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
12 MARCH 2010 SOUTH AFRICA EDITION 134
The next gold rush
There’s money in rubbish dumps, page 16
“I read MoneyWeek to pick up all the vital things I’ve missed elsewhere.” Justin Urquhart-Stewart Seven Investment Management
Canadian Why great telecoms are set to investment trends soar – buy in now are born in bubbles SECTOR
7
GLOBAL VIEW
14
From Greece to Iceland, taxpayers are revolting BILL BONNER
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from the editor
If PIIGS could fly 12 MARCH 2010 ISSUE 134 ISSN 1995-4476
South Africa Gareth Stokes – 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, Northlands Deco Park, Unit 6/8 Avant-Garde Avenue, Newmarket Street, Northriding.
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12 March 2010
Have you noticed a pattern developing in global equity markets? Since October 2009 share prices in both developed and emerging markets have been stuck in a sideways trend. It’s as if investors are unsure whether the next price action will be higher or lower. There are two reasons for this uncertainty. The first is the ongoing value debate, with investors questioning whether corporate earnings will underpin recent share price gains. The second uncertainty is rooted in the world of macroeconomics. Analysts aren’t entirely convinced the economic recovery is sustainable. Alwyn van der Merwe, director at Sanlam Private Investments, reckons fund managers and investors are suffering a bad case of indigestion. They’ve swallowed the market recovery story and gobbled up companies at prices well in excess of historic fair value. Now the feeding frenzy is over they realise they might have bitten off more than they can stomach. The feeling of unease magnifies the later you climbed back on to the equity bandwagon.
are growing concerns the emerging market superpower’s economy is tightening. If Chinese growth stalls you can expect demand for commodities to dry up, and commodity prices to fall. That’s not good news for the average South African investor, because your investments are closely linked to the commodity-rich JSE All Share index. South Africa Inc isn’t in great shape either. The 3.2% quarterly annualised GDP growth reported in Q4 2009 is a bit of a misnomer. It reflects improvements in the global economy, but largely ignores current low levels of consumer and business confidence. You won’t see sustainable growth until private sector investment and employment prospects improve... Equity markets are sitting on the fence right now and fund managers are investing funds with their ‘bearish bull’ hats firmly in place. Share prices surge or fall hundreds of points with each bit of positive or negative news. And that’s not a good sign.
Finding value among locally listed companies is becoming a painstaking exercise. Very few commentators expect double digit returns from equities this year. They warn against an overcooked retail sector – wave red flags around ‘value traps’ in the construction sector – and suggest resource sector earnings will have to surprise on the upside before interest in the sector flowers again. And if you decide to go with banking and financial shares you As Q1 2010 draws to a close there are fresh fears of a dreaded ‘double dip’ in equities. The might have to wait two or more years for a decent capital return. global economy is like a minefield littered with countries in severe sovereign debt crisis. The boom times’ BRICS (Brazil, Russia, India It’s no wonder international investors are looking for more creative ways to generate and China) have been replaced with credit returns. Eoin Gleeson reckons you can strike crunch PIIGS (Portugal, Italy, Ireland, Greece and Spain). Governments are struggling to gold at your local rubbish dump. He considers meet their debt obligations. Greece owes opportunities as diverse as mine tailings and garbage as he trawls the globe for the next big $270bn to European banks with France thing. Turn to page 16 to find out how one ($86bn), Switzerland ($60bn) and Germany ($44bn) first in the firing line. Should one of man’s rubbish is another’s treasure. the PIIGS go to the wall, the ripple will reverse financial stability in a heart beat. China could also become problematic. There Gareth Stokes Editor, South Africa
In this issue 6 Markets Why Australia may be running out of luck.
8 Gareth Stokes Rich pickings for iron ore producers as Arcelor suffers.
10 Columnists Don’t blame the baby boomers; why regrets can be useful.
15 Funds Grab your share of the global
22 Profile Can the man that every Man U fan loves to hate see off the Red Knights? 23 Travel Where to stay in the Maldives – budget or family, there’s a resort for everyone. 24 Toys Even better than its predecessor –
cash pile now.
the new sporty saloon from Lexus.
19 Blogs
25 Blowing it
Why Greece should sell its islands; how to buy great wines cheaply.
How to benefit from Thailand’s turmoil and travel cheap.
news SA economy
Cosatu to strike during 2010 show case “Start negotiations now to avoid strikes during the World Cup”. That’s the message Cosatu is sending company bosses to ensure that union members don’t go on strike before this year’s long awaited FIFA 2010 Soccer World Cup in June. According to The Mail & Guardian, last week Thursday Cosatu’s secretary general Zwelinzima Vavi told reporters that the group could embark on “a nationwide strike before October over the large electricity price increases granted to utility Eskom”. Should the strike go ahead – which would include almost two million members – it would damage the country’s hopes of using the biggest sporting event to showcase itself abroad. “What’s the issue?” you ask. Well, besides the fact that Eskom’s 25% price increase could result in the loss of more than 200,000 jobs, Cosatu is outraged by the news that the ANC holds a 25% stake in Hitachi Africa – the company that “won a tender to supply boilers to two new multibillion rand power stations for Eskom,” reports The Times Live.
This is the latest sign of the widening gap between Cosatu and the ruling party. Speaking at a press conference last week, Vavi told reporters that “the problem with this is that the ANC will not be able to ward off genuine concerns that it might have decided to accept the extraordinary high tariffs imposed on the poor and industry because it stands to benefit.” Vavi also told reporters that it would protest against the government’s budget, which the trade union federation said “did not do enough to alleviate the plight of South Africa’s poor.” Basically it all boils down to Cosatu’s belief that “the centre in the Presidency is not holding and [it’s] blamed this on the inept coterie of people appointed to manage President Jacob Zuma at the Union Buildings.” It’s also stated that it believes this inefficiency is what’s led Zuma into a number of public relations nightmares, including his failure to declare his financial interests. And it gets worse. In an interview on Monday, Cosatu president Sdumo Dlamini said “Zuma should ‘fire’ his political advisers for being a ‘disaster’ and axe his communications team for failing to guide him through a series of PR nightmares that have plunged his Presidency into crisis a mere 10 months since taking office.” Whether this happens or not remains to be seen, but one thing’s clear: Since Cosatu played a major role in securing Zuma’s presidency, ignoring these warnings will land him in hot water.
Companies
Standard Bank: “Fortress-like structures just aren’t enough!” It was an extremely tough year for Standard Bank (JSE:SBK). That’s the consensus of analysts and shareholders alike after viewing the group’s full year results released last week. And while the group’s not proud of its 20% drop in earnings, it’s “relieved the worst is over” reports financial director, Simon Ridley. “Still plagued by economic conditions, impairments on bad loans and the poor performance of Liberty (which is starting to turn around), the banking group reported a 2% rise in total income and 7% higher impairment charges.” Despite this, the group’s lacklustre full year results mask a vast improvement in the second half of 2009. According to the Wall Street Journal: “Net profit fell 21% in 2009 as bad debts rose among retail and corporate customers, and the Johannesburg-based banking group said that while a hesitant economic recovery is expected in 2010, employment and credit conditions remain under pressure.” When asked how they group would ensure these poor results won’t be repeated this year, group deputy CEO Sim Tshabalala told Fin24.com that it would “up its game to become more profitable
The bottom line Co yellow-diamond necklace worn by Kate Winslet (pictured right) at the Oscars.
$50 000 The fee the average American would accept to kill another person. US soldiers get paid $194 a month with $64 extra combat pay.
$25 000 The prize money up for grabs at the International Glutton Bowl. Cow brains, 15 metres of Sushi, bowls of mayonnaise and bulls testicles are just a few of the items
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12 March 2010
contestants will be asked to devour.
safari and a Tiffany crystal-studded cat collar.
£5m How much Tony Blair is
£9,000 How much the average
estimated to have been paid by publishers for his memoir, The Journey, which will be published in September.
woman spends on make-up in her lifetime, according to a survey by Superdrug.
R12m The damages an American tourist is suing a safari lodge just outside Pretoria for after slipping on wet patio tiles.
£61,000
The value of the goodybag Oscar nominees received at this year’s awards. It included an African
R200m
Not even this vast amount of money will get JubJub out of jail. The judge has denied the musician bail after he wiped out four school children in a Soweto drag race gone wrong earlier this week.
$50m
The black market price of an Atomic Bomb.
©A.M.P.A.S.
$2.5m The value of the Tiffany &
news
The market, meanwhile has rejoiced at the news of the group’s “better than expected results” – with Standard Bank’s share price rising 130c (1.2%) after results were released. And analysts were overjoyed. “It’s the only banking stock we hold in our portfolio,” Francois du Plessis of Vega Asset Management told Fin24.com, describing the group “as extremely solid with plenty of depth in management”. According to him, competitors would find it “hard to compete with the bank elsewhere” on the continent.
What the commentators said Icelanders object not to repaying the debt, but to the terms, as The Independent pointed out. You can see why. £3.4bn is 50% of Iceland’s GDP and the annual interest owed would be 5.5%. At more than $16,000 for each of the country’s 317,000 people, it’s “too great a burden”, said Matthew Lynn on Bloomberg.com. Given that Iceland’s already suffering from a deep recession – GDP fell by 6.9% in 2009 – “it could be crippled for a generation”. But Iceland could pay a heavy price if the issue isn’t resolved, said Economist.com. It could jeopardise EU entry as well as a $4.75bn IMF support package, as the Nordic countries who are contributing about half the sum are refusing to go ahead. Iceland already has to find $2bn next year and half that in 2011.
Europe
% change
*5640.57 10563.92 1145.61 2358.95 3943.55 5936.72 25190.00 28088.00 10.07 11.07 7.40
**2.05 4.12 2.02 2.91 3.01 2.44 1.10 1.13 -0.81 -1.65 -1.16
*10 Mar ** since 4 Feb
©DANIEL GRAVES/REX FEATURES
If you’re prepared to carry a giant rabbit around, you could pocket £70,000. The owner of the world’s largest rabbit is offering the hefty salary to anyone prepared to hold the animal at events around the world. Annette Edwards, the owner of three-and-a-half-stone Alice the rabbit, has spent £10,000 on plastic surgery to look like Jessica Rabbit. As a result, she says she can’t hold Alice when in character. “I know it sounds like a lot of money, but it is a very important job and I need a safe pair of hands for Alice,” says Edwards in the Daily Mail. Auditions will be held on 1 April – and Edwards is adamant it isn’t an April Fool’s Day joke.
Winners
% change Price
12 March 2010
Losers
% change Price
Palcap (PLD)
20.11%
215c
Lonfin (LNF)
-20.00%
240c
Anooraq (ARQ)
18.58%
1085c
Comair (COM)
-10.21%
255c
SilverB (SVB)
17.86%
165c
Erbacon (ERB)
-8.24%
156c
Amaps (AMA)
15.33%
173c
Cadiz (CDZ)
-8.20%
280c
S.Ocean (SOH)
14.29%
160c
Simmers (SIM)
-7.41%
125c
Metmar (MML)
14.06%
430c
Onetime (1TM)
-7.08%
105c
Rex True -N- (RTN)
11.76%
922c
Metorex (MTX)
-7.02%
437c
Ceramic (CRM)
11.32%
11800c
Jubilee (JBL)
-6.98%
400c
Af & Ovr-N- (AON)
11.11%
900c
ABE (ABU)
-6.67%
140c
Rolfes (RLF)
10.58%
115c
Urone (UUU)
-6.52%
2049c
Weekly change to JSE stocks as 10 March 2010
4
To make matters worse, ratings agency Moody’s has threatened to downgrade its debt to junk. A deal should be possible, said Breakingviews’ Nicholas Paisner. Before the vote the two sides were closer to agreeing a lower interest rate. Indeed, the difference was less than 1%, which “doesn’t look insurmountable”.
Best and worst-performing shares
Vital numbers FTSE 100 Nikkei S&P500 Nasdaq CAC40 Dax Top 40 All Share Rand/Euro Rand/Pound Rand/US$
Iceland could pay heavy price for ‘no’ vote
● The way we live now
Iceland votes ‘no’ on debt repayment Iceland’s voters have overwhelmingly rejected a proposal to repay £3.4bn of loans to Britain and the Netherlands. The UK and Dutch governments had bailed out depositors in Icesave, a subsidiary of Landsbanki, which collapsed in the credit meltdown of late 2008. They now want that money back. But a repayment deal passed by parliament earlier this year was vetoed by the president, which triggered the referendum. Talks to resolve the issue continue.
©BLOOMBERG
in the year ahead. According to management, its immediate focus will be to “restore earnings to 2008 levels.” Although, as CEO Jacko Maree warned, “whether [it’ll] get there in one year is not clear”. The good news is the company still maintained its dividend payout at the same level as in the past two years.
the markets
Shares find their feet – but on an icy road This week marks the one-year anniversary of 2009’s bear-market low. Shares appear to have found their feet again – the FTSE World Equity index has hit a six-week high and the FTSE 100 an 18-month peak. Better-than-expected US employment data helped, as did the positive reaction to Greece’s latest austerity package. It fuelled hopes that the eurozone can now draw a line under the Greek debt crisis, and underpinned a near-5% jump in pan-European stocks last week. The S&P 500 is up by nearly 70% in a year; the FTSE 60%.
