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from the editor 24 JULY 2009 ISSUE 104
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South African Inc responded positively to the 19 July 2009 announcement that Absa Bank chairperson Gill Marcus would replace Tito Mboweni as governor of the Reserve Bank. By lunchtime, Monday, the JSE All Share Index had rallied 232 points, while the rand surged to session-highs of around R7.97 to the dollar. Marcus is no stranger to the central bank, having served as deputy governor between 1994 and 2004. And since it’s unlikely the incoming governor will make radical departures from the bank’s existing inflation-targeting strategies, you have to wonder whether the market is celebrating Marcus’ arrival or Mboweni’s departure. MoneyWeek would like to wish the incoming governor well over her first term. There are weightier issues influencing the domestic currency at present. One is the continued weakening of the US dollar and the resulting calls from China (and others) to debate the dollar’s relevance as the global reserve currency. We expect the debate will dominate international currency markets in years to come, though changes to the status quo are probably decades away. On the domestic front, the currency is braced for the outcome of talks between Bharti Airtel and MTN Group. If a successful deal is announced, you’ll see massive volumes of two-way currency trade as each group struggles to raise the capital required to bring about their end of the bargain. Other good news is that Moody’s Investors Service recently upgraded South Africa’s foreign currency rating to A3 from Baa. This upgrade will open the door to cheaper international financing and hopefully lift the country a notch or two on the list of preferred destinations for international investors. Love
them or hate them, the ratings agencies still set the tone for international capital flows. Every silver lining has its cloud. As you celebrate the rosier outlook for the local currency, minister in the Presidency, Trevor Manuel has been adding to his recent recession denialism repertoire. He’s now teamed up with President Jacob Zuma in a “hard to believe” jobs through recession double act. Hot on the heels of Zuma’s “500 000 jobs by June next year” pledge, Manuel declared the country was on track to halve poverty and unemployment by 2014! You cannot fault the goal, but it’s not likely government will be able to conjure up enough infrastructure projects to reach it. To have any hope of meeting these targets, the country will have to undertake new projects similar in size to the Gautrain without sacrificing any of the work already underway. And that’s going to be a tough ask! Even if new projects of this magnitude can be planned, financed and implemented in the next five years, we doubt they’d compensate for job losses in the manufacturing, mining and other consumerdriven sectors of the economy. And South Africa is one of the few emerging economies to have developed a heavy dependence on consumers for growth. The turbulence of this recession will force consumers to reconsider their ways and shift from consumption to saving. According to Professor Edward Kerchner of Global Wealth Management, “we’re seeing a shift from conspicuous consumption, to conscious consumption!” What happens when someone pushes the “reset” button on consumer behaviour? Turn to this weeks’ feature article on page 16 for David Stevenson’s take on the matter.
Gareth Stokes Editor, South Africa
In this issue 6 Markets There’s money in defensives; what Big Macs tell us about currencies.
14 Tim Price Why it’s time to ditch financial institutions and fend for ourselves.
11 Strategy Why investors shouldn’t rely on ‘experts’ – not even Warren Buffett.
19 Blogs
Investors shouldn’t panic about swine flu; why California needs soft drugs.
12 Personal view Three mining stocks to 20 Entrepreneurs How Polish sausages
24 July 2009
buy now.
made me rich.
13 Briefing Is Goldman Sachs really a
24 Toys Porsche’s ferocious four-seater; the
money-sucking “vampire squid”?
three best holiday cameras.
news Britain
Bankrupt Britain trades on goodwill Britain is slipping ever deeper into the red. Government borrowing hit £13.5bn in June, the highest figure on record for that month. In the first three months of the fiscal year, borrowing doubled yearon-year to £41bn (£700 for every citizen) as tax revenues crumbled by 10% – faster than the Budget anticipated – and social security spending rose. Government debt is now a record £799bn – 56.6% of GDP. At this rate, borrowing is broadly on course to meet the Chancellor’s full-year target of £175bn, said Capital Economics. But with “the full hit from the recession” yet to feed through, an even bigger total of £200bn looks likely. And we can’t count on a rapid improvement over the next few years, said Gary Duncan in The Times. Think tank, the National Institute of Economic and Social Research, warns that with a lacklustre recovery in the offing, by 2013-14 the deficit could still be around £120bn, a fifth higher than the UK government expects. And that’s only if future public spending is tightened more than currently envisaged. With public debt “vaulting” towards 100% of GDP and no clear plan on how public finances will be brought back under control, “Britain is lucky” that foreign investors have not imposed higher
interest rates on gilts, as Ambrose EvansPritchard pointed out in The Sunday Telegraph. The International Monetary Fund (IMF) warned last week that “this benefit of the doubt is not going to last forever”. Higher long-term interest rates would raise the cost of state borrowing and interest payments and undermine growth. There could even be a “strike by gilt buyers”, followed by a sterling crisis, said Alex Brummer in the Daily Mail. When investors decided in the 1970s that they would no longer fund Britain’s deficits because fiscal policy remained too loose for too long, the IMF had to step in, added Mansoor Mohi-uddin of UBS. The “danger signals are flashing”, said Liam Halligan in The Sunday Telegraph. Since March, when quantitative easing began, gilt yields have climbed (as prices have fallen) even although the Bank of England has snapped up almost half the gilts the government has issued. And the vast global supply of debt hardly helps; the UK is set to borrow three times as much as Italy, and twice as much as Germany and France this year. “If Britain can escape with a gentle rise in gilt yields,” rather than a “steep and sudden” jump, said Nils Pratley in The Guardian, “we’ll be doing well”.
SA economy
The inflation debate lingers on On Monday, two top South African economists challenged Cosatu’s role in the inflation targeting debate.
This isn’t the first time inflation targeting has been criticised. Unions have condemned the Governor of the Reserve Bank, Tito Mboweni, for trying to keep inflation in range for years. This, even though he believes keeping high rates caused “hardship to householders” and was recently very verbal about the banks’ role in bringing down rates. According to the Business Report, Cosatu “has opposed the Reserve Bank’s 3% to 6% inflation target range and has also criticised the concept of inflation targeting”. As you’ll recall, before last month’s Monetary Policy Committee meeting, Cosatu demanded that rates be lowered once more. But the central bank opposed this and decided to maintain rates at 7.5%, because it feared the inflationary effect lower rates would bring. We wonder whether Cosatu has raised the issue again specifically because Mboweni’s two-term reign is coming to an end and Gill Marcus will be taking over the reins. Marcus, who was made Governor Designate last week and is set to take over the role in November, meanwhile has remained mum on the issue. In a statement made last weekend, “Marcus declined to say whether she would continue with the central bank’s inflation targeting policies,” reports SAPA.
Cosatu is clasping at straws… Thankfully, those in power have taken a stand against Cosatu’s most recent outburst. And that’s great news. The ruling party has come out saying that “South African economic policies will not change simply because there was a new
The bottom line £5,000 How much Russell Crowe gave to a member of the crew of his new film Robin Hood. Crowe gave the money to Denise Yarde so she could buy a new car after her old one went up in flames on her way to work.
£22,000 What the spacesuit worn by the Apollo 11 moonlanding astronaut Michael Collins sold for at a London auction.
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24 July 2009
R1m
The prize money a model will win in a new show called... Million$ Model. There’s an alternative prize for the audience of $1m, but the maths is hardly convincing. It seems this may have dissuaded investors and, according to SABC3 communications manager Gesh Conco, the show's producers have been unable to secure alternative financial backing when its US sponsor pulled out.
R1.7m Our parliamentarians are at it again. This is how much Basic
Education Minister, Angie Motshekga, has used of her car allowance..
£105,000
What a Lotus Esprit Turbo that featured in the James Bond film You Only Live Twice fetched at an auction in Oxfordshire.
