for corporate earnings being paid). The programmes of to keep pace with the expectations quantitative easing – which used to be Meanwhile, the prices of top-end London markets are now putting on them. The known as printing money – implemented houses, a market now largely the luxury boom suggests that the rich don’t by most of the world’s main central exclusive preserve of the world’s think there is much money to be made banks haven’t done very much to boost super–rich, are starting to look lively from stocks in the next few years, and bank lending or stimulate economic once again. Prices in central London have don’t want to tie up too much of their activity. But they have created a lot of now gone above their 2007 peak, reckons cash in them. spare cash that is now swirling around online estate agent Rightmove. That the financial system. The way the luxury surge is being led by buyers right at the Indeed, if you wanted to think of the market is booming again tells us that very top end of the market, drawn in by perfect investment for a world most of that newly minted money is the weakness of the pound. But just characterised by rising inflation and low likely to go into creating a series of miniabout anything with any kind of scarcity growth, you’d probably decide it was bubbles in asset prices – and very little of value or collectability seems to be soaring luxury collectible items. The rich have it is likely to go into reviving economies, in price right now. A clump of Elvis already figured that out. They are almost saving jobs, or creating new industries.

Presley’s hair, believed to have been shorn certainly right – and heck, if they are from the singer’s head when he joined the wrong, they’ll still have some decent wine Second, the rich are preparing for army in 1958, just sold for $15,000. in the cellar and some fine antiques to inflation. With interest rates at record Barbra Streisand has raised $600,000 for admire in the hallway. lows, stockmarkets recovering strongly, her charitable foundation by auctioning 14

23 October 2009

investing in property

Why invest in property at all

by Gary Booysen House prices aren’t bouncing back, says Absa’s senior property analyst Jacques du Toit. Plexus chairman, Prieur du Plessis, partially echoes this gloomy sentiment. He explains that while “economic indicators are showing improvement” they’re generally declining slower rather than showing an outright increase. So, we’re no longer plummeting, but we’re not coming back strongly either. Or are we?

Try telling that to Joan Muller at Fin24.

In her recent article entitled: “Buying frenzy at property sale,” she explains how on Tuesday “500 residential units were snapped up for a combined R163m in one of the biggest property liquidation sales ever to hit South African auctions floors.” Nothing goes down forever and “distressed property sales on auction floors are clearly luring investors back into residential property.”

Paul A. Samuelson famously pointed out that stock market has predicted nine out of the last five recessions.

Though not always 100% accurate, the stock market is one of the most powerful leading economic indicators known to man. It’s difficult to ignore the 45.93% rise in the All Share Index since the beginning of March.

Prieur du Plessis points out that the JSE SA Property Index has performed very poorly in 2009. In fact it’s lagging the

There is a great buying opportunity out there but it’s only for the wise. The economy is still in recession but it’s definitely time to turn bullish.

other indices significantly. With almost all other area’s of the JSE looking around fair value or even a little over bought, property is the last haven of good value.

Add to that the effects of the stimulus that the Reserve Bank has forced through the economy and you’re looking at some of the best buying conditions for property you’re likely to see in the next 10 years.

Heading JSE ALL SHARE INDEX

2006 41.2%

2007 19,2%

2008 -23.2%

YTD (16/10/09) 20.9%

JSE SWIX INDEX

39.3%

18.1%

-21.7%

19.8%

JSE FINANCIAL INDEX

35.8%

3.03%

-26.2%

20.5%

JSE INDUSTRIAL INDEX

41.9%

17.8%

-16.1%

21.5%

JSE RESOURCE INDEX

44.0%

29.1%

-28.3%

20.3%

JSE MINING INDEX

48.9%

28.4%

-30.4%

22.3% 16.7%

JSE GOLD MINING INDEX

17.5%

-20.6%

-1.6%

JSE SA PROPERTY INDEX

35.3%

18.2%

-11.1%

4.6%

JSE TOP 40 INDEX

40.9%

19.0%

-23.6%

20.1%

JSE MID CAP INDEX

43.1%

17.6%

-18.7%

27.1%

JSE SMALL CAP INDEX

44.1%

34.0%

-31.2%

17.2%

3 reasons why property is the best asset class Property has been a measure of wealth and power for centuries. From ancient kings and emperors to the modern day superelite, property has been sort by the rich and powerful. Here are three reasons why you should want likewise.

Reason #1: Stability Property has far less volatility than other assets. The reason: Many people don’t consider property an investment. It’s simply somewhere to live. If you take the stock market for example, when a share begins to perform poorly the result is exacerbated by momentum traders dumping stock. The first to get out save money. The last lose it all. Property isn’t as affected by this sort of speculation.

Reason #2: You can make money without doing anything Rental is an amazing form of passive income. The function of a building is to provide shelter. That is its “value added” to society. As long as you’re renting out your property you are generating real, quantifiable wealth. This is a far cry from picking up a couple of growth stocks and banking some capital gains only when someone else thinks that what you have is

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worth more. Property investment is not a zero sum game.

Reason #3: You’re protected from that old thief: Inflation So many fixed income investments pay the penalty over time. You trust your Retirement Annuity to hold its value through time but there are no guarantees the money will be worth anything when it comes to your golden years.

Take the generation of Americans that are being robbed of their retirement by conscious efforts of their government to devalue the currency. Of course, the US authorities willing to deny it but with national debt approaching $12trn, devaluation is the only sensible option. Property protects you from inflation. The passive income that your property is generating will appreciate year by year. Your rental income will keep pace with the times.

That means, if you need ten properties to generate enough money to maintain your current standard of living, in 20 years, the same will be true. Now that’s real peace of mind.

cover story

Is the drought over for agriculture stocks?

There is a second green revolution going on in agriculture. Eoin Gleeson looks at the latest developments – and how to buy a stake in their future.

On 26 February last year, the Svalbard Global Seed Vault opened for business.

Built by the Norwegian government on a remote outcrop of the Svalbard Archipelago, the underground complex was designed to preserve hundreds of thousands of seed types from across the globe. For months, ships from more than 100 countries docked to unload millions of seeds of remarkable diversity – more than 200,000 strains of wheat and 30,000 of corn are locked in a chamber deep beneath the Arctic tundra.

The Svalbard vault is a last line of defence for international seed banks.

It’s a sort of central bank for crops – one built to withstand a nuclear attack. The idea is that as national seed banks are run down in the wake of cropdestroying events, such as typhoons and mudslides, governments can rely on having their reserves replenished.