170 160 150 140 130 120 110 100
Weak pound boosts the FTSE The UK economic outlook may be far from encouraging, but the FTSE is benefiting from the slide in sterling. Around 75% of the top 100 blue chips’ sales base is overseas, says Adrian Cattley of Citigroup. So the threat of a hung parliament and a worsening fiscal mess are “more of an issue for the gilt and currency markets”. Indeed, “if the pound falls further, the earnings outlook for UK plc looks better, not worse”, says HSBC’s Kevin Gardner. For example, one of the major dollar earners, publishing group Pearson, has just reported a 17% jump in annual revenues. But adjust for currency fluctuations and the rise was just 4%, says Neil Hume in the FT. Meanwhile, investors are seeking exposure to fastgrowing emerging markets, so international companies such as BHP Billiton and Vodafone are highly prized. The FTSE 100 is “long global GDP”.
Viewpoint
The big picture: global trade climbs off the floor
“Gordon Brown … cannot believe [that] what he saw as a transformation of Britain’s public services … has to be followed by ... savage cuts. Until he believes it, and can convince everybody he does, the markets … will continue to believe that a Labour victory, particularly a minority Labour government, would be very bad for Britain.”
After plummeting at the fastest World merchandise trade volume (annual % change) rate since the Great Depression in 20 early 2009, trade is rebounding. 15 Global merchandise trade 10 volumes grew by 6% between 5 0 October and December compared -5 to the previous quarter, according -10 to the CPB Netherlands Bureau. -15 That sort of pace is typical of the -20 decade as a whole. Yet for 2009, 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 volumes were down by an Source: www.finfacts.ie/CPB Netherlands Bureau unprecedented 13.2%. And the recent bounce may well fade, given that the developed world is set to struggle. Local tightening measures are likely to temper emerging-market growth too, says Capital Economics. Don’t expect trade to regain pre-crisis levels until at least mid-2011.
David Smith, The Sunday Times
5
risk that tightening will undermine what little growth there is. A related problem is gradually winding up special liquidity facilities – a process that has already started. Then there’s the question of when to raise interest rates: “the tricky bit is knowing when the economy, and the financial sector, is strong enough to S&P 500 Index FTSE 100 Index cope”, says Buttonwood on Economist.com. Given government tightening, broken banking systems Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb and overleveraged consumers in 2009 2010 Source: Pacific Exchange Rate Service much of the West, recovery will be a long slog once the boost from fiscal stimuli and the inventory cycle Global recovery set to disappoint wears off. “Get ready for the austerity The trouble is that the outlook for global decade,” says Larry Elliott in The GDP is also fraught with risk. In the US, Guardian. A renewed slowdown or shock the world’s biggest economy, another in the West will also ripple through 36,000 jobs were lost in February. That emerging markets. continues the recent pattern of “minor losses that look good compared to the bloodletting of early 2009, but rather sad Are markets stuck in a range? compared to a textbook recovery”, say With years of lacklustre growth ahead Philippa Dunne and Doug Henwood of as we gradually work our way out of the Liscio Report. We normally see the credit bust, the medium-term 150,000 jobs added per month by the outlook for developed stockmarkets time two and a half years have passed is uninspiring. A Morgan Stanley since the Fed first begins to ease, adds study of previous major bear markets David Rosenberg of Gluskin Sheff. suggests we’re now set for a rangebound market – albeit in a wide range. The turn in the US labour and housing That could last five years or more as markets is “refusing to arrive”, and most we work through the structural of the numbers coming out of Europe headwinds we face. That makes it vital have “disappointed” of late, says Edward to hold solid dividend-payers, says Hadas on Breakingviews. Swedish GDP Morgan Stanley’s Graham Secker. actually fell in the fourth quarter. A feeble That means holding on to the defensive recovery “will only amplify” the stocks MoneyWeek has been tipping for challenge to governments “already some time. As many are international struggling to find politically acceptable earners, they are currently getting an ways to reduce big deficits”, raising the extra fillip from the weak pound.
S&P 500 v. FTSE 100
12 March 2010
the markets
Australia’s luck is running out looking ever more overextended. House prices have risen 15% to new records since early 2009 and the ratio of prices to earnings is 40% above the longterm average. Houses in major cities are “severely unaffordable”, according to Demographia.
Australia avoided recession in 2009, and the “remarkably resilient” economy looks set to grow by 2.5% this year, says the IMF. But there’s still some “unfinished business”, cautions Capital Economics. While most of the Western world is grappling with the fallout from burst housing and credit bubbles, Australia’s have kept inflating.
©BLOOMBERG
The private sector’s capacity to take on more Australia has been debt “is virtually lifted by its exposure exhausted”, says to China’s stimulus. Keen. Household This bolstered Remarkably resilient to recession… so far debt is now at demand for its 100% of GDP or 160% of disposable commodity exports. A banking system income; the latter figure is higher than that had avoided toxic paper helped too. America’s. The private sector had So unlike in most countries, the fiscal actually started to shed debt in 2008 stimulus went straight to consumers. before being encouraged to take on It boosted disposable incomes by 4% in more mortgages. Australia has taken the the year to 2009’s fourth quarter, says “‘hair of the dog’ approach to a debt Gerard Minack of Morgan Stanley. A hangover”, but that can’t work forever. series of interest-rate cuts added another 5% (most mortgages are based on Now cracks are appearing as interest floating rates). The government also rates rise. Fujitsu Consulting believes that promoted spending by boosting the by December half of the 250,000 firsthousing market through a rise in the time buyers who entered the market in subsidy for first-time homebuyers, the past 18 months will have trouble enticing “Australians back into mortgage meeting payments. “This is eerily debt in droves”, says Steve Keen of the reminiscent of early-stage delinquencies” University of Western Sydney. in US subprime in 2005, says Edward Chancellor in the FT. “The lucky All this fended off a downturn, but leaves country’s luck” may not last much longer. the housing market and the private sector
Governments seek scapegoats Talk about blaming the messenger, says Tim Price of PFP Wealth Management. Whenever markets “highlight” unwelcome truths, such as Greece’s budget mess and the strains inherent in European monetary union, hedge funds and ‘speculators’ are “a welcome distraction”. Some Europeans say that the credit default swaps (CDS) market, where investors buy insurance against debt defaults, undermined Greek bonds. The US Department of Justice is probing supposed hedge-fund collusion to drive down the euro. In reality, hedge funds would be “crazy” to target the euro, note Christopher Swann and Richard Beales on Breakingviews. The currency market turns over $2trn a day and the dollar-euro trade $1trn. Even working together, hedge funds “couldn’t hope to manipulate it”. The sovereign CDS market is relatively opaque, so big players can move prices, says Lex in the FT, but it’s a “sideshow” to the more liquid bond markets. Trading volumes are 2%-12% of government bond trading volumes. Contracts on the likes of Greece and Portugal are worth just 1%-5% of outstanding government debt. Nor does the sovereign CDS market affect the cost of issuing new debt. The facts crush conspiracy theories. 6
12 March 2010
Miners cash in on iron ore boom “It’s time to make hay once again for the global miners,” says Garry White in The Daily Telegraph. For 40 years, the biggest mining companies have set annual benchmark prices for iron ore with key customers such as China – only about a third of iron ore is ever available in the spot market. As they attempt to finalise negotiations for 2010-2011, the three top iron-ore providers, Rio Tinto, BHP Billiton and Brazil’s Vale, are in a strong position. The spot price has more than doubled to over $130 per tonne as the global economy has recovered. China continues to add steel capacity and “even the steel market in Europe has picked up”, say Patrick Flockhart of Steel Business Briefing. Last year the miners set a price of $60 per ton with Japan; now there is talk of a 60%-80% hike in benchmark prices – quite a boost, given that iron ore comprises half of Rio’s operating profits. The miners are now increasingly pushing for quarterly contracts based on the spot price after steel-makers failed to meet their annual purchasing commitments early last year, says Javier Blas in the FT. China, for instance, simply headed for the much cheaper spot market after prices collapsed. Quarterly contracts “will become the norm”, says Jim Lennon of Macquarie. Short-term contracts, however, amplify the downside for producers if the global economy and steel market take a renewed tumble.
Gold watch Gold has traded sideways at around $1,120 an ounce over the past few days, kept down by a firmer dollar. Gold was the best-performing investment over the last decade, according to Halifax. It finished ahead of property, shares and cash with a 277% increase. And the bull run isn’t over yet. The long-term impact of all the stimulus programmes across the world will be inflationary, says Richard O’ Brien, chief executive of Newmont Mining. Dwindling mine production should also help boost gold to more than $1,500 an ounce.
sector of the week
Nab Canada’s telcos on the cheap by David Stevenson You can generally bank on politicians to cause confusion. The Canadian government is no exception. Its latest statements on telecom companies (telcos) have baffled the stockmarket. However, savvy investors who can see through the smoke will spot an opportunity to profit.
©BLOOMBERG
Until now, the telecoms sector in Canada has been almost a closed shop. The federal Telecommunications Act has stopped foreign ownership of the country’s phone companies exceeding 20% of a firm’s voting shares. So far so cosy for Canadian domestic telcos. But there’s a big downside. Competition and investment have been stifled by the rules, “long criticised as overly restrictive and out-ofdate”, says Money.canoe.ca. So a change was overdue and, indeed, expected last week from Canada’s officialdom. In last Wednesday’s annual key policy announcement – ‘the throne speech’ – the Conservative government strongly hinted that both the country’s telecoms and satellite industries would be opened up to extra overseas money. This would “give Canadian firms access to the funds and expertise they need”. However, the message was then watered down. Thursday’s budget speech spotlighted only the satellite sector as an immediate target for liberalisation. The telecoms sector overall would see just “increased competition and investment”.
from outside the country boosting both wireless and landline services. Back in 2003, the then boss of Canadian telco BCE told a government Standing Committee that he “believed the complete removal of ownership restrictions is inevitable”. That’s because nearly everyone would benefit. More investment should bring in faster and cheaper broadband services. In addition, if new Canadian government policy helps reduce borrowing costs – because carriers would be freed to shop around more widely for funds – firms’ expenses and Canadian PM Stephen Harper: mixed messages on telcos consumer prices could both drop, says telecom consultant Mark Goldberg. The result? “Stunned silence and abject “If [the government] fully liberalises confusion,” says Ian Marlow in the foreign ownership, it’s likely to improve Globe and Mail. “Satellites are an stock prices for everybody, because it obscure part of the broader telecom removes restrictions on who can buy industry that haven’t been the subject of Canadian carriers.” foreign interest in years.” A ‘regulatory source’ quoted by Marlow said the And that’s the win for investors. government has “over-promised and “Depending on what rules are relaxed, underdelivered”. In short, it’s all got a bit and when, it could mean widespread messy – for now. The government says it consolidation,” says Marlow. “Mergers will clarify timing “in the coming weeks”. and acquisitions could ricochet through the telecom industry. Bell and Telus [one However, that aside, the longer-term of BCE’s major rivals] could merge. Cable picture looks clearer. “The good news is companies could sell out to large that two earlier government-sponsored American companies. Rogers might buy reports have given a road map” for out Cogeco Cable Inc” – both are also liberalisation, says Peter Rhamey at Canadian telcos. “And huge international BMO Capital Markets. Indeed, “there’s conglomerates might chose to invest in a general sense that it’s only a matter of small Canadian start-ups.” So, exploit time before the rules are changed, at current uncertainty to nab the sector’s least in the cellular sector”, says key players on the cheap. We look at one Telegeography’s CommsUpdate. The in the box below. telecom industry also wants to see cash
The best bet in the sector BCE (CN: BCE), formerly Bell Canada Enterprises, is Canada’s largest telco, with 2009 revenues of C$17.7bn and a market cap 40 of C$23bn. It provides landline services 35 directly in the east (in Ontario and Quebec) 30 and also via its 44%-owned affiliate Bell 25 Aliant in the Atlantic provinces. At end-2009 it had 6.8 million wireless subscribers, up 20 5% year on year. It’s Canada’s largest provider of high-speed internet and video services, each with about two million customers.
BCE
2003
2004
BCE already “boasts healthy cash flow and strong brands”, says Michael Santoli in Barron’s. While the company isn’t immune to
7
12 March 2010
An ongoing cost-cutting campaign is feeding through into analysts’ forecasts of a 7% climb in net profits in 2010. That puts the 2006 2007 2008 2009 2010 stock on a forward p/e of just 11.4, with a forward yield of 5.7%. “The shares could easily trade 10% higher over the next year,” says Santoli. Add in the dividend payout, and they offer a “high-teens percentage return”. Any future foreign investment in the sector could put the icing on the cake.