R21m The amount suspended lawyer, Louis Visser, lost during an illegal moneylending operation he was running through his firm’s trust account.
$350m
The cost of the Apollo 11 space mission, which launched way back in 1969. That translates as around $2bn in today’s money.
©DAVID FISHER/REX FEATURES
£100,000
What singer Alesha Dixon (right) is set to earn as a new judge on Strictly Come Dancing.
news head of the central bank,” reports Fin24. As ANC secretary general Gwede Mantashe put it: “Policy is not a function of an individual… Gill Marcus is going to implement the policies that are there.” Despite this assurance, the Business Day argues that with Marcus in charge, there will be “more active consulation” between unions and policy makers. As such, “the continuing debate on inflation targeting is likely to become more robust, and may lead to some formal changes”.
market represents a “once-in-a-lifetime” opportunity for corporate takeovers. And yet, many investors don’t seem to have taken much notice of the increasingly lucrative deals that are happening right here on the JSE.
So far, analysts are in two minds about this. Econometrix chief economist, Azar Jammine, pointed out: “The decision to keep or scrap inflation targeting [is] seen by foreign investors as a ‘litmus test’ of South African policy direction. If the policy was abandoned, it would create the perception that policy markets were ‘soft on inflation’.” While Razia Khan, head of Standard Chartered regional research for Africa, believes “global markets should ‘tolerate’ such a debate in SA, given the global crisis”.
To date, South African M&A volumes have brought in an estimated $27.6bn (that’s R217.2bn) this year alone. And, the MTN (JSE:MTN)/ Bharti deal (which expires next Friday) could bring in a further $20.2bn.
According to the Business Report: “While the volume of mergers and acquisitions (M&A) fell worldwide by 40% in the first half [of this year…], M&A activity involving local companies rose sharply.”
But while talks have been rife about whether MTN will or won’t succumb to the deal, many other significant M&A deals are going relatively unnoticed. Just recently, a $1.3bn deal between AngloGold Ashanti (JSE:ANG) and Paulson, a New York investment
But whatever the outcome, it’s no secret Mboweni “hated inflation” but he was overly dogmatic about it. Perhaps with Marcus at the helm, we can expect a more balanced look at growth targets and inflation targets.
Vital numbers % change
FTSE 100 Nikkei S&P500 Nasdaq CAC40 Dax Top 40 All Share Rand/Euro Rand/Pound Rand/US$
*4493.73 9723.16 954.07 1926.38 3305.07 5121.56 21288.00 23608.00 10.97 12.94 7.85
**3.02 4.06 1.42 2.19 3.29 3.32 0.20 0.46 -4.27 -3.45 -3.83
*22 July ** since 16 July
24 July 2009
Basenese suggests you buy a handful of potential corporate takeover targets now. And, by the looks of things, you’ll be spoilt for choice.
Best and worst-performing shares Winners
% change Price
Losers
% change Price
Ellies (ELI)
25.69%
137c
Cenrand (CRD)
-22.39%
260c
Oando (OAO)
19.00%
595c
IPSA (IPS)
-16.55%
121c
PallingHT (PGL)
14.29%
440c
MondiLtd (MND)
-14.17%
3090c
GoldOne (GDO)
13.33%
204c
Jubilee (JBL)
-11.64%
486c
Huge (HUG)
13.00%
113c
Anooraq (ARQ)
-9.86%
640c
AfPrefInv (AFP)
12.68%
400c
Petmin (PET)
-9.27%
186c
ElbGroup (ELR)
12.07%
650c
Alliance (ALM)
-8.11%
340c
Kiwara (KWR)
10.87%
510c
QPG (QPG)
-7.89%
175c
SovFood (SOV)
9.51%
1002c
KAP (KAP)
-7.41%
125c
Invicta (IVT)
9.05%
2290c
Sappi (SAP)
-7.17%
2200c
Weekly change to JSE stocks as 22 July 2009
4
Early this year, US analyst Louis Basenese, who specialises in takeovers, said he believed the pharmaceutical/biotech space would see the lion’s share of the deals in 2009. And so far, he’s been right. Besides the Aspen deal we also saw small-cap pharma-firm CiplaMed (JSE:CMP) make the news early this year when Adcock Ingram (JSE:AIP) attempted a takeover bid. Although the deal fell through, it proves Basenese’s point.
The way we live now
©PHOTOLIBRARY
A recent survey by Investor’s Business Daily in the US revealed that over 80% of institutional investors agree the current
Similarly, UK pharmaceutical giant, GlaxoSmithKline has SA firm, Aspen Pharmacare (JSE:APN) in its sights. Should this deal be concluded, we’ll see an extra $668m in revenue flood the markets.
It’s not just humans who go to great lengths to extend their property portfolios. A penguin in a US zoo has left his gay partner for a female with more property. Harry has spent the past six years living with Pepper, another male at San Francisco Zoo. The couple even raised children by protecting abandoned eggs. But the death of one of the colony’s leaders prompted Harry to desert Pepper in favour of the dead leader’s mate, Linda. The dead penguin’s status meant he had two nests rather than the usual one, and Linda inherited them. “Real estate means a lot” to penguins, says the zoo’s Harrison Edell. So she was an “attractive prospect”.
Companies
Local M&As rocket 122%!
company, was completed. This deal, which failed to make big headlines, saw Paulson’s acquire an 11.3% stake in the gold producer.
the markets
The return of the bull? Stocks have recovered from their winter swoon. 1300 The FTSE 100 has gained 1200 8% in seven days, its best run in four years, while the 1100 S&P 500 is up by a similar 1000 amount and has reached its 900 highest level since last 800 November. Unexpectedly 700 strong results from Goldman Sachs and A JPMorgan set the tone. Intel and IBM also produced positive surprises. Early this week Goldman added to the bullish mood by saying it expected the S&P to finish the year another 15% higher.
S&P 500 index S&P 100 index
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Yet while investors may be feeling perkier, “there’s still so much evidence that the bearish fundamentals are little different to a couple of weeks ago when share prices were heading lower”, as Angus Campbell of Capital Spreads puts it. Strong results at Goldman Sachs and JPMorgan don’t mean that the banking crisis is over (see next story), while the latest news has hardly been wholly positive. The overall macroeconomic data are still merely “getting less bad”, agrees Edward Hadas on Breakingviews.com. On the earnings front, economic bellwether General Electric, for instance, has reported a 50% drop in profits and a 17% decline in revenue for its latest quarter. There is still “a very long lineup of companies” where cost-cutting, rather than improved sales, are the key to earnings numbers, notes David Rosenberg of Gluskin Sheff. On the
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other side of the Atlantic, Citigroup points out that the rate of decline in earnings forecast downgrades for 2009 has moderated. But according to Jeremy Batstone-Carr of Charles Stanley, forecasts for 2010 are “far too high”. The wider problem, meanwhile, is that the West looks set for a lacklustre recovery and years of sub-par growth. This is a changed world in which consumers continue to pay off massive debt loads. A more tightly regulated financial system, along with higher taxes to fund government rescue packages, will also lower growth rates. Once investors realise over the next few months that “an extended period of structurally lower growth” lies ahead, the global rally will falter, says Chris Wood of CLSA. Nonetheless, while the general outlook may be discouraging, there’s still money to be made. As Neil Woodford of Invesco Perpetual points out, defensive sectors with secure dividend growth potential, such as pharmaceuticals, telecoms, utilities and tobacco, look cheap.