The Doomsday vault But the vault is also a testament to the problems global agriculture faces. The US Census Bureau estimates that the global population is growing by 75 million people a year. In the early 20th century,

farmers could keep pace with population growth by clearing vast tracts of forest and prairie to use as farmland. When the world began running short of new arable land, farmers found ways to increase harvests. In the 1960s, crop yields tripled with the adoption of new crop varieties, irrigation, fertiliser and pesticides, unleashing a ‘green revolution’.

That revolution is over. The world population has doubled to seven billion since the 1960s. But from 1990 to 2007, global agricultural productivity fell by around 1.1% a year. In India’s wheatgrowing regions, pesticides and fertiliser run-off have polluted up to 40% of the available water supply. In China, over-use of fertiliser has turned half the country into a dustbowl. In 2007, this pressure on the food chain reached breaking point.

As a mania for developing ethanol as biofuel took hold, the price of corn was driven to $8 a bushel, sparking food riots from Haiti to Bangladesh.

But hard lessons are being learned. The Svalbard vault is a start. The seeds kept there will be used to genetically engineer new crop varieties that can prosper in the most abject drought and pest-ridden environments. The already widespread adoption of genetically modified (GM)

crops in the US has helped alleviate fears of a peak in crop yield. Meanwhile, governments in developing countries are funding huge irrigation projects to improve farming quality. Burned by their experiment with ethanol, governments and big oil are developing a new generation of biofuels that won’t tip the world into mayhem when mass manufactured. What we are seeing now is the start of a second green revolution.

Genetically modified crops Last month, many people celebrated the life of Norman Borlaug. The Iowa-born plant scientist, who led the green revolution, died at the age of 95 on 12 September. His career as a globetrotting crop scientist began in 1944, when he left a steady job at Dupont to develop new strains of wheat that might stave off famine in poverty-stricken Mexico. After ten years stooped in baking Mexican grain fields, Borlaug developed a strain of wheat that, when properly charged with water and fertiliser, tripled crop yields. By 1956, Borlaug’s short- and strong-stemmed wheat had helped Mexico double production, making it self-sufficient. His wheat later swept across India, raising yields from 12 million tonnes in 1965 to 20 million by 1970, according to The Economist.

The most promising plays It’s been a gut-wrenching year for farmers amid falling profits, a total lack of credit and grim weather. That has hurt GM seed groups as farmers cut back on buying their seeds. Monsanto has just reported an overall quarterly loss of $233m. And its rival, Syngenta (NYSE: SYT), has fallen with it. But these pressures are easing. Grain prices have stabilised and farm profits are rising again as input costs have fallen. Syngenta’s largest source of income is in crop protection – from herbicides to insecticides. But it is also the third-biggest seed producer, with a 10% share of the market. Syngenta’s proprietary triple stack corn seed (seeds with three favourable traits built in) has just got approval from the US Environmental Protection Agency and could be a huge revenue earner.

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With volumes of its herbicides picking up, it looks a good bet on a forward p/e of 13.7.

But when it comes to boosting yield in the short term, we prefer fertiliser stocks. Potash Corp (NYSE: POT) remains a favourite play on recovering fertiliser demand. It’s up 40% since we tipped it in March, but has a stranglehold on the supply of this critical fertiliser and still looks worth buying. Closer to home, Omnia Holdings Limited (JSE: OMN) gives your excellent exposure to the fertiliser industry.

Another key ingredient for fertiliser is phosphate. Aim-listed Sunkar Resources (Aim: SKR) plans to source this raw material

©FRÉDÉRIC SOLTAN/CORBIS

cover story

India’s 235 million farmers are more vulnerable than most to changes in the weather It’s a romantic story – a lone scientist, tirelessly moving between poor countries to bring hope to impoverished farmers.

And the advances in farming techniques he inspired saved many from famine.

But there are serious limits to this type of farming. It has made farmers in much of the world dependent on fertiliser, pesticides and costly equipment. As the price of these has risen, small farmers have been edged out by big agribusinesses. These produce tracts of monoculture crops that are horribly prone to pests and diseases unless sprayed with vast amounts of pesticide.

could achieve in weeks what had taken him a decade of hard toil. And we are well past the stage of experimentation with GM crops – 95% of US sugar beet is now engineered to resist herbicide, notes Paul Voosen in The New York Times. GM pioneer Monsanto predicts that the yield from maize grown in the US, which has doubled since 1970, can double again by 2030. Cropnosis, an industry consultant, says the market for agricultural biotech grew from about $3bn in 2001 to over $6bn in 2006, and is expected to hit $8.4bn by 2011.

Borlaug had a solution – a ‘gene revolution’. He recognised that GM seeds

In the West, the biggest obstacle to the spread of GM crops is legislation. Europe

from the 800 million tonne Chilisai phosphate project in Kazakhstan. The stock jumped recently after reporting that pilot plant tests support commercial development of the project.

Chilisai should be able to produce phosphate for $120 a tonne and sell it for more than $300, says James Crux in Growth Company Investor. Phosphate sold for $1,200 in the boom years. Sunkar is set to produce 1.2 million tonnes of raw material this year, yielding 600,000 tonnes of phosphate.

Crux notes that revenues of $8m this year are expected to hit $67m next year and $228m in 2012, with a $10.5m profit seen next year.

Amiad Filtration (LSE: AFS) makes water filtration products for municipal water-treatment plants and for irrigation. The group is benefiting from government spending on infrastructure – pretax profits came in at $5.7m for the first six months of this year, despite weakness in its irrigation unit. Amiad is targeting India

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continues to rebuff efforts by biotech firms to boost yields because of concerns that they may contaminate nearby crops, or lead to a reduction in biodiversity. Borlaug dismissed such fears, believing the risks were unproven by science.

But even if GM crops are given free rein in the developing world, farmers may struggle to pay for the seeds. Pest-resistant GM cotton is already grown across India and China. But farmers struggling for credit have been cutting back even on the bare essentials. Fertiliser demand Continued overleaf

as its main area of growth for the year ahead and will rebound strongly once Indian, Japanese and Chinese farmers secure credit for irrigation systems. The £30m company is valued on a forward p/e of 7.7 and pays a 3.2% dividend.

There is still much work to be done before algae biofuel is viable on a commercial scale. But OriginOil (OTC BB: OOIL) could play a big part in getting there, says Nick Hodge of Green Chip Review. Most processes rely on harvesting the algae for their oil and waiting for a fresh batch to grow. Origin instead uses electrical pulses to get at oil inside algae without killing them, leaving them alive to produce more oil. This low-tech solution is cheaper than growing genetically engineered algae and could save 90% of the energy used in traditional methods.