Price in Canadian Dollars
2002
2005
price wars, there’s plenty of room for overall industry growth, agrees Simon Flannery at Morgan Stanley. Only 67% of Canadians are wireless customers, as opposed to 92% in America.
who’s tipping what Gareth Stokes, MoneyWeek’s analyst, picks the best – and worst – tips from the press and brokers’ reports, and suggests a share for the brave.
Steel giant’s contract dilemma offers rich pickings for iron ore producers! Kumba subsidiary in 2009.
Tip of the week: Coal and iron ore company is “positioned to benefit” – Finweek Iron ore is the ‘in demand’ commodity this year – demonstrated by the massive battle raging between Kumba Iron Ore and ArcelorMittal. Investors dumped shares in South Africa’s largest steel producer after threats to its long-term contract to receive ‘cost plus 3%’ iron ore from Kumba. If the contract is abolished – and even if it isn’t – Exxaro Limited (JSE: EXX) should earn more from its 20% stake in Sishen Iron Ore in 2010. It received R1.9bn from the
How does Exxaro keep the wolves from the door? “Exxaro is particularly well positioned to benefit from future domestic and export demand for coal due to its dominance in the Waterberg coal field,” writes Brendan Ryan in Finweek. He says the R9.5bn expansion at the group’s Grootgeluk colliery (to feed Eskom’s Medupi coal-fired power plant) is on track. The group upped its coal production slightly in 2009, producing 16 486Mt of coal at Eskomtied mines and 20Mt at commercial mines. Annual production included 2 020Mt of coking coal and 6 638Mt of steam coal. The good news for shareholders is the 44% year-onyear increase in export coal through the Richards Bay Coal Terminal. Is there more to Exxaro than coal? A closer inspection reveals a
Gamble of the week: Basil Read Construction shares are out of favour at the moment. The majority of analysts believe government’s ongoing commitment to largescale infrastructure projects are largely priced in. Does this mean we should ignore the companies responsible for building South Africa and the continent? We think Basil Read Holdings (JSE: BSR) is worth a look at current levels – though investors should be mindful of the value trap. Basil Read was established in 1952 and today offers services across the full spectrum of the construction industry, including buildings, opencast mining, road construction and civil engineering. The company has delivered outstanding returns to its shareholders despite tough economic conditions, meeting an ambitious R4.5bn turnover target in 2009 and boasting a full order book till 2011.
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diversified miner with net operating profits from a number of divisions. The group earned R1.905bn from coal and R1.830bn from commercial operations in the year to 31 December 2009. These profits were unfortunately eroded by poor performances from its mineral sands businesses. Margins across all
The future for South African construction companies lies in the rest of Africa. Basil Read believes there are opportunities to exploit as the growth trend in subSaharan Africa resumes, albeit at a lower trajectory. They also believe there are opportunities for construction companies to partner with cash-strapped local municipalities in creating innovative ways of financing future projects... There’s plenty of construction work up for grabs. Aside from R15bn in targeted private-public partnerships we could see as much as R30bn worth of water supply projects (to power stations) in the next couple of years. And that’s before water treatment facilities fall under the spotlight.
who’s tipping what business segments were further eroded by rising production costs.
crisis and subsequent sluggish recovery.
Exxaro is cautious about prospects for this year. “The rate of recovery from the global recession remains uncertain despite a number of positive indicators,” said chief executive, Sipho Nkosi. He expects strong demand for export and local power-station coal, and firm demand for steam and metallurgical product. Exxaro will also benefit from its iron ore interests. There are expectations of significant iron ore increases from 1 April 2010. “Overall, the group’s consolidated results for 2010 will largely be driven by the recovery in demand and the prices for its commodities,” added Nkosi.
“It’s the company to talk to if you are looking to get your mitts on an earth mover with tyres large enough to flatten a minibus taxi,” writes Jamie Carr in his latest Diamonds and Dogs column in the Financial Mail. He mixes a description of Eqstra’s core business with an activity that will resonate with many of South Africa’s road users. Problem is demand for major mining, industrial and construction equipment (and motor vehicles) hit the skids over 2008/9. You need only look at Bell Equipment’s recent performance to appreciate the decimation in this segment.
Future profit will be driven by increased coal exports and the group’s hunger for iron ore. Exxaro is worth adding to your resources portfolio at R115.50/share.
Eqstra has suffered more than most as the country’s mining and construction giants delay capital expenditure. In the latest interim period – six months to 31 December 2009 – the group’s revenue decreased 20.5% from R4.412bn to just R3.507bn. Operating profit plummeted 58.4% to R306m and owners of the company were left shouldering a loss of R58m. The headline loss per share was 23.3c.
Recommendation: BUY at 11550c Market capitalisation: R41.964bn
Turkey of the week: “Admiring of the kit only gets you so far,” says the Financial Mail Integrated leasing and capital equipment group Eqstra Holdings Limited (JSE: EQS) has cherry-picked some of the worst-hit industries through the recent recession. Each of its main divisions – passenger and commercial, industrial equipment and construction and mining – operate in sectors that have been pummelled by the global financial
The group’s construction and mining dealerships performed dismally. Equipment sales declined 63% (from 1.434bn to R530m) and the division weighed in with an R89m operating loss. These dealerships have extensive exposure to struggling platinum and diamond miners who simply cannot secure finance
Latest interim results (to June 2009) show a 47% surge in turnover, to R2.1bn and an equally impressive 43% increase in profit attributable to ordinary shareholders, to R122.1m. Divisional contributions to revenue came from construction (R1.703bn), mining (R339.706m) and developments (R31.106m). The question is whether the group can maintain this momentum in the second half? In their latest trading update Basil Read says earnings per share (and headline earnings per share) will be between 10% and 29% higher for the year to 31 December 2009. These results don’t include the contribution from the recently completed merger with TWP Holdings. Basil Read issued 37.3m
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for capital equipment. Industrial machinery sales weren’t much better. Revenue fell 12.9% and operating profit by 25.2% despite efforts to reduce costs. In the United Kingdom, fortunately a small contributor to the overall business, operating profit declined 52.9% to R8m. The passenger and commercial division surprised analysts with a stable financial performance. There’s not much to get excited about in the short-term. Management says activity in its main sectors remains depressed, adding they are unlikely to meet the earnings growth forecast made in August 2009. Eqstra will focus on skills development, working capital management, curtailing costs and maximising cash flow until confidence returns. “The big question is how long it is going to take before the recovery really brings some life back into the related sectors,” says Carr. Avoid. Recommendation: Avoid Market capitalisation: R1.524bn
new ordinary shares and R143m in cash to complete the deal. Chief executive Marius Heyns observes: “Globally there will be a need for large numbers of skilled engineers and architects to tackle the imminent population growth issues of food, water and energy scarcity, as well as major infrastructure requirements.” The group’s clients are happy with the onestop turnkey solution the combined entity offers. Basil Read is nimbler than the country’s larger construction plays and we believe it’s worth accumulating at 1230c/share.
Recommendation: BUY at 1230c Market capitalisation R1.547bn
best of the financial columnists
Boris Johnson The Daily Telegraph
What crisis looks like in Iceland Janice Turner The Times
Why Britain needs more boffins Anthony Hilton Evening Standard
Regrets? We should all have a few John Kay Financial Times
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We baby boomers stand accused of mortgaging our children’s futures, says Boris Johnson. We’re “the most selfish, greedy, job-hogging, pension-grabbing bunch of egomaniacs history has ever seen”. Hanging out at university at taxpayers’ expense then telling our children to pay tuition fees, “luxuriating in housing” we can’t afford, with “lifestyles splurging CO2 that posterity will have to pay for”. But wait a minute. “We haven’t ripped off our kids” – we’ll probably leave them with a much better world than the one we came into. From 1955 to 2005, ‘real’ average global incomes rose by a third, infant mortality fell by two-thirds and medical advances lifted life expectancy by a third. “Baby-boomer technology will deliver incredible improvements in the next generation’s standard of life.” Our tolerance has helped break down sexism, racism and homophobia. Despite today’s financial and environmental woes, “human beings have solved those problems in the past. I’m sure the next generation is well up to the challenge.”
“I’d come to Iceland to see what a wrecked Western economy looks like,” says Janice Turner. Instead of panic, I found 4x4s and restaurant queues. But having to jump through hoops to get euros from local banks “made me realise these people are tethered by their withered currency to their black, volcanic moonbase”. The bad news for Britons is that “we’re bound to the Icelanders by a similar fate”. Icelanders don’t yet know the effect of their national debts. Britons are told deficit cuts will be grim. “The root problem is our financial illiteracy. How can we take bankers to task when, like ‘muggles’ oblivious to the workings of the wizard world, we can’t comprehend what they do?” After reading Whoops!, a guide to the crisis “for the economically dyslexic, I’ve learnt I was right all along”. Dubai’s new money always looked funny, as did Ireland’s, as did young people maxing out credit cards. “We must learn to stoke our anger. The wizards are counting on our ennui: They plan to fly away before we disarm their spells.”
A few years ago, National Grid told me of its problems finding specialist engineering graduates in the UK, says Anthony Hilton. The trouble was that the few who had the necessary skills “headed for the City, not industry, because that was where the money was”. Now Sir James Dyson has issued a report on how to rebalance the UK economy and help science and engineering flourish. But that “will prove very difficult as long as City salaries continue to be so vastly in excess of” earnings elsewhere. And this has been an issue in Britain for decades – in 1980, the Finniston Report warned that unless action was taken, a lack of engineers would hurt innovation and competitiveness and raise long-term British unemployment. Sir James is absolutely right to want to encourage science-based careers. The financial crisis has shown that “finance and housing can no longer provide the illusion of growth”. But “saying it is the easy bit. It is getting it done which seems to be beyond the wit of any government we have had in the past 30 years.”
“Which large financial services company leader recently confessed to shareholders of ‘a very expensive business fiasco entirely of his own making’?” asks John Kay. Plenty of chief executives owe apologies to investors – but most have just blamed someone else. The penitent was Warren Buffett, whose “investment record is such, he could own up to Abraham Lincoln’s assassination and be cheered to the rafters”. You might think his past success makes it easy for him to admit failure. But this capacity “predates his popular fame”, and is in fact probably a key reason for his success, rather than a product of it. Others should learn from this. “One of Gordon Brown’s many problems is that a world in which no errors have been made in economic and fiscal policy since 1997 is so divergent from reality.” Yet in his view, he has made no mistakes. The trouble is, as philosopher George Santayana said, those who cannot remember the past are doomed to repeat it. If we learn no other lesson from the past decade, “we will be fated to learn that one”.
Money talk
©REX FEATURES
Our proud inheritance to our children
“The head of British Gas says its profit margins are less than Marks & Spencer. The difference he fails to recognises that thousands of old people don’t die every year because they can’t afford to shop at M&S.” Comedian Frankie Boyle, quoted in The Sun “Young players, young boys, rich boys – this is the problem.” England football manager, Fabio Capello, says money is spoiling the game, quoted in The Sunday Times “Hugh Hefner could have told us that by showing us how many zeroes are in his bank account.” Dr Steven Platek, of Georgia Gwinnett College, USA, on research showing that curvy women have the same effect on men as beer or drugs, quoted in The Mail on Sunday “I was angry with the bank but I wasn’t crying into my pillow. It didn’t upset me as much as I thought it would. It’s not like I’ve had a call from my doctor and been told I’m not funny any more.” Comedian Frank Skinner on losing millions due to bad investment advice, quoted in the Sunday Express
politics & economics
Democracy in Iraq: will it work? by David Stevenson government must build improved relations with its neighbours, such as Saudi Arabia and Syria. That said, the economic outlook is promising. The country’s oil reserves are the second largest in the region. If it can keep attracting multinational companies, Iraq can become the world’s second biggest oil producer. “Inevitably the ability of the new government to distribute the economic rewards of its oil industry equitably between Sunnis, Kurds and Shias will be central to its chances of success.” But Iraqi democracy is at least Iraq elections: 19 million turned out under mortar fire beginning to produce leaders “capable of expressing their differences to the polls under mortar fire? Or within the framework of the party Americans, for that matter?” But an political system”. election in Iraq “doesn’t represent further proof of the values of our Western The trouble, is “in the US and Britain, democracies. While we think election Indeed, says The Australian, “irrespective Iraq is yesterday’s story”, says The results, however fraudulent or complex of who wins, or of how many pitfalls lie Guardian. America wants out, and “in (Iraq’s next government may take months ahead as a new government is formed in Washington hopes are rising for a final to form), are an improvement, we don’t Baghdad, this is cause for international exit from the quagmire George Bush stop to ask who really wins these congratulations”. Those who keep created”. Despite the risk of renewed elections.” The answer is Iran, whose arguing the invasion of Iraq was a militia violence, America could “impose “demented president” knows how to mistake “will be challenged by the an agreement – any agreement – to avoid handle ‘democratic’ polls. Its two success of last weekend’s poll. While 38 jeopardising its withdrawal timetable”. enemies, the ‘black Taliban’ and Saddam, deaths at the hands of insurgents linked US Vice-President Joe Biden “has spun a have now both been vanquished “without to al-Qaeda are tragic, millions of Iraqis clever line about how ‘politics have a single Iranian firing a shot”. defying the bombs to vote demonstrates broken out’ in Iraq”. But the truth is that the strong hope in the young in Iraq politics and violence go together. Besides, “Iraq still has far to travel on the democracy”. There’s no certainty that Biden’s long road to normality”, says The Times’s “politics” will by themselves allow this editorial. Its security forces will need That the Iraqis are a brave people isn’t fractured country “to slog on towards the better training, and its police force must in doubt, says Robert Fisk in The stability it deserves”. address endemic corruption. And the new Independent. “How many Brits would go ©AFP/GETTY IMAGES
Saddam Hussein won the 2002 Iraqi presidential election by an eye-popping margin of 11,445,638 to zero. Now, as Bret Stephen notes in The Wall Street Journal, a rather more representative election has been held. This time it involved 19 million voters; 50,000 polling stations; 6,200 candidates; 325 parliamentary seats and 86 parties. It seems democracy has finally arrived – first by force of American arms and then by dint of Iraqi will. It’s a remarkable feat, not just in the context of the past seven years of US involvement, or the eight decades of Iraq’s sovereign existence, but “in the much longer sweep of Arab civilization”.