While Goldman Sachs is “reaching for the Champagne”, the bigger picture in the US banking sector is still “far from pretty”, says The Economist. CIT, a lender to small and medium-sized firms, is still close to bankruptcy. Losses on loans, which typically peak well after a recession ends, are still climbing. Prime mortgages, which account for 66% of all mortgages, are the new trouble spot. The number of seriously delinquent loans (where payments are overdue by 60 days or more) rose by 163% in the year to the end of the first quarter, while the delinquency rate on credit-card loans at commercial banks has jumped from around 5% to 6.5% in a year. Another major headache is commercial real-estate loans, which account for almost half the loans made by small and medium-sized US banks. If they keep souring at this rate, losses could reach $30bn this year, says Lingling Wei in The Wall Street Journal. Investment group Lombard Odier reckons that the US financial sector will have to write off a further $1.1trn of bad debts. Let’s not forget Europe, where banks have much more leverage, less capital and greater exposure to emerging markets than their US counterparts, says John Mauldin on Investorsinsight.com. Their positions are huge: if eurozone banks’ loan losses reach just 5% of their portfolio – an “optimistic” estimate – that would be a sum equivalent to 20% of eurozone GDP. The European banking crisis on the cards could be “as big a problem as sub-prime loans”. So an end to the banking crisis – and hence to the credit drought squeezing growth – looks far away.
Viewpoint
The big picture: what a Big Mac tells us about currencies
“Well, I don’t worry about deflation at all. We’ve taken action… that certainly sows the seeds of substantial inflation… we’re flooding the system with dollars. [There was no choice.] Our economy was like a fellow going down in quicksand, and somebody tosses a rope. You can… yank him out… you may dislocate a couple of shoulders, but it still pays to get him out.”
A common way of valuing Big Mac index currencies is the theory of Norway $6.15 purchasing-power parity. This Switzerland $5.98 holds that currencies should Euro area $4.62 trade at a rate that makes the Britain $3.69 Japan $3.45 price of goods the same in S. Korea $2.59 each country. So if a Big Mac Thailand $1.89 costs under $3.57 – the price in China $1.83 America – in another country, Hong Kong $1.72 that country’s currency is 60% 40% 20% 0% -20% -40% -60% -80% Local currency under (-) /over (+)/ valuation against the dollar undervalued against the Source: Economist.com greenback. And that’s the case in much of Asia, according to The Economist’s Big Mac index. With the burger costing just $1.72 in Hong Kong, the Hong Kong dollar is more than 50% undervalued against its US counterpart. By contrast, the most overvalued currencies are in continental Europe.
Warren Buffett, CNBC
5
Credit squeeze is about to get tighter
24 July 2009
the markets
Whatever happened to the commodities supercycle? It’s alive and well… Remember the commodities ‘supercycle’? The CRB index, a key commodities benchmark, plunged by 40% last year. Since then, almost no one has been trumpeting a long-term bull market in raw materials. Yet the likelihood is that the supercycle has been “sharply interrupted by the global recession” rather than aborted, as David Fuller says on Fullermoney.com. Indeed the upswing in raw materials, that began in 2001, looks far from over.
CRB spot index, 1967=100
500
S&P 100 index Periods of US recession
400
300
200
100 1972
Just like equities, commodities tend to move in long-term, or secular, bull and bear cycles. Both are punctuated by short-term, or cyclical, movements. According to Chris Watling of Longview Economics, these secular cycles can be traced back to 1750 – the average bull run has lasted over 20 years, with average cumulative gains of 293%. And the secular bull market of the mid-1960s to the early 1980s was followed by a bear market that ended when the latest upswing began in 2001. The CRB spot index is well up on 2001 levels, says David Rosenberg of Gluskin Sheff & Associates. It’s also interesting to note that during the latest sell-off, “the price of virtually every commodity” bottomed at a higher level than the average price during the last five recessions – even though this contraction
rapidly expanding Bric (Brazil, Russia, India, China) nations alone will account for the majority of global raw materials consumption.
As for supply, the upswing in prices so far has not been enough to make up the supply shortfall induced by the 1980s and 1990s bear market, as Adam Hamilton points out on Zealllc.com. It can take up to 1976 1980 1984 1988 1992 1996 2000 2004 2008 ten years to bring a new mine Source: Haver Analytics, Gluskin Sheff onstream, and in the past seven months, producers have mothballed was the worst in 70 years. The fact that expansion plans as prices have fallen raw materials posted their “highest back, says Peter Krauth on cyclical troughs ever” during the worst Moneymorning.com. Money printing by global recession in 70 years strongly central banks, moreover, points to suggests that commodities have found a higher inflation once economies recover, new, higher “floor”. That makes last and that bodes well for tangible assets year’s sell-off a “steep correction” – a such as commodities. nasty cyclical downswing – in “the early stage of a secular bull phase”. So it looks as though there are still years of upside ahead for commodities. In the There’s a pattern to secular bull markets short-term, however, prices look – widespread reductions in exploration vulnerable to further setbacks. and production, amid a long bear According to Philip Verleger of the market, reduce supply. This then lags University of Calgary, the “economic behind once demand recovers, leading to situation isn’t getting any better” while higher prices. And this time the key global crude oil stockpiles are near highs factor on the demand side is the set in 1997. The glut could send prices industrialisation of Asia. There are now as low as $20 a barrel, he reckons. 3.5 billion people wanting to live as we Deutsche Bank thinks rising supplies of do, whereas during the last secular copper and aluminium could undermine commodities bull, in the 1970s, demand prices near-term. No problem, says was driven by Western countries with Rosenberg – sell-offs are “long-term less than a billion people, notes Fuller. buying opportunities”. By 2020, Watling believes that the
Can Asia give us a ‘V’? “Expectations are running high” in Asia, says Citigroup. As the MSCI Asia ex-Japan index has soared, analysts have been upgrading earnings forecasts. Its aggregate earnings per share were expected to contract by 11% in 2009 a few months ago. But now the forecast is for a mere –2%, followed by a 30% jump in 2010. Throw in the fact that the market has already risen to its 30-year average valuation of 1.7 times book value, and companies “had better deliver” the V-shaped recovery the market expects: “there is no room for disappointment”. Yet disappointments are all too likely. Singapore provided some cheer last week as GDP bounced by an annualised 20% in the second quarter, but “this was a weak light at the end of an
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extremely long tunnel”, as Janet McFarland puts it in Canada’s Globe and Mail. Growth was still almost 4% down year-on-year. With demand in the US and Europe likely to be subdued for some time, strong rises in Asian GDP based on inventories being rebuilt are set to fade, says Capital Economics. “Neither internal nor external demand” has improved enough “to give us a V”, says Citigroup. On the export front – 69% of the Asian economy – the year-on-year declines are just becoming less negative. So, the overall earnings prediction “looks a long shot”. China has juiced up its growth by boosting bank lending, but this just postpones a slowdown – it still depends on exports and western demand is unlikely to recover soon, says Saxo Bank. All in all, investors in Asian markets look set for a rocky ride.
sector of the week
A canny bet on the future of medicine spinal or brain injuries, for example, could eventually be nursed back to health with regenerated stem-cell tissue. And there will be big profits for companies that develop successful treatments. So Pfizer has established a $60m stem-cell therapy research centre in Cambridge, and GlaxoSmithKline has put up $25m to sponsor research at Harvard. The problem for an investor is the potentially long wait for a return – and the risk of investing in a stem-cell group whose research fails.
The balance of power between the sexes may be about to swing decisively. Last week in Newcastle, scientists found a way to develop sperm in a test tube using stem cells from a five-dayold male embryo. At a stroke, the potential of stem-cell research was brought home to men across the world. For how much longer will we be needed?