There’s no doubt that it’s highly speculative. But it looks a good play on what is currently the most viable-looking biofuel in development.

cover story McCaskill of Chemical Market Associates.

Continued from previous page

underwent a 50-year slump in the year to June. When demand for crops begins to recover, it will be potash and phosphate fertilisers (see box on page 16), rather than GM crops, that farmers buy first.

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©MARI TEFRE/SVALBARD GLOBAL SEED VAULT

The ethanol craze illustrates that a biofuel is only as good as its feedstock. The use of corn and sugar in fuels drove up the cost of food by 75% worldwide, says the World Bank. In the aftermath, scientists have rushed to test a Irrigation bewildering range of feedstocks so All farmers are to some extent as not to repeat the mistake. hostages to the weather, but Experts think the 300,000 acres India’s 235 million farmers are of poppies in Afghanistan, for more vulnerable than most. instance, could produce 100,000 Without proper irrigation, 60% of tons of biodiesel – a poppy seed the country’s cropland is entirely The Svalbard seed vault: a last line of defence for our crops biodiesel plant is already running dependent on rainfall, and as credit tightened, governments and in Tasmania. And several garbage-tomonsoon rains are vital. In May, the power groups have stepped in to fund ethanol facilities have already been Meteorological Department forecast that huge water diversion projects. China is approved in Canada and America. rainfall this year would be 93% of normal levels. But when a major storm hit continuing its $62bn scheme to divert billions of tons of water from its central In fact, we’ve already seen three the Bay of Bengal in June, it disrupted and southern regions to the northern generations of feedstock used for biofuels. monsoon season – 44% less rain fell than provinces. Beijing has also promised The first generation consisted of other usual. More than half of the country’s $12.6bn in aid for its struggling farmers food crops, which disrupted the global 600 districts are struggling with drought, and will spend $2.9bn on rural water food supply. The second generation solved says The Economist. conservation under its stimulus plan, says the food problem, but used up too much the Associated Press. precious arable land – these included Meanwhile, decades of over-pumping switchgrass and miscanthus. Scaling up from underground supplies have left Meanwhile, India-focused Jain Irrigation these feedstocks is problematic because of many rural wells dry. In the 1970s, Systems, the world’s second-largest high water and fertiliser inputs. affordable water pumps allowed farmers irrigation firm, expects profits to double to pump water from local boreholes to Third-generation biofuels address both of water their crops. India is now the world’s this year as a result of a 30%-50% jump in sales of its drip-irrigation products. these problems. Most promising is pond biggest user of groundwater, with 20 These ‘micro-irrigation’ systems conserve scum. Algae’s photosynthetic cells million boreholes providing for 60% of water by letting it drip slowly from produce an oily goo that can be converted its irrigated land. But without expensive shallow tubes to the roots of plants, into advanced biofuels. They have several maintenance to prevent siltation in rather than flooding fields. key traits that make them a desirable reservoirs and leakage from canals, dams energy source, according to Amanda and irrigation wells, a huge amount of Irrigation isn’t a long-term fix. You can’t Leigh Mascarelli in the science journal scarce water is being wasted. India loses irrigate huge regions of farmland if you Nature. They can be grown on nonthe equivalent of two-thirds of the new don’t have the water to begin with. agricultural land in a fraction of the area storage it builds each year.

But it’s the kind of medium-term fix that needed by conventional crops, such as governments can really get behind, says corn and soybeans. The algae also capture It’s the same story in China. Humidity in carbon dioxide and can thrive in domestic the Bay of Bengal is the major rain source Jim Jubak on MSN Money. We have a look at two interesting plays on page 17. waste or salt water. for China too and the storm this year has spread drought across the country this The economic downturn has thwarted a year. Groundwater provides irrigation for Sustainable biofuels number of firms that were close to some 40% of China’s agricultural land, Sometimes it pays to sit and watch. according to Nina Brooks of the As George Bush was heralding ethanol as building their first algae processing plants. But earlier this year ExxonMobil Arlington Institute. Underground the cure for America’s oil addiction, a announced a $600m foray into the acquifiers are especially important in the sceptical Chinese government chose to sector. The partnership with Exxon and, arid North. But less than half of this wait. Beijing watched as scores of more recently, Dow Chemical, will go a water reaches the intended soil. The rest Midwest farmers diverted crops to long way to supporting a select group disappears via evaporation and leaks ethanol production and paid particular of algae firms. “This is the equivalent of in the neglected water system. And 53% attention when the price of corn the Queen’s blessing,” as Nick Hodge of China’s arable land lacks basic quadrupled to $8 a bushel. That’s when of Green Chip Review puts it. irrigation facilities, according to Xinhua they decided that this was not the According to a recent report by Pick News Agency. There’s a real need for alternative fuel for them. So they Research, algae-based biodiesel should Asian governments to spend billions of started developing methanol instead – a be commercially viable by 2012. dollars modernising irrigation systems, clear, liquid alcohol made from coal.

Investments in advanced biofuel reckons the UN. Already taxi and bus fleets in China’s processing plants will have reached major cities run on methanol blends, $3.2bn by then, say Pick. We look at The good news is this is now happening. with demand growing at a pace of 15%one algae newcomer on page 17.

While spending on irrigation fell last year 20% a year, according to Dave

the best blogs What the bloggers are saying

www.foreignpolicy.com The introduction of the American potato to Europe, then Asia and Africa, might have been one of “the most significant events in the history of human development”, according to a new study from Harvard University. Looking at population trends from 1700 (when the potato was introduced to the Old World) to 1900, they estimated that 12% of population growth, and 47% of the urbanisation, was directly potato-related.

So what makes the spud so powerful?

First, as the study’s co-author Nancy Qian explains, “If you needed to choose only one crop to survive on, the potato would be it.” It has every nutrient the human body craves, except vitamins A and D. So people “could survive indefinitely on only potatoes, milk, and a bit of sunlight”. Potatoes are also very hardy vegetables, and provide “much higher yields than crops such as corn and wheat, allowing countries to devote less space to farmland and more to cities and factories”. That’s why leaders from Frederick the Great to Ban Ki-moon have recognised the potato’s power and encouraged farmers to grow them.

And although its effect on population growth is less pronounced today, “the potato is still a potent weapon in the fight against malnutrition”. That’s why the United Nations declared 2008 to be the International Year of the Potato.

“And that’s no small fry.”

We love Ryanair – extra costs or not www.adamsmith.org “You have to be of a certain age to appreciate how Ryanair has transformed British air travel,” writes Nigel Hawkins. Those old enough to remember know that before the low-cost airline came along, passengers faced a Hobson’s choice if they wanted to visit somewhere like Poland. “I recall a standard £250 (late 1970s prices) return flight price being quoted from BA if you wished to fly to Warsaw – anywhere else was off the menu.”