Tories and Labour head for stalemate “What if the man pre-crowned as the next prime minister doesn’t make it?” As the election approaches, the unthinkable idea that Gordon Brown could actually hold on to the keys to No.10 becomes more and more plausible, says Anne McElvoy in the Evening Standard. “It’s slipping away from us,” one senior Tory told McElvoy, while another “just looked as miserably anxious as I’ve ever seen him”. New polls at the weekend revealed that the Conservative lead in the key marginal seats – expected to decide the outcome – are slim, to say the least. The expected swing of voters from Labour to the Tories is about 1.5 to 2 points higher in those battleground seats than nationally, reports The Times. This near parity with Labour in seats where the Tories previously held a clear advantage is “concerning”, says McElvoy. It’s also no surprise. The country is “staring in bored distaste at a leathery opportunistic PM it loathes but semi-trusts with the economy and
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a shinily opportunistic pretender it vaguely likes but trusts on nothing”, says Mathew Norman in The Independent. So the parties could be heading for the stalemate they deserve. Cameron must remember the importance of the Tory brand, says Daniel Finkelstein in The Times. He has convinced a lot of people that the party has changed. But he must try harder to “drop the old Tory negatives”. Whatever he does, “it is a rule that before every election in which the Tories have every chance of winning, they suffer an attack of the vapours”, says Michael Dobbs in The Daily Telegraph. But they “must not panic”. Cameron has a tight organisation behind him and he is “a man of gifts, untainted by the disasters of the past decade”. If he and his party “show belief in themselves, the country will, too”. At least 82% of people think it’s time for change, agrees Finkelstein. “The voters are out there to give the Tories a landslide, but the party needs to help them over the finish line”. They just need to show “a bit of bottle”.
personal view The two key factors driving the recovery will light a fire under these shares… What I would invest in now A look at the global economy in recent months, shows us the stimulus packages implemented back in late 2008/early 2009 are working. Despite the volatility we’ve seen, things have turned around and numerous economies are reporting the end of the recession.
This week, Martin Lentsoane, portfolio manager at Absolute Alpha Investment Management, tells MoneyWeek where he would put his money.
Add to this the fact that there are two key economic factors that support the continuing recovery, and we’re sure to see the global economic situation go from strength to strength in 2010. The first factor is the China story. Two years ago, the Chinese State Council approved a $586 billion stimulus package to boost the Eastern super power. This was one of the first of many moves that sparked the current recovery. There’s recently been much talk about whether or not China will cut back its stimulus, but the Chinese have been competent thus far. It’s unlikely that they will make moves that will compromise the efforts already made. Until the global economy fully recovers, China will continue to stimulate its economy. The second factor is the Greece debacle. Things looked tough for the Mediterranean country a few weeks back, but I’m happy to see the Eurozone has handled the situation well and things are under control again. The euro has, subsequently, stabilised and looks set to recover the losses against the dollar. As I mentioned earlier, the signs of a continued recovery are there. Using a top down approach for selecting shares, it’s clear certain sectors will be buoyed more than others by the two key factors mentioned. The first sector that will benefit is non-food retailers. Boosted by lower interest rates and higher expected consumer spending figures, this sector will run up sharply as GDP figures continue to grow in 2010. The second sector that offers huge promise for investors (the commodity sector) will be boosted by increased demand from China. For this reason, I’ve picked my favourites from each sector for this week’s issue. The first is none other than furniture group Lewis (JSE:LEW). There are many things standing in Lewis’s favour right now. The first is South Africa’s impressive fourth quarter GDP figure of 3.2%. This shows the economy
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is growing again and consumers are likely to have more discretionary spending in the coming months. This is positive news for the leading household furniture, electrical appliances and home electronics retailer that sells the majority of its products on credit to the ever expanding middle income market. When you look at its recent sales figures, it’s clear things are turning around. After reporting a good performance during December trade (posting sales growth of 7.9% for the quarter to December), Lewis told reporters it expected to see positive signs in January trade. And it did – sales were, in fact, in line with what the group experienced in December and showed a gradual sector recovery is under way. Another plus is that on a forward PE of 9.26, Lewis is cheap compared to its peers. The group also provides the highest level of earnings consistency in the sector, which should continue to improve as consumer spending turns the corner. Expect the group to reach a target price of R64 in the next 12 months. My second share tip is diversified commodity miner, Metorex (JSE:MTX). The group’s been through the wars in recent months thanks to a tight lending environment, subdued demand for its products and problems at its Congo mines. But these issues are a thing of the past. In a radical plan to survive the economic downturn, it turned to former Gold Fields’ CEO Terence Goodlace to get it through the tough times. And produce the new CEO certainly has. Just last week, the group, which operates in Zambia, the DRC and South Africa, reported profits of R452m for the six months to December. It posted adjusted headline earnings per share of 11.8c, compared to an adjusted headline loss of 0.7c previously. Add this to the fact that commodity prices have surged strongly over recent months – and will continue to do so in 2010 – and there’s no doubt Metorex’s share price will improve from here on out. The share’s also trading around 80% lower than its all-time high of R28.75. And that means the potential to shoot up is enormous. Expect the share to reach R9 in the next year.
The shares Martin likes: Lewis
12mth high 12mth low Now R32.10 R59.30 R59.59
Metorex
R1.15
R5.55
R4.37
*Prices as at 10 March 2010
investment briefing
Will China float its currency? China’s dollar peg is distorting prices, with potentially disastrous consequences for the world economy. Will China give way and let the yuan float? Simon Wilson reports. What’s new? China saw a 46% surge in exports in the year to February, lending fresh weight to complaints that its currency is undervalued. It follows recent predictions by several economists, including ‘Doctor Doom’ Nouriel Roubini and Goldman Sachs’ chief economist Jim O’Neill, that China is set to relax or remove the renminbi’s unofficial dollar peg. This has been in place since July 2008. Most analysts agree it undervalues the renminbi (or ‘yuan’) by around 25%40%. Currency traders got excited last weekend when the governor of the People’s Bank of China, Zhou Xiaochuan, hinted that a revaluation – or least appreciation – was on the way. Zhou said the currency peg was a “temporary” policy for dealing with the financial crisis. But his remarks seemed to contradict more non-committal comments from other senior figures, including the commerce minister.
the 2008 banking crisis – and the renminbi with it, despite the largely cosmetic 2005 decision to let it float within a narrow band – the value of the renminbi became even more clearly out of line.
What about more recently?
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©BLOOMBERG
This perception that the renminbi is undervalued has only grown since it was once again pegged to the dollar in July 2008. China’s economy is now powering ahead with 8% growth rates, and its foreign reserves last year surged 23% to $2.4trn. This is a problem, as is often argued by President Obama and many US pundits, because an undervalued currency gives China an unfair advantage when it comes to exports and manufacturing and so is a none-too-subtle form of protectionism. But of course, this is precisely why China is less keen to revalue Zhou Xiaochuan: dropping hints – its reliance on exports means that any significant rise in the renminbi could hurt economic growth and, more importantly for Beijing, push up unemployment. Why is a fixed dollar peg a bad thing? And as Andrew Batson in The Wall Street Journal points out, The most fundamental argument in favour of genuinely freewhen Japan let the yen appreciate under US pressure in the floating currencies rests on a basic tenet of market economics: mid-1980s, the resulting slowdown in growth “pushed the that if you distort prices you distort the overall allocation of government to boost spending and lower interest rates. resources, leading to inefficiency and bigger trouble down the A real-estate bubble and years-long slump followed.” line. Whether it is consumer goods, assets such as equities or bonds, or national currencies, the ‘price mechanism’ is an essential gauge by which households and firms make spending So why should China let the renminbi rise? or investment decisions. If those decisions are not based on true Unemployment is a big concern for the Chinese government. demand and supply, then bad decisions get made. In this case, But so is inflation, which is an equally big threat to social the Chinese government is holding its currency at an artificially stability. Consumer prices rose at an annual rate of 1.5% in low price to keep its exports cheap – a distortion that could January. It might not sound much, but prices are expected to have dangerous implications for the entire global economy. continue rising in the coming months. China can only keep its currency pegged to the dollar by printing money to buy greenbacks, and all those billions of renminbi ultimately feed back into Why does it matter so much? the real economy – chasing assets, creating bubbles and stoking For many years, China’s exchange-rate manipulation didn’t prices. A stronger currency would help contain inflation on two matter much. Indeed, in the aftermath of the Asian crisis of fronts. It would cushion the impact of rising import prices; and 1997, China won international respect for maintaining its dollar it would give the central bank peg (held at 8.27 RMB/dollar more flexibility to raise interest until 2005), in effect leaving rates without attracting ‘hot the renminbi overvalued while money’. China also recognises neighbouring economies What will China do? the need to rebalance its undertook competitive A large, one-off revaluation would please economic purists, but economy in favour of domestic devaluations. The Chinese seems an unlikely move for China’s cautious leaders. On the consumption: revaluation currency only became other hand, a resumption of the gradual appreciation of the would help that, but it’s a big obviously undervalued in the renminbi against the dollar (the trend seen between 2005 and risk when its export markets years that followed, as first the 2008) also presents difficulties. This would be likely to attract are already threatened by technology-led stockmarket inflows of ‘hot money’ – speculative currency flows in search of sluggish demand. Whatever it bubble and then China’s 2001 a one-way bet – likely to frustrate Beijing’s efforts to control decides, the timing and extent entry into the World Trade domestic asset- and consumer-price inflation. Some of any strengthening are likely Organisation fuelled a surge in economists, such as Bank of America-Merrill Lynch’s China to be dictated by domestic investment and exports. specialist Ting Lu, believe China’s best bet would be to stresses, rather than mounting Then, as the dollar began benchmark the renminbi against an undisclosed basket of calls for new tariffs on Chinese falling against other floating currencies, which is similar to the system used by Singapore. imports by US senators. currencies in the years before
opinion
Don’t ignore the hype: great investment trends are born in bubbles boom took something of real importance and magnified it to daft proportions.
It’s a statistic to sober up the most bullish investor. On 10 March 2000, the US Nasdaq index hit 5,132. Dotcom mania was in full swing, and the key American Matthew Lynn technology index looked like it would never stop rising.
Global view
A decade on, what can investors learn? Two lessons are important. Bubbles, for all the hype associated with them, usually contain an important grain of truth. And just because something is overhyped, it doesn’t mean you can afford to ignore it – a lesson that clearly applies to China and the rest of the Bric economies now. Future economic historians will no doubt cast the dotcom bubble, along with Dutch tulips, as one of the best examples of a capitalist system going completely haywire. And with good reason. For a time, it seemed like any vaguely plausible young man or woman with a convincing line in patter about ‘eyeballs’, ‘land grabs’ and ‘first-mover advantages’ could load up with a few million in venture capital and bank a fortune from the initial public offering a few months later. Mundane matters like having any revenues, or indeed any knowledge of how to build a website, could be conveniently forgotten. In the ‘new economy’, everything seemed possible. So it’s no surprise that many dreams turned to dust. Investors lost a huge amount of money. And yet, looking back, the main surprise is just how much truth there was to many of the claims made at the height of the bubble. The internet 14
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©IKON IMAGES/CORBIS
But that day, it did. After hitting that peak, the Nasdaq went into a steep decline that made even the drop in the Japanese Nikkei index in the 1990s look benign by comparison. By 2002, it had plunged all the way back to 1,300, wiping out three-quarters of its value in around 18 months. The dotcom bubble, of which the Nasdaq was always the best measure, had well and truly burst.
So what’s the equivalent today? There seem to be plenty of bubbles in the world right now. British house prices, for example. Or government bonds. Or equities in China, or any of the other emerging markets giants, such as Brazil, Russia and India. Some are just bonkers. Why are British house prices as high or higher than they were before the credit crunch hit, when they should be much lower? And how can it make sense to lend money for ten years to a practically bankrupt Spanish or Italian – or indeed British – government at rates of around 4%? Those are just bubbles. You don’t want to go anywhere near them.