© PHOTOLIBRARY
by Eoin Gleeson
A while yet it seems. For one thing the stem cells that were used to create the sperm could only have been derived from a male embryo, according to Professor Karim Nayernia of Newcastle University. So at least one male will always be required. And it will also be a long, long time before this type of experiment will produce a commercial fertility treatment. The regulatory authorities may have given a green light to the first-ever human trials using embryonic stem cells in January. But that doesn’t mean we can suddenly expect a string of medical miracles. Indeed, Forbes’s Michael Fumento estimates that stem cells are at least a decade away from generating a profitable and sustainable treatment. It’s partly a question of biology. Stem cells are essentially the master cells in the human body. Adult stem cells can already be extracted relatively easily from bone marrow, for example, and then treated to generate more bone or new cartilage. But their range of possible
Now we can even make our own sperm uses is restricted because, being from an adult, they are already mature. That is not a limitation that applies to embryonic stem (ES) cells. However, it is difficult to predict what kind of tissue ES cells will become. Some, for example, have a nasty tendency to form malignant tumours called teratomas – literally ‘monster tumours’ – which can contain random bodily structures such as eyes and teeth. Another risk is immune-system rejection. “Introducing stem cells into a body is a bit like transplanting an organ,” says The Economist. “The immune system might throw a wobbly and try to destroy the intruder.” So patients need to take powerful immuno-suppressive drugs, often with unwelcome side effects. The scientists are not about to give up. Embryonic stem cells are much more versatile than adult cells – victims of
That’s why adult stem cells are a cannier bet. They have already been used to treat scores of illnesses including many cancers, auto-immune diseases, neural degenerative diseases and a host of other blood conditions. Adult stem cells are also easier to come by than embryonic cells and less expensive to run in clinical trials. And they are still reasonably versatile. So even if a company’s trials hit a snag in the treatment of one ailment – as happened to stem-cell pioneer Osiris Therapeutics last month when one of its drugs was found to be no more effective in treating a pulmonary disease than a placebo – there are often other illnesses that will respond to the same treatment. In short, “adult-derived cells are the ones that have been studied for the past ten to 15 years and are ready for prime time,” says Debra Grega of Case Western Reserve University. We have a look at how you can benefit in the box below.
The best stock in the sector ReNeuron (Aim: RENE), the only UK-quoted company focusing entirely on producing adult stem-cell therapies, has two that could prove themselves very quickly, according to Tom Bulford in The Right Side.
ReNeuron 25 20
Figures in pence 15 10
First off, it is waiting for final approval to 5 start clinical trials on a treatment for stroke 0 patients. An update on regulatory clearance Jan 2008 for this treatment is imminent. “I’m pretty confident it will get final clearance,” says Vadim Alexandre, analyst at Daniel Stewart. Even then a successful treatment is at least two years off. However, the second therapy – for an unpleasant side effect of diabetes – is closer to a breakthrough. Those suffering from diabetes often
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24 July 2009
lose circulation, especially in the feet – which can become black and swollen and even need amputation. ReNeuron’s therapy, coded ReN009, has shown it can stimulate the tissues of the foot to increase circulation, albeit so far just in rats.
Nonetheless this is a small company (£20m) with substantial risks. ReNeuron reported a loss for the full year ending in March of £3.7m, down from £6.6m the year before. It also reported cash of £0.9m. But this potentially blockbusting stock has so far managed to avoid most of the publicity heaped on its peers. That may not be the case for long. Jan 2009
who’s tipping what Julie Brownlee, MoneyWeek’s analyst, picks the best – and worst – tips from the press and brokers’ reports, and suggests a share for the brave.
This AltX debutant is lathering up a storm Tip of the week: “There is potential in this business,” says the Financial Mail Financial shenanigans are the big “nono” of the investment world. And once you’re a listed entity, transparency is everything, making the task of sweeping these discrepancies under the carpet much more difficult. “Consistency in financial performance has not been a hallmark” with Beige Holdings Limited (JSE: BEG), notes Sasha Planting in the Financial Mail. The company’s had its fair share of financial nonsense, but it appears to have turned the corner.
In 1999, Beige was suspended from trading on the JSE as a result of discrepancies uncovered. This suspension wasn’t lifted for over two years, until late 2001. Beige holds the accolade of being the first company to list, in December 2003, on the AltX. Beige was formed in 1974. According to the company website, Beige “is a leading contract manufacturer and distributor of cosmetics, soaps, household products, toiletries, laundry soaps and allied bath and body care products”. It services both the local and international market with its wares. And these products aren’t small fry. You’ll be familiar with most of the goods in its stable, including multinational giants, such as Johnson & Johnson, Unilever and Sara Lee. Closer to home, it’s responsible for a stack of household names, including Woolworths, Edgars and Dischem.
Gamble of the week: Cipla Medpro South Africa Ltd (JSE: CMP) It’s not bad enough that we’re dealing with the backlash of the financial crises, now we have a global pandemic to contend with. Swine flu, or the H1N1 virus, has certainly made a name for itself over the past few months. The virus jumped across animal borders in April. But since it leapt across boundaries and made its way into humans, starting in Mexico thanks to intensive pig farming, who knows what reach this super virus will have. The current stats speak for themselves regarding the severity of the virus. Over 740 people have died to date from contracting the virus, while millions have been affected. South Africa had been pretty sheltered from the contagion spreading like wild fire through the Western hemisphere, but not anymore! As of last week, we had over 100 confirmed cases of H1N1. The spread is only set to get worse once the Western world heads into its winter months. The World Health Organisation jacked up the
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The latest financials, to end March 2009, show a vast turnaround when compared with the previous year’s. Highlights include a massive 32.9% jump in revenue and a staunch improvement in operating profit of over 55%! Earnings per share also improved vastly from 2008 FY results. This recovered from a loss of 2.97c to 1.74c a share. Mark Di Nicola, CEO of Beige since 2004, can be rewarded for the about
virus’s rating to pandemic status on 11 June. So whilst the world maybe worrying about the long-term effects of the viral spread, here at MoneyWeek, we’re wondering how we can profit from it. And that led us to look at the pharmaceutical counters listed on the JSE. With our modest three listed pharma companies, which one offers you the best bet on profiting from the pandemic? The universe includes Adcock Ingram, Aspen and Cipla Medpro. And Cipla Medpro South Africa Limited (JSE: CMP) is where we’d be putting our cash at the moment. This lightweight pharma counter is racing ahead. Through its generic version of the much publicised Tamiflu, Oseltamivir, it’s set to have a growing number of buyers as the flu pandemic rages on. As Cipla Medpro has learnt to its advantage, generic is the way to go, especially in these cash strapped times. And with the number of South African cases growing daily, the future couldn’t look brighter. Cipla Medpro was born last November after changing its name
who’s tipping what turn at the company. His hard work definitely seems to be paying off. As Beige’s website highlights, “Di Nicola centres his corporate vision around four major elements: Risk, passion, opportunity and desire”. And this is clearly reflected in his hunger concerning acquisitions, contributing to the growth of the company. Beige is a small-cap share and with that carries the associated risks. But, this company seems to be running a tighter ship that it has in the past. If you’re up for living a bit on the edge with part of your investment capital, then Beige could be just what your portfolio needs. Accumulate shares gradually as the share is a bit illiquid and you should be rewarded for your patience. This share’s a buy at current levels of 8c. Recommendation: BUY at 8c Market capitalisation: R128.665m
Turkey of the week:
long before the economic meltdown struck the markets. A quick glance at the share price chart just shows the illiquid status of Milkworx. A glance at Milkworx’s most recent full year financial results show that things aren’t getting any better as time trundles on. Revenue fell 10%. Gross profit plummeted a staggering 58% when compared to its 2007 FY. And headline losses per share plummeted from 0.29c to 1.26c. Grim reading. Changes have to be made to breathe some life into this flailing firm. So Milkworx set off on an acquisition to try and pull it out of the doldrums. At the beginning of July, the company announced its offer to acquire Ububele Holdings Limited to its shareholders. But will this added “ingredient” have the desired effect?
“It’s better to wait for sentiment to simmer down” – Finweek Fancy a milkshake? Well, perhaps you should wait a while before adding Milkworx Limited (JSE: MKX) into your portfolio mix. As Marc Hasenfuss puts it in Finweek, this “struggling dairy products business [is] long overdue for an infusion of new operating ingredients”.