©BLOOMBERG

What we owe to the potato

He transformed British air travel Sure, Ryanair adds extra costs to the basic airfare, but some of these are outside its control. Many others, such as the cost of putting baggage in the hold, can be avoided. And these are minor gripes given you can fly to far-flung spots at off-peak times for less money than a one-stop Tube ride costs. Little wonder a recent BBC “exposé” cut no ice with many viewers.

How airlines can deal with carbon www.technologyreview.com There are two ways the aviation industry can reduce greenhouse emissions, says Kevin Bullis. It can replace fossil fuels with biofuels like the car industry. Or it can redesign planes to make them more efficient – a much better option.

Existing biofuels, such as ethanol, won’t work in today’s aeroplanes – it doesn’t store enough energy and it introduces safety concerns because it’s much easier to ignite than jet fuel. And even a switch to advanced biofuels such as those produced from algae will only lead to a 5% reduction in carbon emissions by

2020. Meanwhile, 4%-5% more passengers want to fly each year.

Redesigning planes, on the other hand, could make aircraft about 20%-35% more efficient by 2020. The industry is already making great strides. The weight of planes is decreasing as, for example, heavy wiring is replaced with lighter fibre-optics. New engines run hotter and at higher pressures, so use less fuel. But long lead times on aircraft mean many of the gains won’t be felt for another ten years. In the meantime, airlines are best off buying carbon offsets and paying other industries to reduce emissions.

From the tip to the stockmarket www.reuters.com

“Russians are drinking a little bit more due to the crisis, and this helped me get out of the rubbish dump,” said Konovalov, an ex-engineer who has spent the last 20 years living in a tip.

The bearded former tramp said he was encouraged by his two grandchildren to take risks on the stockmarket. He took their advice – and his first deal was a €50,000 share-purchase.

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©MAXIM MARMUR/GETTY IMAGES

A 63-year-old homeless Russian man has gone from street life to stockmarket trading after collecting thousands of empty booze bottles for cash. “Pictured in a majestic purple suit and matching violet jewellery”, Leonid Konovalov told the Tvoi Den paper he collected around 2,000 bottles a day over the past year after Russians hit the bottle during the downturn.

obituary

Shy deal-maker who pioneered hostile M&A Bruce Wasserstein, the Wall Street legend, died last week, aged 61

©REBEL IMAGES/REX FEATURES

For a ‘barbarian’ worth more than $2bn, Bruce Wasserstein, chief executive and chairman of investment bank Lazard, had a fairly low-key lifestyle. He had expensive homes in New York city and the Hamptons, but he wasn’t one to “spend his evenings… amid New York’s glitterati”, as The Daily Telegraph put it. And his personal appearance – his yo-yoing weight, a dress sense often described as ‘crumpled’ – were ill-at-odds with the stereotype of the suave, designerlabeled banker. Indeed, says James Quinn in The Sunday Telegraph, he was “shy to the point that he would often not speak to employees in his own lifts if he didn’t know them”.

Yet Wasserstein, who died on Wednesday 14 October at the age of 61, was among the most ruthless deal-makers Wall Street has ever known. He pioneered the hostile takeover in the 1980s, and “reshaped the mergers and acquisitions (M&A) business into a high art”, says The New York Times. Over his career, Wasserstein was credited with having a hand in more than 1,000 deals worth more than $250bn in total. His best known was advising private-equity group Kohlberg Kravis Roberts on its $31.5bn takeover of food and tobacco conglomerate RJR Nabisco in 1989 (see box below). The deal was not surpassed in value terms until 2006.

What made him so successful? The clue was in his detested nickname ‘Bid-’em-up Bruce’. Wasserstein didn’t just act as

adviser on mergers. He would actively push chief executives to pounce on weakened rivals, and take on big risks and debts to secure their prize. If clients wavered, he would encourage them, “stroking their egos with what became known as his ‘Dare to be Great’ speech”, says The New York Times – a pep talk where he would argue that for a firm to become a global player, its boss would have to be bold and “pay the price”.

An academic prodigy, Wasserstein graduated from the University of Michigan aged 19, then attended both Harvard Law and Business schools, before coming to Britain on a fellowship to study merger law at Cambridge. He practised law for a short while before joining investment bank First Boston.

He and long-standing business partner Joseph Perella made their names in M&A there, before leaving in 1988 to set up their own boutique investment

bank Wasserstein Perella. Of course, M&A is notorious for destroying shareholder value, and while Wasserstein was the toast of the banking industry, he was also “the bane of many investors who found their interests sacrificed by empirebuilding executives”, says Rob Cox on Breakingviews.com.

When merger fever abated in the early 1990s, his deals were found to have left companies “soggy with debt and operationally doomed”. Many consigned him to “history’s dustbin”, says Karl Taro Greenfield in Portfolio magazine. Yet Wasserstein’s best deals – those he cut for himself – came “well after his reputation was in tatters”.

In 2000, he sold Wasserstein Perella to Dresdner Bank in 2000 for $1.6bn, pocketing $600m. In 2002, he joined Lazard, and after a high-profile struggle with then-chairman Michel David-Weill, took the bank public in 2005, raising $855m in the process.

Once asked why he kept working so hard, he said: “I never considered the alternative. That’s who I am.” Perhaps as a result, he had a turbulent personal life.

His first three marriages ended in divorce; he married his fourth wife Angela Chao earlier this year. He had seven children including the adopted daughter of his Pulitzer Prize-winning playwright sister, Wendy Wasserstein, who died in 2006.

Entrepreneurs will be back next week.

Wasserstein’s most notorious deals Bruce Wasserstein is perhaps most famous for KKR’s 1989 bid for RJR Nabisco. The deal was made notorious by the bestselling book Barbarians At The Gate, by investigative journalists Bryan Burrough and John Helyar. Of the $31.5bn purchase price, $30bn was funded by debt – at the time, the largest leveraged buyout ever. KKR managed to win a bidding war against a buyout proposed by RJR’s CEO Ross Johnson. KKR then had to mount a rescue capital injection, though it eventually made a profit. Wasserstein walked away with a $25m fee.

Wasserstein’s first major deal was in 1981. Oil group Conoco was finalising a merger with fellow oil company Cities Service

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Co when both drinks group Seagram and rival oil giant Mobil launched hostile bids for Conoco. Then chemicals group DuPont, advised by Wasserstein, joined the bidding. It bet correctly that its offer was more likely than Mobil’s to get past the competition authorities, and succeeded in completing what was then the biggest takeover – $7bn – in corporate history.