Brics: overhyped, but still the trend of the century genuinely was a disruptive technology. Big industries have been consigned to history. Others have been changed completely. Look at the state of the newspaper industry. Observe the plight of once-mighty record labels, such as EMI. Music stores, bookshops and travel agents are vanishing from local high streets. And the process hasn’t stopped. Internet-enabled mobiles are only just starting to reach the mass market. Plenty more industries will be changed forever before the web’s impact has played out. And it really was a ‘land grab’. Want to launch an online book store against Amazon, an auction site against eBay, or a search engine against Google? Forget it. Those companies dominate their space, brushing aside all rivals. They will be the great monopolists of the 21st century – precisely because they got in early and, where necessary, spent big money to establish themselves. All the ‘new economy’ evangelists got wrong was the timing. It all took a bit longer than they predicted. Yet even on that they were only out by a few years. The dotcom boom was more like the railway boom of the 1880s than the tulip craze. Railways had a huge economic impact. Just like that bubble, the dotcom
But the Brics? They’re different. Sure, it’s hard to value stocks accurately in China. We’re not sure we really believe the growth figures Beijing publishes, never mind the price/earnings ratios that appear on the Shanghai bourse. We have no real idea whether Brazil can grow in the next decade as rapidly as it did in the last, whether Russia is at long last a stable democracy, or whether India can complete its journey to modernity. We may well look back on the mania for the Bric stockmarkets in 2020 and wonder what on earth we were thinking. But it’s unlikely that we’ll think nothing of significance was going on. The Bric economies have passed the point of no return. They are too far along the path of industrialisation to go back to being agricultural, resource-based economies. With a combined population of 2.8 billion, that is going to have a huge effect on the global economy. Whole industries, trade patterns, and cycles of capital will be changed permanently. It’s very similar to the dotcom bubble. Overhyped and oversold maybe, but still of huge significance. The key lesson is simple. Don’t get fooled by the bubble – you must be very selective about how you invest and you may need to get out early. But also don’t let the fact that it’s a bubble lead you to ignore its long-term impact on the rest of the world and on your portfolio. If you do, you may well miss out on one of the great trends of this century.
funds
Bolton’s back – but should you buy in? by Gary Booysen It is hard to find an investor with a bad word to say about Anthony Bolton. And for good reason. During his 28 years at Fidelity’s Special Situations Fund he returned an average of 19.5% a year. If you’d invested R10,000 in 1979, you would have been sitting on R1.43m by the time Bolton retired in 2007. No wonder, then, that the talk of the town is Bolton’s return to the fray. He is about to launch a new fund with his old employers – the Fidelity Investment China Special Situations Fund. To most investors this is a dream come true: If you can invest in everyone’s favourite market with everyone’s favourite fund manager, why wouldn’t you? Lots of reasons. This fund isn’t going to come cheap. It’s an investment trust, which is good, as its closed-end structure means it won’t ever grow too big, plus Bolton won’t have to buy and sell assets as investors move in and out of the fund.
But the main advantage of investment trusts is that they tend to have lower management charges than unit trusts. But not so this one. Investors are to be charged 0.5% when they put their money in. Then there will be a 1.5%-a-year management fee and, worse, a performance fee, which, says David Wighton in The Times, will be charged if the fund makes anything over 2% more than its benchmark Chinese index. That earns that even if the fund falls in value, investors will still pay the fees – as long as the fund falls less than the index. We don’t like the sound of this. These days even hedge funds tend to operate with “high water marks”: they don’t charge a fee unless they are actually in positive territory. And there is one other big problem with Bolton’s new fund: It is to be invested in China. Most investors expect the market to perform well over the next few years, but this is far from a given. Not only are bubbles building across the economy, but a huge level of growth – which may or may not appear – is already factored into stock prices. Our verdict? This fund is too expensive and too risky.
Fund of the week
Snap up your share of the world’s growing cash pile with one tax free tool… With shares prices rocketing left right and centre, the financial press has been ignoring dividend income to your detriment. Dividends remain one of the best ways to generate returns without SARS grabbing a slice of your interest. It’s not just the tax exempt status that makes them attractive. Last year companies across the board were panicking about how expensive credit was becoming. Enticed by fear the cash pile grew quicker than the Allies and Axis arms race of 1939. They slashed dividends to build their massive cash mountain. But with economic data pointing to a solid sustained recovery, companies can’t just let it sit on the balance sheet. They need to either invest it or pay it back to shareholders. The problem is the economy has a lot of spare capacity in the wake of the credit
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crisis, leaving them only one option… pay out juicy dividends. One fund that’s going to take advantage either way is the Marriott Dividend Growth Fund. This medium-risk fund seeks ever increasing dividend payments from solid JSE listed companies. It doesn’t limit itself to the top 40 but includes blue chips like Reunert (6.07%), Tigerbrands (5.52%) and Steinhoff (5.02%). See the adjacent table for the top 10 holdings. Its benchmark is the Financial and Industrial Index and its performance is nothing to sniff at. Over the last two very difficult years – a period where even Anglo American cut its dividend – it managed to return more than any other fund. It returned 41.14% weathering the greatest non-war time recession in human history. To get involved visit www.marriott.co.za or call 0860 378 466 for more information.
Performance to 9 March 2010 Invested
Price
Income
Total
3 months
7.94%
0.78%
8.71%
6 months
15.87%
1.77%
17.65%
1 years
44.49%
12.25%
49.84%
5 years
74.48%
29.40%
103.87%
cover story
Strike gold at your local rubbish dump Miners shift tons of ore to extract a mere gram of precious metal. But there is an easier way – and it could prove to be the next gold rush, says Eoin Gleeson. The crew of the Ocean Guardian have landed right in it. Within days of sinking their semi-submersible oil drilling rig off the coast of the Falkland Islands, they’ve managed to set off the most explosive diplomatic row between Britain and Argentina since the 1982 Falklands War. The Argentines have accused them of piracy. President Cristina Kirchner has been rallying allies across Latin America to banish the crew from the region. This is the last thing Falkland oil explorers needed. Up to 60 billion barrels of oil are thought to lie beneath these waters. But the treasure trove is proving a nightmare to get to. Forget the diplomatic problems. It took almost two years of wrangling to secure the Ocean Guardian. And having hauled it across the South Atlantic for 62 days, there’s still no guarantee the crew will strike oil after drilling 3,500 metres through sandstone. It’s not getting any easier to find the stuff.
Gold miners will say the same. At the Kloof and Driefontien mines in South Africa, Gold Fields is operating as deep as four kilometres below ground to mine gold. The company will spend $0.7bn deepening the mines… The problem is operating costs skyrocket the deeper into the bowels of the Earth you go. There’s an easier way to find gas and gold. If you venture to the outskirts of any major city, you’ll find huge deposits of gold, silver, cobalt and gas – just waiting to be shipped. Where are they? Why not try you local rubbish dump! This is where the next mining rush will take place. To mine one gram of gold, most companies will move a ton of ore. But you can pull the same amount of gold from just 41 mobile phones, according to a United Nations report on electronic waste published last week. Silver, cobalt, palladium – metals that are increasingly sourced from unstable, despotic countries – are all found in abundance at your local landfill. And it’s not just electronic waste – there’s money
to be made from landfill methane, animal grease and medical waste too.
Electronic waste Electronic waste is the fastest-growing form of rubbish worldwide. China alone will produce 2.3 million tons of electrical refuse in 2010 – dumping 500,000 tons of refrigerators, 1.3 million tons of televisions and 300,000 tons of computers. Huge mountains of electronic refuse are piling up outside China’s cities. And locals clamber over the parts left by recyclers, tearing apart televisions and computers for copper wire and gold from circuit boards. The trouble is that this waste is highly toxic. The cadmium from just one mobile-phone battery is enough to pollute 600,000 litres of water – a third of an Olympic swimming pool. In Britain, we discard a million mobile phones every year. As a result governments have been introducing laws that require electronic companies to use professional recycling groups to deal with their waste. The European Union’s Waste Electrical and
Forget trash – there’s gold in mine dumps too Garbage is the ultimate play on a growing global population. Since 1960, the amount of solid waste we create every year has tripled, while the population has grown by less than 100%. America produces 700kg of municipal waste per person, compared to Nairobi’s 220kg, says The Economist. We can no longer let this waste just pile up in the dump!
of US landfill space is split between Republic and its rival, Waste Management (NYSE: WM). The latter is investing heavily in waste-to-energy technologies and now operates 115 gas-toenergy facilities. Waste Management maintains a solid profit margin of 7%, trades on a forward PE of 14, and pays a dividend of 3.5%.
We throw away thousands of computers, televisions and mobile phones each year. Regenersis (LSE: RGS) is one of Europe’s leading phone recyclers, collecting unwanted mobile phones from major phone companies and selling them to suppliers in the developing world. Paul Hill’s Precision Guided Investments newsletter says the stock is very cheap.
South Africa’s waste management landscape is littered with bad news stories. Earlier this year it emerged contractors were dumping medical waste in open landfill sights in blatant contravention of the law. The Environmental Management Inspectorate (Green Scorpions) unearthed a number of illegal landfill sites, where sharps, pharmaceuticals, vials, syringes, drips, dirty bandages and general medical waste were disposed of. The bulk of the country’s waste management businesses are private unlisted companies, and since the de-listing of EnviroServ (in August 2008) local investors are stuck for investment choice. If
The world’s greatest investor is also on the prowl for rubbish. Warren Buffett recently raised his stake in garbage group Republic Services (NYSE: RSG) from 3.6m to 8.3m shares. Much
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cover story
China alone will produce 2.3 millions tons of electrical refuse in 2010 Electronic Equipment (WEEE) directive – now law in Britain and across the EU – has set firm targets for the collection and recycling of electronic goods.
gold than can be produced from 17 tonnes of gold ore, Christian Hagelücken of Belgian recycling group Umicore tells Spegil.
In practice, this means that electronics manufacturers and retailers are dumping their wares into public recycling sites. There, the computers and TVs are stripped for reusable microchips and parts. These are sent back to the likes of Apple for remanufacture. Then recyclers strip the rest for the metals. A tonne of scrap from discarded PCs contains more
Not every electronics firm has the scruples to recycle their waste like this. It’s far cheaper to ship your waste off to un-regulated foreign shores, where it is dumped in huge toxic piles outside the likes of Nairobi and Shanghai. Germany alone exports around 100,000 tons of electronic scrap each year, says Hagelücken. “Old cars awaiting export in
you want listed exposure to waste processing you should consider mine dumps rather than rubbish dumps. A number of the country’s gold miners are reclaiming the precious metal from the massive mine dumps scattered throughout Gauteng. Simmer & Jack Mines (JSE: SIM) is one such company. The gold mining junior is actively expanding its surface operations to supplement costly underground activities. In the latest quarter (to 31 December 2009) the company achieved a 37% increase in surface production at its Buffelsfontein Gold Mine. The mine produced 170kg of gold from 499 503 tons of surface mine dumps at a yield of 0.34g/t. The underground operations at the same mine produced 668kg of gold from 178 488 tons of ore, at 3.74g/t. The company’s Transvaal Gold Mining Estates recovered 27.5kg of the precious metal from its Elandsdrift Heap Leach Pad and a further 37.6kg from rock dumps and other surface sources. Simmer has finally settled a long running dispute between management and its major BEE shareholder and can refocus on mining. It delivered R8m in cash operating profits in the latest period from 903 kilograms of gold.
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Hamburg harbour are often stuffed to the ceiling with electronic scrap.” But other electronic items are quite lucrative to recycle. Take mobile phones. The average phone returned to retailers has a working life of between six and seven years, notes Paul Hill in the Precision Guided Investments newsletter. Each mobile phone that we dump in Britain is worth around £16 to a recycling group. The Chinese are particularly interested in importing laptops and Continued overleaf
The business of animal rendering and recycling is serving Darling International (NYSE: DAR) well during the recession. Darling is America’s biggest independent rendering group – collecting and handling animal by products and grease from restaurants and slaughterhouses. A deal with oil refining giant Valero Energy also means the company will be processing waste into bio-diesel. The deal could add another $137m to its $660m market cap by 2013, reckons analysts at Jessup & Lamont. The group has $22m in net cash on the balance sheet and trades on a forward PE of 12.4. Sharps Compliance (NASDAQ: SMED) is a medical waste disposal expert in America. Hospitals pack their needles, surgical knives and other sharp implements into its puncture resistant containers and send them off to a disposal centre. The $95m company has more than $20m in deals with big pharmaceutical companies sitting in the pipeline, says Joel Greenblatt on Seeking Alpha. With big pharmaceutical and government contracts the forward PE 8f eight makes it worth the risk.
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Landfill gas
a lot less is being dumped too. If you’d visited your local landfill six months ago, it would have been very quiet. Operators at the Puente Hills Landfill in San Francisco, one of the largest in the US, recorded a 30% drop in tonnage around this time last year.