Firstly – what is Ububele? On visiting the company website, it emerges that this firm is involved in investing in food and agricultural based businesses. The company plans to list on the JSE this year, so Milkworx offers them the opportunity to do just that through this reverse listing. Ububele also boasts a BEE shareholding of over 30% as of the end of June this year.
Since peaking at 51c in October 2005, there’s only been one direction for this company’s share price – down! Since late 2006, the share price has been bouncing about between 2c and 4c – and that was
According to the released announcement, directors of both companies “have identified key areas of synergy... including distribution and marketing networks, production facilities and
from Enaleni. Enaleni originally listed on the JSE’s main board in December 2005. The group’s composed of two divisions. Firstly, according to its website, Cipla Medpro, based in Cape Town, is the “country’s sixth largest pharmaceutical company”. Its second division is Cipla Medpro Manufacturing, based in Durban, “offers contract manufacturing solutions to large local and multinational pharmaceutical companies”. The most recent financials depict a company brimming with health. Results for the year to 31 December 2008 reflect revenue from continuing operations up 23%, with gross profit increasing 19%. Earnings per share improved 17%. Business growth continues to be positive, especially in its asthma, cardiovascular, over the counter and animal health products, to name a few. In the financial year, an extensive upgrade, at a cost of R195m, was conducted on its Durban factory. This affected production, but
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geographic footprint”. Interestingly, if the acquisition is successful, the financial director of Milkworx will be replaced with Ububele’s existing financial director. If everything goes according to plan, we should get confirmation of the acquisition bid by the end of the month. Despite the changes being something the company has craved for several years, don’t be tempted to jump in feet first. Rather take a “wait and see approach” and let some water go under the bridge first. Ububele’s core focus in food production and agriculture gives it a defensive flair – we all need to eat after all. At MoneyWeek, we’d rather sit on the sidelines and see what materialises within the company for at least the next six months. As Hasenfuss states, “excitable punters must desist charging into Milkworx at any price”. Further down the line – Milkworx could be worth a dabble, but avoid for now. Recommendation: Avoid Market capitalisation: R35.060m
not the bottom line. And makes it the only pharma company in SA to boast international Pharmaceutical Inspection Cooperation Scheme compliance. One deadweight in its recent financials was the weakening of the rand against the dollar in the last quarter of last year. Forex issues aside, there are opportunities to grow with the demand for swine flu treatment, not to mention Cipla Medpro’s growing lucrative over the counter business, bolstered by its integration with FirstPham Pharmaceuticals and the increasing demand for its HIV/Aids drugs. The share’s had a good run up of late, but there’s plenty more room for growth as time ticks on. We’d be buyers of this pharmaceutical baby at 400c/share.
Recommendation: BUY at 400c Market capitalisation R1.773bn
best of the financial columnists Gambling prohibition won’t work Editorial The Economist
Britain must renew its faith in space Mary Wakefield The Spectator
Obama’s double standards Bret Stephens The Wall Street Journal
Parking fines are just a stealth tax Philip Johnston The Daily Telegraph
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Politicians say that prohibition of online gambling is the most effective way to protect people from a “potentially addictive pastime”, says The Economist, “but kinks in the law expose their hypocrisy”. In both the US, where online gambling is prohibited, and Europe, where seven out of 27 member states have tried to outlaw it, local gambling monopolies are allowed to offer the same sorts of bets that are illegal if placed with firms abroad (where punters can get better odds). “This suggests that the prohibitionist governments’ main aim is to protect the revenue that they earn from their state-approved gambling monopolies.” Nor has prohibition stopped online gambling in the US: it has just driven the most determined to place their wagers in the “the murkier bits of the internet”. Change is needed. “Rather than criminalising gamblers for trying to get a better deal, governments would do far better to offer punters and online gambling firms a safe, legal but regulated market – and gain some tax revenues to plug their deficits at the same time.”
Money talk
“Britain won’t be a part of the 21st-century space race until we regain our space faith,” says Mary Wakefield. There is a “curious notion” that space is somehow a bit “old hat”. Yet it represents not only the pursuit of knowledge, but offers “infinite resources” which are there to be exploited – not just for cash, but also as a way of saving our planet. Space-based solar panels are already a given (a company called Solaren plans to hoick a 1km-wide panel into orbit in 2016) and “when (not if) the next asteroid threatens to destroy Earth, we’ll need a space-based system to shove it off course”. The first money will come from tourists: when Sir Richard Branson’s Virgin Galactic gets going it is expected to fly 3,000 new astronauts in its first five years, at roughly $200,000 a pop. Then there’s satellites; the kind that measure global warming and find ships lost at sea. China knows we’re on the verge of a new space age, and has been planning for it, as has Russia. Let’s hope it doesn’t leave us entirely behind.
“I don’t need a man. I might sometimes want a man but I don’t need one. I earn my money, I create my art, I know where I’m going.” Singer Lady Gaga (above), quoted on Sky News
Barack Obama’s speech on Western policy in Africa was “the best of his presidency”, says Bret Stephens. If only he’d apply the principles to the rest of his agenda. If trade and investment are good for the USAfrica relationship, why has his administration “dragged its feet” on free-trade deals with Columbia and South Korea? If he aims to “isolate” irresponsible countries, why does he promise engagement with the likes of Iran and Russia? Similarly, “while US governments don’t usually demand bribes”, the US corporate tax rate, at 39%, is the industrialised world’s second highest. As for “creating space for small and medium-sized businesses”, what about US business owners facing the expiration of the Bush tax cuts? Finally, if the $2.3trn the West has given in foreign aid over the past five decades has done nothing to raise Africa from poverty, why will a stimulus package work in the US? “At least in Africa’s case, the West could periodically forgive its debts. Who will forgive ours?”
Parking has become a “stealth tax” administered by local councils, says Philip Johnston. Last year in England, four million tickets were issued, 250,000 more than 2007 and a fivefold rise since 2001. Controlled parking zones (CPZs) – supposed to cover small areas where there are legitimate parking worries, but which have spread across whole towns – have proved a particularly good way to raise money. But Neil Herron, a “latter-day Wat Tyler” when it comes to “parking tyranny”, is causing “consternation in town halls across the land” with a judicial review involving a CPZ which “may itself be illegal because it was not correctly signposted”. The government is taking a direct interest in the case because the implications are considerable. Should other CPZs be invalidated, millions of pounds in penalties may have to be returned. Of course, if this happens, it “will be the council-taxpayer that suffers, so we will pay anyway”. It should come from the pockets of those who played “fast and loose with the laws they expect us to follow”.
“I’m told I am the prime minister’s Willie, but he already has a pair of Balls in the cabinet.” Lord Mandelson recalling Baroness Thatcher’s remark about Lord William Whitelaw that “every prime minister needs a Willie”, quoted in The Sunday Times “If employers can’t fire employees for being too old, and employees can’t afford to retire, then the workplace will increasingly resemble a geriatric ward.” Tom McPhail, head of pensions research at Hargreaves Lansdown, quoted in The Times “I’m addicted to success. There’s no rehab for success, or I’d check in right now.” Rapper 50 Cent, quoted on Sky News “There was a time when money and power were my gods – with hindsight, that just seems plain daft.” Jonathan Aitken, quoted in The Sunday Times
investment strategy
Trusting ‘experts’ is a costly mistake Analysts set short-term price targets by taking future expected annual profits or cash flows for a company, then expressing them all in today’s money using ‘discounting’, before adding them up. In short, if the ‘target’ value is higher than the current share price, it’s a buy. Sounds easy, but there are big challenges.
by Tim Bennett Faced with today’s uncertain economic outlook, investors might be tempted to look to the ‘experts’ – fund managers, newspaper tipsters and professional analysts – for guidance. But that could be a mistake.