Other deals guided by Wasserstein included food and tobacco conglomerate Philip Morris’s $13bn purchase of food group Kraft in 1988. At the time of his death, he was advising Kraft Foods’ $16bn current unsolicited takeover of UK chocolate-maker Cadbury.

personal finance

Avoid the 4 deadly sins of credit

by Karin Iten 720. That’s the most important number you’ll ever need when it comes to your finances. Why? Because a credit score below that will mean you won’t qualify for the best credit rate out there. And that means you’re paying interest on the money you’re borrowing.

Deadly sin #4: Not using your credit facilities

This may sound strange, but to get a good credit score you actually need to use your credit. Let’s say you have a credit facility of R20,000 on your credit card and you’re only using R6,000 of this facility (in other words, this is the balance on your credit card). If you apply for a But have you ever wondered bond, for example, the what decisions make a big bank will check with the impact on your credit score?

National Credit Register Cast your eye down the page. to find out how much Have you ever made one (or money you potentially more) of these costly credit owe. It won’t look at how Paying the bare minimum? It could take you up to 25 years to pay mistakes without even much you actually owe – back your credit card debt knowing it? Chances are, you but how much credit you have. But before you get into a panic can potentially get – in this case How to fix it: If you’re already carrying and let someone fool you into thinking R20,000. So it doesn’t matter whether a balance, look for ways to step up you need to hire a professional to help you’ve never actually used the full payments. Talk to your bank manager repair your credit, remember this, amount, what matters is that you have about the options open to you and, if all fixing credit sins is easier than you access to it. else fails, consider taking out a loan to think… pay the debt off. (At least this way, How to fix it: Reduce your credit limit to you’ll be paying off the same amount at slightly more than what you expect to a much smaller interest rate.)

Deadly sin #1: Not using credit to need each month. Say, for example, you negotiate the best deals spend an average of R4,000 on your A high credit score can be an incredible Deadly sin #3: Excessively shopping credit card each month, ask your bank negotiation tool. So don’t forget to for credit to cap your limit at R5,500. This gives check your credit score before a major Every time you fill out a credit you a bit of leeway for unexpected purchase to see exactly where you application, you give the credit provider expenses but still shows potential stand. This way, you’ll be able to permission to access your credit report. lenders you aren’t drowning under huge negotiate reduced prices on car and home When they do, your credit report stores debt repayments. loans, as well as credit cards and this information as an “enquiry” for insurance policies by leveraging your 24 months. Doesn’t sound too hectic credit scores. does it? But according to credit guru Michael Bouchier “it’s a statistical fact 5 strategies to improve your How to fix it: Apply for a free report at that consumers who have more rating! www.mycredit.co.za. If your credit rating enquiries are higher credit risks than is less than ideal, work on raising it consumers with fewer enquiries.” For 1. Make loan payments on time and before you apply for more credit. Check this reason, the more enquiries you for the correct amount. out the box at the end of the article to have, the more points you’ll lose on 2. Never ignore overdue bills. If you discover five ways to do just that. your credit score. encounter any problems repaying your debt, call your creditor to How to fix it: If you aren’t applying make repayment arrangements.

Deadly sin #2: Only paying off the for a big amount (like vehicle financing 3. Make sure you don’t have a credit minimum or a home loan), ask your bank to card from a financing company, As a card holder, minimum monthly up your credit limit instead. If you’ve as this can negatively affect your payments are your enemy. Consider this: been a good client – paying back what score.

A fairly typical household with R6,600 you owe with plenty of time to spare – 4. Open numerous store accounts of credit card debt making minimum they should be more than happy to and be sure to pay these accounts monthly payments would take over negotiate with you. And try not to on time – this can dramatically 25 years to pay off their balance – and have more than three enquiries every increase your rating! that's with a decent interest rate! If six months. If you do, lenders will 5. Keep your outstanding debt as you’re only paying the bare minimum, think you’re a frivolous spender and low as you can. Continually “it's nearly impossible to make a dent in they’ll be more likely to turn you extending your credit is viewed your debt,” says money management down. poorly. guru Janna Weiss.

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profile This week: Raj Rajaratnam

When Raj Rajaratnam launched his hedge fund Galleon Technologies in 1997, he told a journalist “only the paranoid survive”, says the FT. He should have watched his back more carefully. Last week the Sri Lanka-born hedgie was arrested at dawn at his Manhattan home and charged with running the biggest insider-trading scheme yet seen involving a hedge fund.

of a 2001 book The New Investment Superstars. His rise from humble technology analyst to hedge-fund billionaire (Forbes puts his net worth this year at $1.3bn and he is claimed to be the richest Sri Lankan in the world) was certainly impressive, says The Guardian.

Until his arrest Rajaratnam was living in a $10m condo with his wife, three children and two elderly parents.

News of Rajaratnam’s arrest “has shaken the secretive hedge-fund world”, in which intelligence on companies is often shared among Wall Street analysts, traders and other investors, says The New York Times. The investigation made extensive use of wire taps, tactics long used to tackle mobsters and drug gangs. The defendants, who include corporate insiders at Google, IBM and Intel (see box), operated in “a cosy world of you scratch my back, I’ll scratch yours”, claimed a prosecuting attorney.

Rajaratnam built himself up as a market genius, impressing Wall Street for years with his talent for picking high-flying tech stocks. But it seems he is not so much a master of the universe as “a master of the Rolodex”.

He had a pretty good start in life, says the Asian Tribune. Born into a wealthy Tamil family – his father ran the Asian operations for sewing-machine-maker Singer – Rajaratnam was sent to school in Britain and later studied engineering at the University of Sussex. After taking an MBA from Wharton in the US, he joined the investment boutique Needham & Co, rising to become president in 1991. The internet boom hit full swing and he left the bank in 1997, taking its tech hedge fund – renamed Galleon – with him. Rajaratnam’s returns were always enviable. In the years to 2008, Galleon boasted an annualised return of 23%, and he was credited with considerable nous when it came to market-timing. In 2000, when the average tech sector fund bombed 33%, his fund gained 16%.

Rajaratnam, 52, attributes his success to being hungrier than everyone else. “After a while, money is not my motivation...

Taking calculated risks gets my adrenaline pumping,” he told the author

Rajaratnam always remained close to his homeland – too close some would say, according to The Wall Street Journal. In

©BLOOMBERG

The downfall of a hedge fund billionaire

2007, he was involved in a criminal complaint about fundraising for the Tamil Tigers, though he was never charged. A noted philanthropist (he gave millions when the 2004 tsunami struck), Rajaratnam has never denied funding his own people, says the Asian Tribune.