The last few years have brought a series of breakthroughs for gas explorers. Vast reserves of hydrocarbons were found thousands of feet beneath the sea floor from Africa to the South Atlantic. And explorers in the Marcellus Shale region of America have perfected a method of horizontal drilling, whereby they lower drills thousands of feet into the fractured rock and twist them to reach once unreachable reserves.
But one type of trash has been thriving during the recession: junk food. “Eating healthily has been one of the big casualties of this economic downturn,” says Harry Balzer, author of a recent report on eating patterns in America. Cash-strapped consumers are finding solace in their local fast-food chains. In Europe, McDonald’s recorded a 6.9% jump in same-store sales last year.
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But it would have been far cheaper to source the gas from the dump. Landfill is an excellent source of methane gas. As rubbish degrades, methane rises up to the surface. When waste is subjected to heat, it breaks down to yield a blend of hydrogen and carbon monoxide called syngas, which can be burned in engines and turbines. There are some 1,000 projects underway worldwide selling gas gleaned from degrading rubbish to industrial outfits. By fermenting the cellulose in paper at landfills, you can also produce pretty decent ethanol. But who buys the methane siphoned from landfills? Utilities companies for one! The US turns about 12% to 15% of its solid waste into electricity a year – generating enough energy to serve 2.8 million homes. Already the world’s 700-odd waste-toenergy plants generate more power than all its wind turbines and solar panels put together. Last month, British Airways said it plans to start sourcing some of its fuel supply from rubbish. A jet fuel plant, set to be built in east London by US bio-energy group Solena, will initially supply 16 million gallons of “green airline fuel” a year – about 2% of BA’s fuel consumption. The plant is expected to begin active production by 2014, according to Kevin Hammond of Biofuels Watch. The biggest problem for the companies developing these waste-toenergy projects is there are cheaper ways to deal with rubbish. A plant with a capacity of 1,300 tons of waste per day is likely to cost around $30m to $180m to build, according to a report this month from research group Frost & Sullivan. But governments worldwide are offering big incentives to waste firms to fund these 18
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mobile phones to source rare-earth metals. We look at the leader in mobile phone recycling in the box on page 24.
Cars run better on this than chips
“You can run a car on animal fat” projects. While methane only accounts for 4% of greenhouse gas emissions – largely from rotting food – landfill gas is one of the few sources of emissions over which they have jurisdiction. In Britain we discourage waste firms from allowing their dumps to fill, by taxing them heavily. The tax has risen by £8 a tonne in recent years (it’s now at £32). And by recovering energy from waste, governments can compensate for dwindling energy resources.
That keeps the landfill sites busy. But it’s the organic waste that’s the really interesting sideline here. Cooking meat generates a lot of fat that you can’t simply dump. So there is a steady business in collecting and handling animal grease and other by products from restaurants and slaughterhouses – particularly in the US, where a few independent groups dominate. Why is animal fat useful? Because you can run a car on the stuff! We’ve long known that you can fuel a car with chip fat. But it turns out that biodiesel from animal fat is far better than vegetable oil. A number of major oil refiners have already developed green diesel plants in the US – with the government handing out loans that cover 80% of the building costs for anyone who’ll ask. We look at one group leading the green bio-diesel industry on page 24.
Medical waste There are also a number of waste-toenergy technologies that could radically cut the costs of producing gas from landfill. Waste Management, the biggest waste group in the States, has been experimenting with a type of landfill called a bioreactor. This is designed to speed up the decay of biodegradable waste by pumping in air, water and recycled leachate (the liquid that drains from a landfill). This produces gas four times faster than normal and cuts the volume of waste to 35%, says The Economist. Waste Management is already operating 115 gas-to-energy facilities across America. We take a closer took at the company in the box on page 24.
Animal fat Not everything at the dump is worth recycling. As the price of paper, glass and plastics dived during the recession, recycling efforts rapidly tapered off. And
American hospitals create a huge amount of waste each year. Discarded medical devices are often shipped to hospitals in developing countries that could never afford it otherwise, or recycled for re-use in US hospitals. But much of this waste can be extremely dangerous if not dealt with properly, or if thrown away with ordinary garbage. In Gujarat last year, for example, officials seized hundreds of tonnes of recycled medical equipment after an outbreak of Hepatitis B killed at least 70 people and left about 240 infected. So as with any other form of hazardous waste, there’s a steady line of business available for companies that can deal with it safely. A few specialist groups do very well disposing needles, equipment and devices from hospitals throughout the West. We have a look at one group in the box on page 16.
the best blogs What the bloggers are saying
http://www.adamsmith.org/blog Why do unemployed Americans work harder at finding work than Europeans? asks Tim Worstall. According to a new paper from America, the average US unemployed worker devotes about 41 minutes to job hunting on weekdays. That’s substantially more than their European counterparts. The reason lies in another finding – across the 50 states of the US, the amount of job hunting done is inversely related to the value of the unemployment benefits available. It also spikes just as unemployment benefit is about to end. In other words, “if you pay people to be inactive, there will be more inactivity”. No surprise, then, that in many European countries, state unemployment payouts are high. And the evidence mounts further if you break unemployment down into short term (under a year) and long term. You then find short-term unemployment is around 4% of the workforce in America and Europe. But in Europe there are another 4% who have been out of work for over a year, compared with almost none in the US. Why? It’s simple: US unemployment benefits run out after six months, while in most of Europe they continue for years, “or indefinitely”. This merely confirms that “long lasting unemployment benefits really do provide an incentive not to look for work”.
Why doesn’t Greece sell a few islands? http://stumblingandmumbling.typepad.com “It is perfectly normal for a company in financial difficulties to sell some assets. So why shouldn’t countries in financial trouble – as Greece is – do the same?” asks Chris Dillow. After all, “economic efficiency requires that assets should go to those best able to manage them”. And that should include territory. “There is a good precedent for this.” Two-fifths of the US landmass was acquired through market transactions. The main objection seems Greek islands: a potential source of cash to be that such deals “violate national sovereignty”. But what does that mean? “If it has any value then surely it derives simply from the fact that individuals have a right of self-determination.” That is irrelevant for many unpopulated Greek islands. And where potentially tradeable territories have populations, letting them decide their future might result in them insisting their territory is transferred “to more competent governments”.
Unemployment is bad news for flu viruses http://blogs.wsj.com Scientists are “puzzled”, says Justin Lahart. Why did new H1N1 swine flu cases dwindle this winter? “Perhaps the economy has something to do with it.” With unemployment high, “fewer people are sniffling around the water cooler”. And that matters, according to research by economists from Emory University. Looking at data from the Centres for Disease Control and the Labour Department’s household survey of employment, the economists used regional differences in flu cases and
employment rates to calculate whether increased hiring can lead to a rise in the number of people laid up in bed. They then cross-checked their results against Google Flu Trends data on the number of flu-related web searches by state. Sure enough, they found that for every 100,000 new employees, there are 2,246 new flu cases during flu season. OK, so the economists didn’t apply their work to what’s happening now, “but we can”. Nearly 3.9 million fewer people working in the US in January than a year earlier translates into about 87,000 fewer flu cases. “Nothing to sneeze at.”
Organic wine: not to be sniffed at http://blogs.reuters.com/felix-salmon
This “is a huge result”. It implies that if you take the “organic” label off, say, Californian wine, you can jack up its price. That in turn presents an opportunity. Just buy wines labelled as organic, “and you’ll save lots of money”. Wine-makers know that organic wines taste better, but consumers think they taste worse. “So wine-makers often make organic wines without telling. And
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Why would a wine-maker go to the trouble of making organic wine, but not tell his customers? asks Felix Salmon. The answer is surprisingly simple. Research reveals that while certifying a wine increases the price by 13%, including an eco-label actually reduces it by 20%. This rather confirms “the negative connotation consumers apply to ‘green wine’”.
consumers will happily pay up for them as long as they don’t know they’re organic. Sure, organic wine can age badly once opened. But that’s the only downside. Until consumers wise up, those of us in the know “can continue to play the arbitrage”.
©PHOTOLIBRARY
Why Europeans prefer the couch to a job
entrepreneurs
Redundancy was the push I needed her daughter Lily, whose name she adopted for the business, in a crèche and took on the deliveries, production, packing and sales herself.
by Jody Clarke With legendary Irish racehorse trainer Vincent O’Brien for an uncle, it’s no surprise that Mary Ann O’Brien, 49, got her first proper job in the horse-racing industry. “That’s all everybody I know does,” says the founder of £16m-a-year chocolatier Lily O’Brien’s Chocolates. But she’d always wanted to run her own business. So when the Dublin racetrack she worked at as a marketing director shut down, she grabbed the first business opportunity she saw with both hands. Tipperary-born O’Brien was on holiday in Cape Town in 1993 when she ventured into the hotel kitchen. The owner’s daughter had a tiny business making chocolates. “I spent the whole two weeks of my holiday in a bikini in the hotel kitchen making chocolates. The minute I came back from South Africa I made the same batch.” She sold them that same day, at her local hairdressers. They were simple ‘chocolate crunchy hearts’, made from honeycomb and rice krispies, but people liked them, and she sold the lot. O’Brien continued cold calling. She’d melt and hand-pipe chocolates every night, then box them up and drive around the country in her car with them. “I was the only employee, so I used to cry when things broke because I didn’t have an engineer.” With the firm gaining some traction, O’Brien borrowed £36,000 from AIB in Dublin and
Mary Ann O’Brien, Lily O’Brien’s Chocolates
In 1994, Aer Lingus asked O’Brien to tender for its trans-Atlantic and European contract, making six million mint pins and three million ‘two-choc’ boxes. I laughed and said, “Look lads, I couldn’t make that in a year.” But in 1995 the airline came knocking again. By then, O’Brien’s sales had hit the £1m mark and she had her own purpose-built factory. She took on the Aer Lingus deal, and “went immediately to British Airways, where I won my first very large BA contract. After that, I was away like a shot from a gun.” It was big business. Everyone in the business section of every plane, from noon onwards every day on every flight got a two-choc. “That was four million twochocs a year, which allowed us to get into the airline catering business.”
approached the supermarket Superquinn. “I was a great woman for knocking on a door with a briefcase and prototypes, even though I didn’t really have a factory.” They liked the moulds of lion’s heads and crocodiles she’d brought back from South Africa. “So they allowed me to put some of my chocolates in the chocolate section of the bakery. And within nine months, the Belgians were out and I was in.” The contract was worth £250,000 at the time. O’Brien put
In 2008, the group served 17 million branded Lily O’Brien’s chocolates on 23 airlines around the world. Turnover hit £16m last year. The business has opened a store in Manhattan, and O’Brien is trying to keep a handle on the recession and a sky-high cocoa rice price. “Speculators can really push the price up, which makes me very cross because it’s my livelihood. But what goes up must come down – if you’re at it long enough you just hang on.”
MY FIRST MILLION
The MoneyWeek audit: Johnny Depp ● When did he get his big break? Johnny Depp’s big break came in 1987 when he won the lead role in US TV show, 21 Jump Street. The show turned the actor, now 46, into a heart-throb and earned him $45,000 an episode. In 1990 he made the move to the big screen with Edward Scissorhands – his first collaboration with director Tim Burton. The film grossed $54m worldwide, but Depp recently stated that many in the film industry saw him as “box office poison” during the 1990s, due to his odd, cult film choices. He didn’t entirely shake off this reputation until he signed up to play Captain Jack Sparrow in Pirates of the Caribbean in 2003. He was paid $10m for the first
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film – it was such a phenomenal success that his fee was doubled for the second instalment. ● How important is Tim Burton to his career? In 2008 the Guinness Book of Records named the pair as having the most lucrative partnership in Hollywood. At that stage their six collaborations had grossed £550m worldwide. But in terms of personal wealth, the Pirates of the Caribbean franchise has contributed the lion’s share to Depp’s fortune. A royalties deal on the film and the merchandising is believed to have earned the actor more than £100m so far – he earned $72m in 2008 alone. And he is set to make a fourth film in the series next year. ● What does he spend his fortune on? In 2004 Depp splashed out $3.5m on a 35-acre private island in the Bahamas, which comes with six private beaches and a Tiki hut. He also co-owns the Man Ray restaurant in Paris with fellow actors Sean Penn and John Malkovich.
personal finance
Seven sure-fire ways to secure that crucial loan with minimum fuss... by Karin Iten 4. With credit being tight right now, getting a loan is hard. And since more and more institutions have access to your personal financial records, a bad credit rating could be the very thing that stands in your way of getting the best possible interest rate. Or even worse, having your bond or car loan application denied.
5.
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That’s why it’s become so important to understand what your credit rating is, as well as knowing how to improve your present score. Here are our top tips to doing just that.
7.
Five factors that determine your credit rating... Credit bureaus tend to base your credit risk on five factors:
A bond shows potential lenders you can handle your finances
1. Payment history (35%): Do you pay your bills on time? Obviously, on time is better, and being late becomes progressively worse depending on how late, how frequently and how recently the event occurred.
makes a note of the inquiry on your record. Too much activity on your account will make potential lenders nervous. Statistically speaking, someone seeking a lot of credit in a short time is inherently riskier than someone who doesn’t.