Warren Buffett is well known as a great investor – so why not just copy him? A London School of Economics study showed that, from 1976 to 2006, a portfolio that mimicked Berkshire Hathaway (his investment firm) at the start of each month after its purchases were publicly disclosed earned 10.75% a year above the return from the S&P 500.
©CORBIS
1. Don’t follow gurus
“Do your own research. You are right because your data are”
But that doesn’t mean the strategy will work for you, says Tim Hanson on Motley Fool. Berkshire is very different now compared with 30 years ago. Its huge size means it can only trade in very large stocks, suggesting future returns will be more pedestrian than in the days when Buffett had his pick of the small caps. And because of the “Buffett effect” – a boost to share prices when he buys – Buffett now tends to favour “private deals or full acquisitions”. Neither route is open to retail investors. Following gurus in general is a bad idea because you don’t know why they’re buying, says Hanson. A deal might be motivated by a desire to get on even terms with a rival buyer, or even by tax considerations. You just don’t know. By all means “study Buffett’s shareholder letters and apply those lessons to your investing” or invest in Berkshire if you want a piece of his success. But don’t slavishly follow his – or anyone else’s – share trades hoping to match his returns.
2. Don’t follow the newspapers A recent study by Lily Fang and Joel Peress for Insead business school ranked stocks by how often and prominently they were mentioned over the decade ending 2002 in four US newspapers – The Wall Street Journal, The New York
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One is predicting future profits or cash flows, and knowing how far ahead to look. Another is picking the right discount rate to turn those forecast annual returns into today’s money (as R50 received as profit or rent in two years’ time is worth less than R50 received now). Cut future returns by 10% rather than 5% a year, and you’ll get a very different valuation. The higher a stock’s risk, the higher the discount rate applied and vice versa. Another highly subjective number, called a stock ‘beta’, is used to capture this risk. Put it all together, and conjuring a share-price forecast is much more art than science.
Times, The Washington Post and USA Today. They found that around 25% of stocks got no mentions at all, a few were mentioned “hundreds of times” and the average chalked up 12 mentions a year.
What to do instead What’s interesting, says Jack Hough in Smart Money, is that the ‘no-media’ stocks “clobbered high-media ones by three percentage points a year”. The very best performers were “small companies with limited analyst coverage and plenty of individual (as opposed to institutional) coverage”. Here the “no-media premium” hit 812% a year. The reason is simple. Stocks heavily covered in newspapers tend to be the most popular ones. So your chances of getting in early enough to grab a bargain – ahead of the big investment institutions – are slim.
Do your own research. “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right,” said Ben Graham, who analysed stocks using value investing ratios such as price/earnings rather than following ‘gurus’. You are also more likely to uncover bargains among less-well-known smallcaps. One worth watching is Zytronic (LSE: ZYT), a little-known “world leader in what is evidently a fast-growing sector”, says Tom Bulford, in the Penny Sleuth newsletter.
3. Don’t follow analysts either Professional analysts are paid well to come up with share tips. So you’d think they’d be worth following. Not so, says David Dreman, author of Contrarian Investment Strategies: The Next Generation. He analysed 1,500 US stocks from 1971 to 1996 and found that analysts’ top tips actually underperformed the market 75% of the time. Why?
The firm’s touchscreen technology for vending machines has just been adopted by Coca-Cola. The forward p/e is 15, the stock is covered by just two analysts, according to Bloomberg, and a search on Google news throws up no mainstream press articles. We’ll be asking our experts for more small-cap ideas in next month’s MoneyWeek Roundtable.
personal view
In gold we trust – 3 mining shares to add to your arsenal What I would invest in now
This week, Greg Lecoq, Editor of Red Hot Penny Shares, tells MoneyWeek where he would put his money.
Global markets have been in a strong rally for some time now. But, when looking at the overall picture, I believe, in terms of a recovery, markets have run ahead of themselves. And, as such, we can expect to see a bout of profit taking over the next six to eight weeks. This will open a great window of opportunity to investors who’ll be able to pile into great shares at much better prices. Speaking of global recoveries, I’m still fairly nervous about China, which is overvalued at present. Not only are its banks exposed to too much money in the system, but the massive $586bn stimulus package it put into place has been used to prop up share prices and not solve problems within its economy. It simply can’t go on like this. And it’s one of the reasons why I’m in favour of selling equities (like Foschini and Woolworths) and buying gold instead. In fact, I’m so bullish on the prospects of gold, I believe we could see it run past the $1,000 mark soon. There’s even a good likelihood that, if it carries on inching upwards (like it’s doing) and it makes it over the $960-$965 mark, it’ll shoot up quickly. Shares with direct exposure to this market will have to catch up – fast. You see, unlike other shares, the share prices of gold mining companies haven’t run up nearly as well. And it’s here that opportunity lies. There are a few shares I’d look at depending on your risk appetite and available capital.
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The first, is mining giant Harmony Gold (JSE: HAR). It’s currently trading at the bottom of its trading range (at just R72.50). But, bearing in mind that gold’s performance over the past 18 months or so has been rather volatile, I’d play this one safe and put in a very tight stop loss (at around R69). My next two share picks, we find at the other end of the price scale – down in the penny shares department. Right now, DRDGold (JSE: DRD) and Simmer & Jack Mines (JSE: SIM) offer good prospects for less risk adverse investors. Yes, it’s been a bit volatile just recently, but DRD’s a strong contender to move up when gold starts flying. And it’s poising its business for the inevitable upturn. Just last week, it announced a bid for Mintails’ SA assets. DRD, already a 50/50 partner in Mintail’s Ergo joint venture (a project recovering gold from tailings dams on the East Rand), should benefit substantially from this move. Should this come to pass, the miner’s gold production will expand rapidly and so to should its profits. Simmers, on the other hand, recently made the headlines when it withdrew its bid for Pamodzi Gold's Orkney assets. This move was given the thumbs up from the market who wants management to concentrate on existing assets, instead of buying more marginal mines. It’s currently trading cheaply at just R2.22.
The shares Greg likes: Harmony DRDGold Simmers
12mth high 12mth low Now R132.85 R52.10 R72.50 R9.55 R2.86 R6.35 R4.15 R1.47 R2.22 * Share prices as at 22 July 2009
investment briefing
Goldman Sachs’s miracle profits Investment bank Goldman Sachs seems to have shrugged off the credit crunch, announcing record profits and billions in bonuses. How did it do it? David Stevenson reports. Why is the firm back in the news? “The money machine that is Goldman Sachs is humming again,” says Andrew Bary in Barron’s. Goldman has just reported second-quarter net revenues of $3.44bn, up 65% year-on-year and its strongest showing ever. The firm has also managed to repay $10bn of government loans received as part of a US government bail-out programme. The board has also set aside $6.65bn for pay and bonuses. “As if the credit crunch had never happened, the Goldmanites are on course this year for average pay, bonus and benefit packages of an eye-watering $770,000 (R5.9m) per head,” says Alistair Osborne in The Daily Telegraph. “That’s almost twice what President Obama earns.”
perfectly legal, but the net effect was Goldman making profits by playing the rest of us for suckers.” And “Goldman’s high-risk business model hasn’t changed from what it was before the implosion of Wall Street”, says former US Labor Secretary Robert Reich. The firm is “still wagering its capital and fuelling giant bets with lots of borrowed money”.
But whose money is it?