His arrest has “hit Sri Lanka like a thunderbolt”, triggering panic among the many high-level politicians and business tycoons now “under a cloud of involvement with him”, says Transcurrents.com. Rajaratnam’s tentacles stretch everywhere: he is the single largest foreign investor in Sri Lanka’s stockmarket, with stakes in all ten top-listed companies, and has links to several cabinet ministers. So the question on everyone’s lips in Colombo this week was: who’s next?

The fraud that led to his arrest Rajaratnam is charged with 13 criminal counts of fraud and conspiracy. He is accused of making at least $20m via illegal tips from senior sources inside companies including Google, IBM, Intel and the Hilton hotel group. According to court documents, it was a suspicious trade involving Hilton shares that got the investigation going, reports the FT. The US SEC was alerted when a single US trader netted $630,000 on Hilton options after Blackstone announced a takeover of the hotel group. Two weeks later, the same trader took home $500,000 when Google announced poor earnings. Within four months, the authorities were so hot on the trail that “the trader agreed to flip and tell all”.

Privileged information obtained by Rajaratnam’s “gang” – which also included a McKinsey director and two executives from fund

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manager New Castle Funds – typically related to forthcoming deals, says The Guardian. A tip-off about an Intel investment in Clearwire, an internet service provider, allowed Galleon to make a quick $579,000 profit; the Hilton deal yielded some $4m. Overall, Rajaratnam’s extensive network of cronies guaranteed him “a sneak preview of market-making events”. He was careful to avoid leaving an email trail, little suspecting that the Feds were tapping his mobile phone.

Insider trading is said to be rampant among hedge funds, says the FT. This case, perhaps the first of many, represents “a significant ramping up” of the US commitment to tackle it. As New York federal prosecutor Preet Bharara sums it up: this case “should be a wake-up call for Wall Street”.

Spending it Travel

Why the Global recession could slash the cost of your holiday this December by as much as 70% If you’re thinking of staying home this Christmas – don’t! There’s never been a better time to travel. The current recession has left the tourism industry floundering for customers. And that means in some cases the cost of travel has dropped by as much as 70%.

The hotel industry has been hit by falling occupancy and revenue numbers, value-added promotions such as third-night-free packages are fast becoming the norm.

Protea Hotels are running specials for as little as R295 per person per night. By joining hotel loyalty programmes, hotel costs can be lowered. Marriott Rewards gives 10 points for each dollar (R7) you spend at most of its hotels (a R1,750 room will net you 2,500 points). While InterContinental will reward you with 2,000 points per visit, regardless of how long you stay.

Cruises have also become one of the most cost-effective ways to travel. In the last 12 months prices have dropped by about 30%. If a 30% discount isn’t enough to give you your sea legs then there’s never been a better time to get discounted plane tickets. Airlines are struggling to meet their “quotas”. 2010 will see a lot of airlines closing down or at the very least restricting their routes. By booking flights through 1time and Kulula.com you can qualify for discounts of between 20% and 45% on rates from Avis, Southern Sun hotels and City Lodge.

Visit Protea Hotel at: http://www.proteahotels.com/specials/all_specials.html.

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Visit www.pointmaven.com where you can search hotels according to destinations and get information on the different loyalty programmes available.

Starlight Cruises is currently offering fantastic specials: Honeymooners get a 10% discount plus a free upgrade, while pensioners qualify for a 20% discount for a 2 to 4-night cruise.

Get the most competitive prices through these two price comparison sites: http://www.travelo city.com/Cruises and http://www.cruise pricescompared.com.

Use www.travelstart.co.za to compare dozens of ticket prices in just a few moments.

What the travel writers are saying

If you visit New York, book a suite at the RitzCarlton, says Anne Robinson in The Daily Telegraph. It’s “sophisticated, with quiet rooms, good food and brilliant service.” If you book a suite, then you get access to the Club Lounge, where you can “graze all day” on free food. “I pay a ridiculous price just so I can have free smoked salmon sandwiches.” Suites cost from $1,395 per night, see Ritzcarlton.com.

With ski season almost upon us, it’s time to book your break. If you fancy trying somewhere new this year, then Condé Nast Traveller has recommended three resorts that are “off the beaten track”. Veysonnaz in Switzerland “offers all of Verbier’s skiing without the razzmatazz,” and in the morning you can reach the top slopes long before the Verbier crowds. Stay at the new, Asian-style chalet Hidden Dragon (Hidden-dragon.com), which sleeps 12 and costs R288,000 per week, including a chef.

23 October 2009

©BBC PICTURES

My dream holiday

Foodies should head to San Cassiano and Corvara in Italy. “These two villages in the Dolomites have the region’s highest concentration of gourmet restaurants”. The Rifugio Scotoni is an excellent choice for lunch. Stay at the new Lagacio Mountain Resident (Lagacio.com), with an apartment for two costing from €180 (R1,973) per night. Or for something completely different, visit Yabuli in China. This ski resort covers 50 hectares and features a heated gondola service that will whip you up the mountain in just seven minutes. The Sun Mountain Lodge (Melcochinaresorts.com) offers a limousine pick-up service from Harbin or Mudanjiang City airports. Doubles cost from $200.

cars

McClaren’s 320km/h supercar “The McLaren F1 was the greatest road car of all time,” says Top Gear. “Now, its successor, the MP4-12C, has arrived. You should be excited.” The mid-engined car is powered by an all-new, 3.8-litre, twin-turbo V8, which produces 600bhp. Expect a 0-100km/h time near three seconds and a top speed in excess of 320km/h. Prices will be from R1.6m to R2.2m when it goes on sale in 2011. Compared with the old F1, that’s “a bargain”. It’s basically all the best bits of the F1 wrapped up in a car you can actually use on the road, says Joseph Dunn in The Sunday Times. It will be “the final word in supercar excess”.

The interior has a futuristic feel, says Dunn, and has all modern creature comforts, including a wi-fi connection.

There are supercar touches such as gullwing doors, but the looks are otherwise clean and simple, says Top Gear.

Wine of the week: a wine named after a stamp and a post office Wine: Post House Penny Black 2006 R130 at exclusive wine retailers Post House Cellars derives its name from the small Post Office which used to serve as the local missionary to the community of Raithby – between Stellenbosch and Somerset West. It’s since become the winery office and residence. I don’t think I need to explain

by Marilyn Cooper the origin of the Penny Black. Anyone who’s collected South African stamps will know what I’m talking about.