2. The amount of money owed (30%): What is your credit limit and how much have you used up? In some cases, your score can be hurt if you accept a credit limit increase offered by a credit card issuer that’s slow to report the new limit. If the lender doesn’t immediately report your new limit, a high balance can show up as exceeding your credit limit.
But what about shopping around for the best loan? you ask. Your rating won’t be penalised if you’re hunting for a car loan or a bond within a short time frame. But your score will be affected if you shop around for the best credit card or personal loan deal by applying for it.
3. Types of credit in use (10%): Lenders like to see a mix of debt beyond credit cards. A bond or a car loan shows you can handle your money. But be warned, getting credit from a finance company will appear as a black mark on your record (one way to tell a finance company from a bank is that banks generally offer cheque and savings accounts; finance companies don’t). 4. New credit (10%): When you apply for credit, the prospective lender calls up your credit report and the credit bureau
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5. Length of credit history (15%): When a credit card company offers you a higher limit, it’s like another ball in the air for a juggler. Can you handle the added burden? The credit bureau presumes you can’t, until you prove over time that you haven’t taken on more than you should and can continue to make payments on time.
Bottom Line: Three months before you apply for any kind of a loan, get a copy of your credit information. Visit www.mycredit.co.za to apply for your annual report – free. If your credit information is inaccurate in any way, contact TransUnion on 0861 886 466, and ensure the information is corrected BEFORE you apply for a loan (or you could run the risk of being denied!). Remember to include any additional information too. The more information you can provide about yourself, the more comfortable lenders may feel about extending credit to you. And certain information – such as having the same job or address for a few years – can make you appear to be more stable in lenders’ eyes. Make sure the bureau adds the following: •
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7 strategies to improve your rating! 1. Make loan payments on time and for the correct amount. 2. Avoid using more than your available credit limit. 3. Never ignore overdue bills. If you encounter any problems repaying
your debt, call your creditor to make alternative arrangements. Make sure you don’t have a credit card from a financing company, as this can negatively affect your score. Open numerous store accounts and be sure to pay these accounts on time – this can dramatically increase your rating! Keep your outstanding debt as low as you can. Continually extending your credit close to your limit is viewed poorly. Limit the number of credit applications. When another company looks at your credit report, it’s viewed negatively.
•
If you’ve had your current job less than two years, your previous employer and job title should be listed as well. Is your address listed and correct? Is your identity number listed and correct? This is the way most lenders will identify you. Is your telephone number listed and correct? Many lenders may not extend credit if they can’t call to verify your information. Does your report include all the accounts you’ve paid on time? You can send a letter to the bureau with a copy of your latest statement and cancelled cheques to prove you’re paying on time.
profile This week: Malcolm Glazer
Friendless money-making machine who saddled Man U with £700m in debt
Glazer likes to describe his rise as a “true American success story”, says The Guardian. The son of Jewish Lithuanian immigrants, he worked in the family watch-parts business in Rochester, New York, as a child. When his father died in 1943, he assumed responsibility for the business at the age of 15. “Thereafter the tale has less charm.” His 60-year career – spanning everything from property and sports clubs, to fastfood, fisheries and nursing homes – has been punctuated with bizarre court cases. He was dubbed a “slumlord” after he
illegally charged the residents of one of his trailer parks $5 a month for keeping pets. And, even after making his fortune, he fought his six siblings for a decade in the civil courts over his mother’s $1m estate.“He’s like a machine – money, money, money. There’s no other dimension,” one sister later observed. “Gimpish, orange-bearded and given to belting his trouser waistband ludicrously high”, Glazer is a man “with no discernible friends”, says the Daily Mail. The recurring theme in his career has always been leverage, combined with “high nerve and astute analysis”. He made his first pile borrowing heavily to buy cheap rental properties in Rochester. Then, in the 1980s, he reinvented himself as a corporate raider. A decade later, he made a killing in junk bonds. Given his reported dislike and ignorance of sport, Glazer’s move into American football – with the 1995 acquisition of the Tampa Bay Buccaneers for $192m – surprised some, says The New York Times. The rumour goes that “he once cheered for the wrong side”. But, like his later acquisition of Manchester United, it was a pure business play. Say what you like about Glazer – now reckoned to be worth $2.2bn – but at least he’s consistent, says The Guardian. Back in 2005, Manchester United seemed an “enticing prospect for Glazer-style
©NFL/GETTY IMAGES
By all accounts, Malcolm Glazer has a thick skin. But even he must have winced when he heard “Malcolm Glazer’s gonna die” chanted around the stands at Old Trafford when he bought Manchester United in 2005. Since then, Glazer, now 80, has suffered two strokes and handed control of the club to his sons. But as for mercy, forget it, say Manchester United fans. If anything, the chants have got worse. Yet for all the vitriol and threats, the Glazers seem determined to fend off the Red Knights’ bid for the club, or at least hold out for the highest possible price (see box). That won’t surprise anyone who knows Glazer, says The Tampa Bay Business Journal. He has always been a “high-stakes poker player who holds his cards extremely close to his vest and only offers subtle hints as to how he will play them”.
financing”: A rock-solid asset that he could mortgage up to the hilt to crank up the potential returns. So it’s little surprise that the top of the gripe list for fans is that Glazer and his three director sons have saddled a previously debt-free club with liabilities of £700m, while lining their own pockets. But after years of fruitless battle, the Manchester United Supporters Trust has been invigorated by the Red Knights’ attempted putsch. “In the coming days and weeks we can change everything”, the group is telling its members. Maybe.
World’s most powerful football fans plot a coup The plot to snatch control of Manchester United from the Glazers has electrified both Old Trafford and the City, says The Observer, mainly because of the collective pedigrees of the Red Knights. The group is led by Jim O’Neill, chief economist of Goldman Sachs. It also includes Keith Harris, chairman of broker Seymour Pierce, plus sundry other hedge-fund supremos, hot-shot lawyers and senior advertisers. But can what is perhaps the world’s most powerful group of football fans pull off the coup? Many in the City are sceptical, says The Sunday Times. It is thought that the Knights may need anything up to £1.5bn to buy out the Glazers and leave the club debt-free – hardly small change. They intend to raise about £500m from 50 or 60 “superinvestors”, a further £250m from rank-and-file fans, and would
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probably retain a £500m bond. But the supporter-owned model is fraught with difficulties – and it is far from clear if they would get the backing of the club’s CEO, David Gill (reported to dislike Keith Harris), or its manager, Sir Alex Ferguson. Besides, the tilt carries personal risk for O’Neill, once described by BusinessWeek as “Goldman’s rockstar”. The Glazers are longstanding clients of Goldman Sachs (which helped with the £500m bond issue) and are threatening to terminate their relationship. Rule one of Goldman’s business principles states: “Our clients’ interests always come first.” Rule two begins: “Our assets are our people”, notes Nils Pratley in The Guardian. So what happens when these principles collide? We may be about to find out.
Spending it Where to stay – the Maldives
A family-friendly resort versus a budget paradise Anantara
Lily Beach Resort & Spa What’s so special?
Forget the traditional image of the Maldives as a honeymoon-only zone. The archipelago in the Indian Ocean is now luring families and children with kids’ clubs, children’s menus and entertainment. Anantara is one of four islands that offers free child care for children aged four and over.
What’s so special?
With the Maldives opening up to a wider audience, it’s not just kids who are now welcome. There is also now a more wallet-friendly way to enjoy paradise. It isn’t quite a budget option, but Lily Beach Resort’s allinclusive Platinum Plan is as close as you’ll get in the Maldives. The package includes flights, villa accommodation, unlimited branded drinks, fine dining and even unlimited cigarettes for seven nights.
How they rate it
Anantara is “my favourite family-friendly” resort, says Jane Knight in The Times. And there’s no fear of disturbing loved-up honeymooners. The hotel is split between three islands: children stay on Dhigu Island; couples on Veli and Naladhu. On arrival there “was not just a welcome toy but a whole gift pack, incorporating every-thing from toothbrush and child toiletries to a make-your-own rocket kit”.
Renovated in April 2009, the Lily Beach Resort & Spa “exudes barefoot luxury”, says Deepa Shah in The Independent. The modern decor executed in traditional woods and natural stones blends discreetly with the lush vegetation. There are 115 villas, one of the most private of which is the Sunset Water Suite. This three-room villa features a king-size four-poster bed, free mini-bar, a shower with a glass floor over the sea, and a private deck with infinity pool and steps directly into the sea.
The menu The food “was the most diverse that we tasted in any resort”, with eight restaurants offering Thai, Japanese and Italian cuisine and seafood. Knight’s son was “always served first at mealtimes – a full child is a happy child”.
The menu The resort has three restaurants which serve “beautifully-presented, international fare including everything from home-made waffles to sushi”.
The cost Seven nights B&B with flights and transfers cost from R22,279pp with British Airways. www.ba.com.
The cost Seven nights all-inclusive cost from R24,132pp with Kuoni. Find out more at Kuoni.co.uk.
How they rate it
What the travel writers are saying
My dream holiday
There should be an award for best motion picture backdrop, say Kate Quill and Tom Chesshyre in The Times. If there was, here are the films that would be this year’s nominees. The “stunning landscapes” of the planet Pandora in Avatar do exist – “if a little less digitally enhanced”. Kauai Island in Hawaii was used for the backdrops as it has “all the requisites of paradise: palm trees, aquamarine sea, waterfalls, canyons, ravines, rainforest and dramatic cliffs”. Bon Voyage Travel has a ten-night Hawaiin island-hopping trip, with five nights on Kauai costing from R21,161pp. Bon-voyage.co.uk.
Heaven on earth is Fish Hoek in South Africa, says Brian Blessed in The Sunday Telegraph. This town lies at the mouth of the Silvermine River and is “the most beautiful place in the world”. The Tudor House Guest Lodge (Tudorhouse.co.za) is right by the sea and “boasts the most fabulous views”. There is a “terrific” restaurant on the beach called The Galley (fishhoekgalley.com), which “serves the tastiest fish I’ve ever eaten”.
Vasquez Rocks Park in Los Angeles County has featured in numerous films, most famously Star Trek, but most recently Tom Ford’s A Single Man. The strange rock formations are part of the San Andreas fault. The park is a 30-minute drive from Los Angeles, entrance is free and the park is open daily from 9am-5pm. The scenes where the murdered Susie watches her family cope with her death in The Lovely Bones were shot on South Island, New Zealand, a “real-life heavenly location”. Bales Worldwide offers a 13-day “Highlights of New Zealand” tour from R24,975pp including flights. Balesworldwide.com.
12 March 2010
toys
A sporty saloon from Lexus This is the updated Lexus IS-F, its luxury, high-performance saloon, and it’s even better than its already-impressive predecessor, says Ollie Marriage in Evo magazine. Pull away and it feels almost identical to the old model. But that’s only until you “really start working the throttle through corners”. That’s when the new car’s limited slip diff comes into its own. The torque-sensing diff has lopped two seconds off the IS-F’s lap times and improves traction and stability in highspeed corners. “What strikes you first is not only how much earlier you can get on the power, but how much harder.” The steering
isn’t as well weighted and consistent as a BMW M3, but the IS-F does have a “truly bonkers engine, a proper roarer that goes rabid over 3,700rpm”. In fact, it compares very well with its nearest rivals, the M3 and Mercedes C63 AMG. That’s assuming you can “see past the badge”. The IS-F is excellent and offers BMW-like levels of overall performance, luxury and safety, says Automotive Addicts. The new model has more technology and standard equipment, including a new sat nav, and driving it is “pure excitement and pleasure”.
Price: R776 900. Engine: 4,969cc, V8. Power: 417bhp @ 6600rpm. 0-100km/h: 4.8secs (claimed). Top speed: 270km/h (limited).
Wine of the week: from Allee Bleue, a great place to visit Allee Bleue Starlette Blanc 2009 Approximate retail price: R30 Situated in Groot Drakenstein, close to Franschhoek, this picturesque estate is definitely worth a visit. Not only can you taste their range of wines, but you can also experience their peppery intense Olive Oil. They produce a wide selection of fresh herbs, which are sold by Marilyn Cooper commercially around the country, from rocket, watercress, basil, coriander, lemongrass, parsley etc. Look out for them in your local supermarket. The farm is centrally situated, so you can visit wineries in Paarl and just over the mountain in Stellenbosch while staying in
12 March 2010
Kendall Cottage, an historic residence dating back to 1920. It also makes an ideal wedding venue. The wine I enjoyed while sitting under the tree enjoying a picnic was the Starlette Blanc, the first wine made by the new winemaker Van Zyl du Toit. An 80% Sauvignon/Chenin Blanc blend, it is elegantly zesty – a characteristic from the Sauvignon, while the Chenin adds a hint of pasion fruit and mango both to the aroma and the palate. ● Marilyn Cooper is a Cape Wine Master and Managing Director of the Cape Wine Academy.
blowing it
Seinfeld’s long struggle with parking grumbling about a New Year’s Eve bomb scare in Times Square. This was caused by a van that had been abandoned there for two days, having gone unnoticed due to a police association sign on the windscreen.