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©PIC CREDIT
The US taxpayers’. Goldman’s performance is “not free-market earnings but an almost pure state subsidy”, says journalist Matt Taibbi on his blog. Taibbi described the bank in a Rolling Stone piece as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”. Harsh perhaps, but it’s hard How does Goldman do it? to believe that Goldman would be Founded in 1869, Goldman Sachs has long Where did Goldman’s billions come from? celebrating record profits today without had a reputation as one of the world’s top last year’s mega-amounts of aid from the US government. investment banks, with a finger in almost every financial pie. It buys and sells stocks, bonds, currencies and commodities, and underwrites securities – for a fee – issued by other firms that are Does Goldman ever get it wrong? raising capital. It also acts as adviser to its corporate clients on Oh yes. Goldman did some very large credit insurance deals mergers and acquisition (M&A) deals, and to governments on with the giant insurer AIG. But these would have been issuing sovereign debt securities, again taking a cut of each worthless had AIG gone bust. Instead, it was bailed out to the offering it handles. It’s been helped by a highly favourable tune of $80bn. “Exactly how big would Goldman’s profits financial wind. Since the banking deregulation of the Ronald have been this year if they had to fill a $13bn or even $20bn Reagan era, the US economy has been ‘financialised’ – financial hole from AIG’s collapse?” asks Taibbi. And “you can bet instruments that slice, dice and repackage risk have soared in Goldman has taken full advantage” of a galaxy of bail-out importance compared to actually making things. The sector programmes organised by the US Federal Reserve to dump called ‘securities, commodity contracts and investments’ has “worthless crap assets acquired over the past ten years when grown especially fast, from only 0.3% of GDP in the late 1970s the banks were playing roulette”. to 1.7% of GDP in 2007 – a near sixfold increase. Goldman has been at the centre of this growth. Should we be worried? “Goldman Sachs’s resurgence should send shivers down the backs of every hard-working American who has lost jobs or a So what sets it apart from rivals? large chunk of retirement “Many experts believe savings in this economic Goldman’s success is rooted in debacle,” says Reich. Most of its savvy, high-octane trading its major competitors are out style,” says Stevenson Jacobs Is the financial system on the mend? of action or under the strict at Timesleader.com. Others By rescuing the financial system without reforming it, control of the Treasury and the are more cynical. As Nobel Washington has “set the stage for an even bigger financial Fed, so it has the market prize-winning economist Paul disaster a few years down the road”, says Krugman. Taxpayers mostly to itself. Krugman notes, “other banks are still on the hook if things go wrong, and bankers have invested heavily in the same every incentive to take big risks. In the 1930s, when there was And “unfortunately, what toxic waste it [Goldman] was a similar expansion of the financial safety net, much tighter Goldman does is bad for selling to the public. Goldman regulation was introduced. This time, new rules are still on the America”, says Krugman. made a lot of money selling drawing board, “and the finance lobby is already fighting Huge bonuses show that securities backed by sub-prime against even the most basic protections for consumers”. And “financial industry high-fliers mortgages – then made a lot there’s danger here for president Barack Obama, says Michael are still operating under a more money by selling Scherer in Time – one worker in six is unemployed and dole system of ‘heads they win, tails mortgage-backed securities queues are growing. Obama may have “flashed anger and other people lose’, with every ‘short’ [in other words, it got frustration at America’s financial titans but so far he’s resisted incentive to steer investors into rid of them] just before their bonus-curb calls. This leaves the White House vulnerable.” risks they don’t understand”. value crashed. All of this was
opinion
We must shun the banks and make our own financial arrangements ETFs offer today’s individual investor the same sort of asset management flexibility that was once a preserve of larger institutions. They’re not the only development to do so. The growing turnover in contracts for difference (CFDs) and spread trading also allows the active investor to hedge his market risk as well as any fund manager. The growth in self-managed pension arrangements, not least Sipps in the UK (self-invested personal pensions), means that many individual investors are no longer at the mercy of life insurance
The financial crisis is radically changing attitudes towards the City and Wall Street, with deference replaced by profound cynicism about Tim Price how City firms conduct themselves. We last saw such a bitter reaction to market abuse in the wake of the technology boom, after which investment banks’ analysts were found to have been overhyping trash. But a few years of recovering equity markets drew punters back.
Market view
Nor are such responses limited to the individual investor. Investment banks and their staff have for years grown rich on the proceeds of merger advisory fees. This is despite the evidence that, on average, a takeover or merger between two businesses tends to be value-destructive rather than wealth-creative. So if corporate executives can resist the siren songs of self-interested M&A bankers, they stand to leave their businesses in better shape than if they succumb.
But thanks to the democratisation of markets and the march of technology, we can now buy and sell shares online far more cheaply than before. And we can also buy exchange-traded funds (ETFs) offering specific sector or thematic access at a fraction of the price of actively managed (and almost inevitably disappointing) funds. 14
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©BLOOMBERG
This time, the wholesale abuse of borrowers (via self-certification mortgages that should never have been written) and widespread abuse of investors (via structured mortgage products that should never have been rated, let alone sold), combined with ridiculous amounts of leverage by the banks, has brought the entire financial system close to the brink. So far, finger-pointing at presumed culprits has generated much heat, but little light has been thrown on any way out of the gloom. But each of us has the means to resolve this crisis, at least as regards our own savings and investments. When the equity market boomed in the 1980s, institutional brokers had a near monopoly on equity dealing. Individuals had to pay stockbrokers what amounted to a bundled, two-fold charge. The first charge was for market access – the execution of deals on the floor of the Stock Exchange, on which they had an effective stranglehold. The second was for advice, whether such advice brought any value or not.
But as individual savers and shareholders, we can circumvent the banks if we want to. We can direct our savings toward the institutions that played no significant role in the structured mortgage debacle (which includes a number of the more soundly run building societies), or to those financial institutions with the least need to raise further capital. We can remove our savings from, sell our equity stakes in, and refuse to buy any further financial products from, those banks that were most culpable in the crisis and which remain most vulnerable now.
We should turn our backs on the City
products or other wrappers that guarantee high charges without any necessary expectation of decent returns. City institutions have betrayed the public trust, as suggested by the bankers’ initial response to Sir David Walker’s relatively modest plans to rein in executive power and make their pay more transparent. Despite billions of pounds of taxpayers’ support, those same bankers refuse to acknowledge their responsibility for the damage they’ve wrought to the economy and to the public finances. The banking sector now looks set to be a political football for the foreseeable future.
It’s too easy to describe our current problems as being down to market failure. The markets haven’t failed us. Banks, intermediaries and regulators have failed us (and under a future Conservative government the British Financial Services Authority may well be the first administrative casualty of the crisis). But you don’t have to despair at this grim state of affairs. We can take matters into our own hands. Firstly, the triumph of scepticism over deference to financial services providers is to be wholly welcomed. Secondly, we owe it to ourselves to question whether we should ever be buying what the market is selling. And thirdly, by taking ownership of our financial futures (perhaps supplemented with an independent and appropriately remunerated advisor where required), we will be liberated from a venal establishment whose interests will always be markedly at odds with our own. Tim Price is director of investment at PFP Wealth Management. He also edits The Price Report investment newsletter. ● Matthew Lynn is away.
investing in property
Landlords are tied up in red tape – Avoid capture! by Gary Booysen Is your investment property about to become impotent? Would you sit idly by, watching your pension dry up without a fight? What if I told you, you won’t even need to fight for it; you just need one vital piece of information? Perhaps you rely on that property for your pension income. Perhaps you need that income to pay off your next bond. Whatever you use your property investment income for... don’t get caught with your pants down.