This wine is a blend of all sorts of varieties, but the whole is far better than its bits. It’s an extremely dark, inky-black colour,

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because of its youth. But after the enticing nose of fynbos, pepper, spice and floral aromas, the palate is quite a delight – an elegant, full bodied, ripe, fruitcake palate with firm but supple tannins. It will definitely age – at least eight years.

Nick Gebers is quite specific with his food matches – Try Caerphilly and a Red Leicester cheese, or serve with rare roast beef, rack of lamb, Proscuitto ham, Irish stew, duck and steak and kidney pudding.

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

blowing it

Eskom predicted to be R122 billion short proposed tariff hikes unreasonable, is a largely selfinflicted economic blow of staggering proportions. Our economy at large and the creation of new jobs in particular will suffer dramatically.”

Through market volatility and uncertain times, the one thing we can rely on is that Eskom blunders will be the headline of most newspaper. This week is no different...

Eskom’s latest plan to triple the price of electricity over the next three years is an attempt to avoid following in last year’s financial footsteps, when they finished the fiscal year at a R9.7-bn loss.

"It's a painful adjustment, but an unavoidable adjustment for a sustainable and secure future," said Eskom CEO Jacob Maroga. But even with the potential rate hikes, it is predicted Eskom will still be facing a shortfall of R63.3bn in the three years to 2013. Eskom's total shortfall for the six years from 2009/10 to 2014/15 is predicted to be R122bn.

The electricity increase comes when January 2008 nationwide power failures are still fresh in all South Africans’ minds. Eskom needs R385-bn to build new power stations. Due to concerns around electricity supply, Eskom has

been forced to abandon their R24-bn Coega aluminium smelter project near Port Elizabeth. A joint statement was released: "We acknowledge that although some progress was made in discussions regarding the supply of electricity to the Coega aluminium smelter project, it was insufficient to proceed."

DA shadow minister for trade and industry, Kobus Marais blamed the government: "The decision by Rio Tinto to scrap its plans because Eskom's electricity supply is unreliable and its

He explained: "If Rio Tinto's decision becomes a yardstick against which other potential international investors gauge the economic climate in South Africa, there could be further consequences for other projects involving direct foreign investment.”

Marais explained with the cost of the R64 billion loaned to Eskom and the costs of Rio Tinto's decision, Eskom’s mismanagement has just cost South Africa billions. "Our entire budget deficit is in the region of R200bn. No doubt it could be halved had Eskom been properly managed. It is an indictment; the impact will be felt, especially those in Port Elizabeth and surrounds, who would have been looking to the smelter for new jobs," he said.

Pointers for the South African government...

Radical Mayor cutting the fat from local government What a brave lot the people of Doncaster, Britain are. Four months ago they elected, as executive mayor, a retired schoolmaster called Peter Davies, who belongs to a tiny and obscure political party, the English Democrats. Mr Davies has no time for conventional politics. He does not, I would guess, read The Guardian over breakfast.

His approach to local government, in short, is truly revolutionary: he believes it should be efficient and cost as little as possible.

Davies’ first priority was saving money. First to go was half his own salary. Within a week of taking office, he’d cut it back from £73,000 to £30,000 (R887,336 to R364,590). He’d also scrapped the mayoral limousine and abolished the council’s free newspaper. He wrote to the Electoral Commission asking them to scrap two thirds of Doncaster’s 63 council seats so he could save the town £800,000 (R9.7m) a year. “If Pittsburgh can manage with nine councillors, why do we need 63? They each get a basic salary of £12,590 [R153,054] and we have only eight council meetings a year.”

Nor is Mr Davies a fan of what he scathingly calls “green

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claptrap”. He must be the only mayor in Britain who actually wants more traffic in his town, and has announced an end to bus only routes. “Like it or not, we live in the age of the car,” he told the Daily Mail.

He doesn’t believe in overpaying staff. Any new chief executive in Doncaster will have to take half the £175,000 (R2.1m) salary of the current incumbent. Twinning, in his book, is just an excuse for councillors to have jaunts abroad, so Doncaster won’t be twinned with anywhere. He’s scrapped the local Gay Pride march because he says it shouldn’t be funded by the taxpayer, and council translation services on the grounds that if people choose to live in England they should learn English.

And so it goes on.

What’s he like? Hardman found him a “bluff but canny operator, sitting in a spectacularly drab Sixties office block that once housed the Coal Board”. His views are robust, a touch too robust for most of us: he believes in the birch and the noose, and thinks the Taliban could teach us a thing or two about family values. But while his views may be unfashionable, he would point out that he’s not a government minister. He’s a practical, straight-talking Yorkshireman elected to make Doncaster work after decades of Labour corruption. You never know, he might just manage it.

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

PUNTS Company

Media

Reason

Current price

Paladin Capital (PLD) Speciality Finance

Financial Mail

Sasha Planting of the Financial Mail believes this speciality financier is looking good. Paladin Capital turned profitable in July. But it’s only recently been listed as an investment vehicle of the stalwart PSG. It sits on a portfolio of 13 investments in a range of industries from private schools to mining, tank construction and black economic empowerment investment.

Jamie Carr reckons “Taking a nibble now means the punter can get in at a small discount to an NAV that has been written down to reflect recent economic turmoil.” Buy.

147c

“People don’t just stop smoking so it’s a very good defensive play.” That’s why Charl Bester at Kruger International believes British American Tobacco is a winner. He refers to it as the stock he’d pick for his mother. “This market has run very hard so you need to look for companies where you can see some predictability in future earnings.” It has good exposure in the emerging markets as well as a solid presence in the first world.

Buy.

24326c

“On the principle that the time to buy value is when a company is being battered and its outlook isn’t particularly good, Argent is worth investigating,” says Shaun Harris of Finweek. Two factors that have forced down its price are the steel price and the fact that Argent is a small cap. Add to that a dismal trading statement has spooked investors and you have a prime candidate for a little value shopping. Argent aims its products at the consumer market. When the market turns this share has every possibility of doubling its price. Buy.

879c

Warwick Lucas at Imara SP Reid says it’s unclear why this stock has suddenly given ground. He does remind us that its not so long ago that MD Alan Burke was an insatiable buyer. “We know that clueless old Eskom needs to upgrade infrastructure, and the scuttlebutt from various sources is that they haven't been nearly as busy buying as one might have expected.” At its current level it’s worth the punt. Buy.