There can be few things more satisfying than seeing hugely wealthy people scuppered by the day-to-day annoyances that beset the rest of us. I read with glee at the weekend that stupidly rich US comedian Jerry Seinfeld has landed himself in hot water over parking spaces, of all things. Despite the fact that Seinfeld’s eponymous sitcom ended more than a decade ago, reruns of the show earned him around $50m last year, adding to overall annual earnings of $85m and a total fortune of more than $500m. Even so, he still can’t get a parking space in New York. Seinfeld has complained about New York’s lack of parking spaces numerous times in his stand-up routines. “Everybody in New York knows there’s way more cars than parking spaces. It’s like musical chairs, except everybody sat down around 1964,” he once said. Seinfeld even based a whole episode of his sitcom around the problem of finding a parking space. In The Parking Space, the character of George Costanza sets out on a mission to find a free parking space, explaining: “It’s like going to a prostitute. Why should I pay when, if I apply myself, maybe I can get it for free?” Now it seems that Seinfeld’s driver has
come up with a novel, if not entirely legitimate, way to get around the parking problem. When Seinfeld arrived to film his new show, The Marriage Ref, his driver used an expired police parking permit. An “alert television reporter spotted the prized police placard on the dashboard”, reports James Bone in The Times. The reporter contacted Mayor Bloomberg to ask why Seinfeld had it. “I have absolutely no idea,” responded Bloomberg. It’s not the first time a celebrity or public official has been caught abusing police parking permits. But Seinfeld certainly chose the wrong time to be caught up in a parking scandal. New Yorkers are still
Seinfeld said the permit belonged to his driver, a retired policeman, but a quick investigation by the New York Police Department revealed that the permit actually belonged to a female detective, and had expired in 2007. To add to the mystery, the permit doesn’t even help you park in Manhattan – all it entitles the bearer to is a parking space at the Bronx Narcotics unit. Somewhere I’m assuming Seinfeld doesn’t go very often. But my favourite part of the story was learning that Seinfeld once spent $2m converting a building in the very expensive Upper West Side of Manhattan into a climate-controlled garage for his 20 Porsches. May I suggest travelling by helicopter in future, Seinfeld? You’ll have far less trouble finding a parking space – and heli-pads don’t need air-conditioning.
Tabloid money... Thailand’s tourist discounts ■ Political turmoil has hit Thailand’s tourism industry hard with the number of tourists dropping to 14.1 million in 2009 and revenue shrunk 3 percent from 2008. To get tourists back into the country, government are offering free insurance coverage worth $10,000 (around R75,000) to any tourist harmed in riots or political demonstrations. According to IOL, “victims will also receive free medical treatment and a daily $1,000 (around R7,456) in compensation if sent to hospital for more than 10 days”. If tourists’ travels are delayed due to riots they will be given $100 (around R745) per day. IOL also reported that tourists of all nationalities no longer have to get visas for Thailand – this policy will be in place until March 2011 but may become permanent. Thai government will be giving airlines 10 percent discount off parking fees and reduce landing fees by 20 percent. Hotels can also expect discounts off their electricity bills.
12 March 2010
■ A “lucrative industry” surrounds some of Britain’s deadliest prisoners, says Jane Moore in The Sun. Serial killer Peter Sutcliffe is using public money to fight for release from prison. Lawyers are “coining it in” via “taxpayer-funded ‘legal aid’”.Then there are the “doctors and other experts all being paid to supposedly ‘cure’ these sick minds”. Not to mention the costs incurred every time one of these prisoners “seeks to exploit some law imposed by the European Court of Human Rights”. But saying that a serial killer has “a low risk of re-offending” is not at all reassuring for the women who might meet Sutcliffe on the street if he is released. “Hopefully, his ‘life’ conviction will prevail, but not before hundreds of thousands have been spent pursuing the ‘human rights’ of a man who callously denied others the fundamental right to live.”
shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news PUNTS Company
Media
Reason
Exxaro (EXX) Mining
Financial Mail
Exxaro is the largest supplier of coal to Eskom and as Charlotte Mathews notes this company is moving from strength to strength. It’s managed to increase exports and is even looking for other energy opportunities. “Management shows vision and the long-term prospects are good.” Buy. 11750c
British American Tobacco (BTI) Tobacco
Summit TV, Rudi van der Merwe, Standard Financial Markets
Rudi van der Merwe of Standard Financial Markets says: “The market is looking stretched and vulnerable at this stage so I’m disinclined to be rush in.” But he adds that if you’re looking to get into equity, you stay with the defensives. British American Tobacco is one share that will hold value if the markets turn bad. Buy.
24650c
According to Charlotte Mathews, Petmin’s prospects have improved recently. It’s considering anthracite and iron ore expansions. If these pay off, we’ll see a strong improvement in the share price. Add to this the fact that the share has improved its operating margin in difficult markets, and it’s definitely worth a punt. Buy.
243c
Imara SP Reid is looking to Harmony as a long-term growth asset. The recent movements in the rand price have been favourable for South African gold miners. But at these levels, the share’s looking a little underpriced. “I-Net consensus forecast shows the market is already pricing in an 80% rise in earnings.” Buy.
7152c
Razina Munshi explains in the Financial Mail why, despite the difficult environment, Mondi actually looks like a good investment. It’s been slapped with low demand and European operations have struggled through the first quarter. That said, the business is going through a period of consolidation and will use its substantial cash reserves to reduce debt and reward shareholders. If you pick it up now, you could be in for some handsome dividends. Buy.
5050c
PETMIN (PET) Mining
Harmony (HAR) Mining
Mondi (MND) Mining
Financial Mail
Imara SP Reid
Financial Mail
Current price
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12 March 2010
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shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news DOGS Company
Media
Wesizwe (WEZ) Mining
Reason
Current price
Stockmarket Sleuth This platinum miner had a lot of potential but there’s no end to its funding problems. Gary Booysen of Stockmarket Sleuth points out that the platinum price may be rising ahead of expectations, but the car market remains depressed. The management squabble continues and without funding, Wesizwe isn’t going to be able to extract the platinum from its assets near Sun City. Avoid. 230c
WATCHLIST Company
Media
Reason
Current price
Blue Label Telecoms (BLU) Fixed line telecoms
Finweek
Simon Dingle of Finweek likes the look of Blue Label Telecoms. It’s had large growth from its international divisions and its cash reserves have jumped substantially. The international divisions in Nigeria, Mexico and India have exposed Blue Label to currency volatility, but there are plenty of positives for this stock. It’s disposed of assets that weren’t performing and has explored some very lucrative strategic partnerships offshore. The group currently earns 90% of its revenue in South Africa and this will allow the group to expand quickly. 482c
Imperial Holdings (IPL) Industrial Transport
Finweek
Svetlana Doneva of Finweek likes the look of Imperial car holdings. Its entry-level car market helped it to perform above expectations in the six months to end 2009. The group reported a 109% increase in profit and Imperial is in the market for expansion. It’s announced a number of sizable acquisitions. It’s also going to benefit from the influx of tourists thanks to its large exposure to the rental car market. It holds brands like Europcar, Tempest Car Hire and AA Autobay. That said its International Logistics division isn’t doing well and the strong rand could wipe out profits there. Increases in car prices thanks to the carbon emission tax set to be introduced later this year may also impact the company negatively.
10475c
**Closing prices as at 10 March 2010
I wish I knew what short-selling was, but I’m too embarrassed to ask Most investors make money by buying low, then selling high – the classic ‘long’ trade. But you can also make money by selling an asset first, then buying it back cheaper later. Often the stock being
I wish I knew what over-the-counter was, but I’m too embarrassed to ask Deals in any security can be done in two ways. One is via a regulated public market such as the London Stock Exchange. But many transactions are done privately
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12 March 2010
‘short-sold’ is borrowed. For example, a hedge fund might borrow 1,000 shares from a pension fund and sell them straight on for R2.50. Later, they are bought back for R1.50, netting the hedge fund a profit of R1 per share less any borrowing charge (interest) paid to the pension fund. Short-selling can backfire
badly if the borrowed shares rise in value after they’ve been sold. They still have to be returned to the lender, meaning a big loss for the short-seller when they have to buy them back for more than they sold them for.
between counter parties and with no exchange involved. These are known as over the counter, or OTC. OTC deals have a number of advantages for each party, including the fact that details of the trade are not published. Furthermore, in many markets OTC deals are subject to less reg-
ulatory scrutiny as they are not generally open to the investing public. However, OTC deals also have their critics, who complain that the existence of ‘dark pools of liquidity’ – large deals being done regularly off-exchange – exclude private investors from the best trades.
last word
The patsy revolt of 2010 Nothing for something is not a good deal. “Masked youths … attacked the head of Greece’s largest trade union, who was addressing the crowd, and hurled stones at the police. GSEE union boss Yiannis Panagopoulos traded blows with the rioters before being whisked away, bloodied and with torn clothes.” The Daily Mail account puts the blame for these disturbances on Germany’s finance minister, who warned the Greeks that “the German government does not intend to give a cent”. At least Bild, a popular German newspaper, tried to be helpful. It suggested Greece sell Corfu and that Greeks get up earlier and work harder.
Bill Bonner
prosperity. He saw savings as a threat. He had it backwards. Consumer spending is made possible by savings, investment and hard work – not the other way around. Then, William Phillips thought he saw a cause-and-effect relationship between inflation and employment; raise prices and you raise employment too, he said. Jacques Rueff had already explained that the Phillips Curve was just a flimflam. Inflation surreptitiously reduced wages. It was lower wages that made it easier to hire people, not enlightened central bank management. But the scam proved attractive. The economy has been biased towards inflation ever since.
stamps and so on. Households no longer needed to save. They could live up to their means… and then, beyond them.
©AFP/GETTY IMAGES
As time wore on, more and more people lived at someone else’s expense. Lobbying and lawyering became lucrative professions. Bucket shops and banks neared respectability. Every imperfection was a call for legislation. Every traffic accident an opportunity for wealth redistribution. And every trend was fully leveraged. If there was anyone still solvent in America or Britain in the 21st century, it was not the fault of the banks. They invented subprime loans and securitisations to profit from areas of the market that had previously been spared. By 2005 even jobless people could get into debt. Then, the bankers found ways to hide debt, and ways to allow the public sector to borrow more heavily. Goldman Sachs did for Greece essentially Meanwhile, from Iceland what it had done for the comes news that every voter subprime borrowers in the with an IQ above air private sector – it helped them temperature has cast his to go broke. As long as people ballot against a bail-out plan. thought they were getting The Icelanders were slated to something for nothing, this make good $5.3bn in bank model enjoyed wide support. losses (see page 4). But why But now they’re getting nothing shackle common voters to for something, the masses are Insurrection is in the air – but the system will collapse all on its own the banks’ losses? The plan unhappy. Half the US states are Economists enjoyed the illusion of was so outrageous and so unpopular that insolvent. Nearly all are preparing to raise competence; they could hold their heads Iceland’s normally compliant prime taxes. In Europe too, taxes are going up. up at cocktail parties and pretend to minister called for a referendum. Given a Services are going down. Taxpayers are know what they were talking about. chance to vote on it, 93% said no. being asked to pay for banks’ losses, and Now they were movers and shakers, not The other 7% probably read it wrong. pay interest on money spent years ago. just observers. The new theories seemed to give everyone what they most wanted. Insurrection is in the air. In England, Several countries are already past the Politicians could spend even more money government employees are preparing the point of no return. Even if America taxed that didn’t belong to them. Consumers biggest strike since the 1980s. In 100% of all household wealth, it could enjoy a standard of living they America, dissatisfaction with Congress is wouldn’t be enough to put its balance couldn’t afford. And the financial at record highs; four out of five of those sheet in the black. Professors Rogoff and industry could earn huge fees by selling polled say “nothing can be accomplished Reinhart show that when external debt debt to people who couldn’t pay it back. in Washington”. Herewith, an attempt to passes 73% of GDP or 239% of exports, deconstruct the rebel yell. By way of the result is default, hyperinflation, or Never before had so many people been so preview, it’s not the principle of the thing, both. IMF data show the US already too happily engaged in acts of larceny and we conclude; it’s the money. far gone on both scores, with external legerdemain. But as the system aged, its debt at 96% of GDP and 748% of promises grew. From the 1930s, the There are more clowns in economics than exports. And now the patsies are in government took upon itself to guarantee in the circus. They invented an economic revolt. They needn’t bother; the system life’s essentials – retirement, employment, model that has been very popular for will collapse on its own. and, to some extent, health care. Over the more than 50 years, particularly in the years this grew to include minimum US and Britain. It began with a bogus To read Bill’s thoughts, sign up to wages, unemployment compensation, insight. John Maynard Keynes thought Money Morning’s free email at disability payments, free drugs, food consumer spending was the key to www.moneymorning.co.za. 28
12 March 2010