205c

British American Tobacco (BTI) Tobacco

Argent (ART) General Industry

Summit TV, Charl Bester, Kruger International

Finweek

Arb Holdings (ARH) Imara SP Reid Electrical equipment

Data Vendor Company

Contacts

Dealings

Services

Profile

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23 October 2009

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

Company

Media

Allied Technologies (ALT) Fixed line telecoms

Summit TV, Jonathan Fisher, PSG Konsult

Reason

Current price

Jonathan Fisher at PSG Konsult likes Altech. It’s a company that’s in the telecommunications and IT space - they design and manufacture certain products for that infrastructure. Netstar, the vehicle tracking system, and Altech Autopage Cellular are just two of the names in it’s stable. The big growth area is Kenya Data Networks (KDN) where it owns 61%. It lays fibre optic cable throughout Kenya and other East African countries. It also has that essential link to the Seacom cable. Buy.

7600c

DOGS Company

Media Financial Mail

Iquad (IQG) AltX

Reason

Current price

Larry Claasen isn’t prepared to wait around for this one to pick up. Its primary business is advising businesses how to access government’s incentive schemes. “It is a function of the general economy, so when that starts to lift, so should its numbers.”

He’s convinced South Africa’s recovery is far enough away to warrant investment elsewhere. Avoid.

235c

Reason

Current price

WATCHLIST Company

Media

Spanjaard (SPA) Speciality Chemicals

Finweek

Jamie Carr thinks “it’s all getting a bit like the final scenes of Gladiator, as the Spanjaard gets a low blow that puts the kibosh on what had been a tidy recovery.” The lubricant supplier was heading in the right direction. Weakening conditions in the local mining and industrial sectors have knocked it off course.

Hold.

385c

SecureData (SDH) Computer services

Financial Mail

Larry Claasen at the Financial Mail says SecureData has knocked by a foreign exchange loss but other than that it’s looking healthier. Revenue is up 71% and operating profit has increased 57%. But it’s best to wait and see what happens. Hold.

70c

Trans Hex Group Limited (TSX) Diamonds

Imara SP Reid

De Beer’s Chairman Nicky Oppenheimer has said demand for diamonds was "most probably" outstripping supply. This is especially true when considering Asia. The demand from China and India has significantly improved. Despite the improvement in the diamond market, Imara analyst Percy Takunda warns about exposure to Angola. Hold.

365c

Nefarious conditions at Insimbi’s nonferrous, foundry and steel divisions have had a serious impact on the bottom line. Sasha Planting of the Financial Mail doesn’t think conditions are likely to improve in the near future but leaves her signal unchanged.

Hold

75c

Insimbi Refractory & Alloy Sup (ISB) AltX

Financial Mail

**Closing prices as at 21 October 2009

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23 October 2009

last word

Do nothing, and order will prevail What we can learn from 1920s president Warren Harding strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity […] it will be an example to stimulate thrift and economy in private life. Let us call […] for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic.”

“He who goes a’borrowing, goes a’sorrowing.” The quote comes from Ben Franklin. But it was recalled to us neither by America’s president, nor Britain’s prime minister. Instead, The Daily Telegraph reported it from the mouth of Cheng Siwei, a “top member of the Communist hierarchy” in China.

Bill Bonner

What goes around, comes around. The Anglo-Saxons have forgotten what makes a successful economy. The Chinese have remembered. Just look up Warren Harding on Wikipedia. The first entry you will find is not the 29th president of the United States of America, but a rock climber with the same name. But what do you expect?

History is nothing but a long list of disasters in chronological order.

Historians love calamity. And they reserve their highest accolades for those who cause them. The same is true in financial history. Those who make it big are those who make it worse.

By the time Harding took office in 1921, the Panic of 1920 was taking the unemployment rate from 4% to nearly 12%. GDP fell 17%. Then, as now, the president’s subordinates urged him to intervene. Secretary of Commerce Herbert Hoover wanted to meddle – as he would ten years later. But Harding resisted. No bail-outs. No stimulus. No monetary policy. No fiscal policy.

Harding had a better approach; he cut government spending and went out to play poker. He said: “We will attempt intelligent and courageous deflation, and 28

23 October 2009

Warren Harding may never have been the brightest bulb on the White House porch, but intuitively he understood that proper macro-economic policies were more the product of virtue than genius.

Debt led to trouble; that’s all he needed to know. Keynes came along a few years later. He was a genius; everybody said so. And he had an answer for everything.

Nature? Government could do better.

Debt? Without government intervention, it will only get worse, said Keynes.

©GETTY IMAGES

It’s safe to assume that no one working at the Federal Reserve or at the White House has a picture of Warren Gamaliel Harding over his desk. Yet, if American presidents were ranked on the basis of how well they faced up to financial disaster, Harding might be a somebody.

His handsome face would be carved on Rushmore; his likeness would grace the reflecting pool. Harding was the last American president to deal honestly with a major financial crisis. Every president since has tried to scam his way out of it.

observed: “Good order results spontaneously when things are let alone.” Later, economists of the Scottish Enlightenment, notably Adam Smith and Adam Ferguson, elaborated. Smith, like Harding, saw the economy ordered by the invisible hand of God. Ferguson saw markets as a kind of spontaneous order that was the “result of human action, but not the execution of any human design”. The same basic insight led Irving Fisher – the greatest economist of the 1920s – to come up with his debtdeflation theory of depressions. After people had borrowed, they needed to pay back. Busts followed booms; there was no getting around it.

Harding: applied Taoist wisdom to crisis

Within a decade, Harding’s views were collectibles. But in 1921, he still saw the economic world as a moral world ordered not by man, but by God. This was not the result of long study or deep reflection on his part. He was probably the dummy everybody said he was. As Keynes pointed out, politicians are always in thrall to some dead economist.

At least Harding was in thrall to the good ones. “No statute enacted by man can repeal the inexorable laws of nature,” he announced. “Our most dangerous tendency is to expect too much of government.”

Harding was not the first to see the economy as a ‘natural’ order, one that you disturbed at your peril. A Taoist named Zhuangzi, who lived at about the same time as Alexander the Great,

But Harding had already proved him wrong. Harding did the very opposite of what Keynes recommended. Instead of increasing government spending, he reduced it. He cut the budget almost in half. He slashed taxes too – and cut the national debt by a third.

Japan at the time struggled with the same downturn. But it had no Harding at the helm. Instead, its masters prefigured Keynes, trying to stay the correction using price controls and other interventions. The result was a longdrawn-out affair that lasted until 1927 and ended in a bank crisis. In America, meanwhile, by 1922 unemployment was back down to 6.7%. By 1923 it was down further – to 2.4%.

This lesson was lost on the world’s economists: when the next crisis hit a decade later, they turned to Keynes. Of course, it turned out to be a moral world after all. They got what they deserved.

To read Bill’s thoughts, sign up to Money Morning’s free email at www.moneymorning.co.za.