The key is in the loopholes In Ohio, it’s against state law to get a fish drunk. And, in Kentucky, it’s illegal to carry a concealed weapon more than six-feet long! Knowing where the law begins and ends – and what goes on in that fuzzy no man’s land in between – can make the difference between losing your house and making a fortune. I have an uncle who bought a furniture factory just outside Grahams Town. He retired for the quiet life, bought his dream house and thought this was it. It’s time to park off on easy street for the next 20 years. After a couple of years, he decided small town living wasn’t for him. He sold up the factory and moved back to Port Elizabeth. The problem is, while trying to find a buyer, he let out the property to a lawyer. Once he’d found a willing buyer, the lawyer refused to move out. The lawyer lived there for three years rent-free, all because of one loophole. My uncle lost a fortune and, instead of retiring, he was left close to destitute. So, landlords listen up. If your managing agent is making excuses about your tenant’s inability to pay, if the fees he charges are outrageous, even if you just don’t know the answer to the question I’m about to ask you, stop... Shut your wallet... And make sure he’s registered with the council before you pay him another cent.
on sectional title property, without being registered as debt collectors. If they do, they’ll contravene the Debt Collectors Act of 1998. This means, if your tenant picks up on this, he can live in your property rent-free and you’ll lose that revenue stream. But, before you run in panic, make sure your property is a sectional title. Many people don’t actually hold the title deed to their property, so here are some guidelines. Apartments and townhouses are almost always sectional title. While anything with a rolling garden is usually classified as freehold. (Though, this isn’t always the case – Thanks to complex communities that have sprung up across the country, the lines are blurred.) Your agent should know this but, in this case, it might be a conflict of interest.
Is your agent a debt collector? A national council committee just made a landmark ruling: Estate agents and managing agents can’t collect arrears,
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Personally, I wouldn’t advise approaching the deeds office. Apart from a shockingly archaic and user
unfriendly website (www.deeds.gov.za), you’ll have to register and pay R100. The catch is, to register, you need: • • • • •
A copy of your identity document Proof of residence Contacts of two credit references Banking details (a copy of a bank statement or cancelled cheque) Registration document (in case of CC/company)
So unless you enjoyed the hassle of becoming FICA compliant, speak to your body corporate instead. Once you’ve established that your property is sectional title, you can easily check the managing agents status with the Debt Collectors Council by calling +27 (0) 12 804 9808 or emailing info@debtcol-council.co.za. As the landlord of a sectional title property, you won’t have any hassles collecting the rent personally, but if you’re overseas or just don’t have the time, nip this potential problem in the bud. You’ll thank me later.
cover story
How to profit as consumers tighten the purse strings If you’re expecting a brief round of belt-tightening before things return to normal, you’ll be disappointed. It’s time to get defensive, says David Stevenson. A seismic shift is starting, both in Britain and America, in the way that people spend – or save – their cash. And it could flag the biggest change in consumer behaviour for 50 years.
will be.”At first glance, that may look a bit over the top. Yes, consumers are cutting back as house prices fall and job losses mount. But isn’t this just a temporary round of belt-tightening before things ‘return to normal’ any day now?
“I’ve often written that the four most dangerous words in the investment world are ‘This Time It’s Different’. It almost never is,” says John Mauldin of Millennium Wave Advisors. “And yet – I’m going to make the case that it really is different this time.” Mauldin is one of the sharper fund managers around. So it’s worth taking notice when he says: “We’re on a track that looks far more like the Great Depression than the recessions of our lifetimes. We’re hitting a massive reset button taking us to a new and lower level of consumer spending and leverage, etc. No one knows what the new level
We don’t think so. Consumer confidence – despite rebounding a little from its lows – remains very fragile on both sides of the Atlantic, even compared to previous recessions. And small wonder. Not only have dole queues grown fast in both Britain and the US, but they’re also set to get a lot longer. At 7.6%, British unemployment is already at its worst for 12.5 years and is likely to move towards 10% next year, says the Confederation of British Industry. In May, the US jobless rate hit 9.5%, its highest point in no less than 26 years. Again, it’s likely to head even higher in 2010.
It’s not just rising job losses that will force consumers to cut back. Household wealth has taken a pasting, meaning less money will be available to spend. For example, the collapse in property and share prices has sheared $11trn off the value of US families’ net assets – about 18% of the total (more on this in a moment). Surging borrowing was a crucial factor in fuelling the consumer boom. But the ‘inverse wealth effect’ has slashed the collateral consumers can borrow against. In other words, falling house prices mean there’s no more equity for consumers to ‘withdraw’ from their homes. And that’s at a time when consumers are in no position to borrow more. Personal debt as a share of disposable income in the US now stands at 130%, more than twice the 1980s peak. In Britain the figure is over 170%. Continued overleaf
Five stocks to cash in on the new thrift You don’t have to look far for evidence of a struggling consumer. The latest Statistics SA survey of retail sales data, for May 2009, shows a substantial 4.2% slowdown year-on-year in that month. This decline follows a severe squeeze in April and a rolling three month total that makes for depressing reading. Lower levels of consumer activity have a knock-on effect across the economy, with sharp declines in manufacturing, vehicle sales and bank credit activity leading to lower estimates for second quarter GDP growth. Ironically, some of the best equity value remains in traditional consumer sectors. The smart money is flowing to companies that satisfy the basic human needs of food, clothing and healthcare. People will shop for food and clothing no matter how deep the recession bites. The only behavioural change that emerges after the boom times is they seek out stores where their money will stretch further. Local investors can choose from three supermarket groups, Pick ‘n Pay, Spar or Shoprite Checkers. Although recent Profile Media
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consensus recommendations rate each of these companies a “hold,” turnovers remain robust. We would pass Pick ‘n Pay’s earnings and dividend history for the country’s favourite value shopping destination, Shoprite Group (JSE: SHP). Shoprite’s recent trading update for the 12 months to 30 June 2009 vindicates our choice. Turnover is 24.5% higher to R59.3bn and like-for-like growth is a staggering 19.1%. Revenue growth even outstripped food price inflation, at a sticky 15.8%! Shoprite achieved an impressive 39.9% growth from the 102 stores operating outside South Africa’s borders too. At the height of the financial crisis, management said the group was “better placed than most to weather the storm”. The positive operational update suggests it was spot on. At around R59.30/share, Shoprite trades off a forward price to earnings ratio (to June 2010) of 12.96 times and a dividend yield of close to 3%. Sticking with the basic needs category our second “thrift” share is AltX listed Taste Holdings (JSE: TAS). The company owns the popular Maxi’s and Scooters Pizza fast food franchises. Earnings Continued overleaf
cover story
©BOB ELSDALE/GETTY IMAGES
the US purse strings, controlling 50% of the nation’s entire discretionary income, purchasing 43% of all new cars, accounting for 79% of all leisure travel spending, and eating out four to five times per week. That all stacked up to the baby boomers outspending younger generations by a ratio of 2:1. In short, from 1980 to 2007, boomers were the money behind almost every economic development in the country.
Western consumers are preparing for a long, hard winter Continued from previous page
That’s all scary enough. But there are two other key issues that will force ‘Anglo-Saxon’ consumers to save rather than spend. Firstly, they could soon have even less cash in their pockets as their pay packets come under threat. American average hourly earnings were unchanged between May and June, cutting the annualised rate of earnings growth to the lows last seen in late-2003. It’s only a matter of time before
Americans see an actual drop in hourly earnings. Average earnings growth has already turned negative in the UK, says Capital Economics, and looks set to weaken further. Outright pay cuts, temporary periods of unpaid work or sabbaticals are becoming more common. Secondly, there’s the demographic factor. During the ‘baby boom’ years between 1946 and 1964, 76 million Americans were born. As of late-2008, they held
But they’re also the ones picking up the bill for the household wealth implosion. In just one year, they lost nearly 20% of the money they had planned to retire on, and the pain keeps coming as the US housing market meltdown continues. Now “boomers are in trouble”, says Graham Summers on Seeking Alpha. “We’ve now entered what may be the greatest period of wealth destruction in American history. The effects on boomer spending and investing will completely change the investing and economic landscape for the US regardless of what the Fed, Obama, or any other economic/political authority attempts.” In other words, America’s boomers will be cutting back and saving what they can. And Britain’s boomers will have to do the same. “I think we’re at a behaviour inflection point,” says Professor Edward Kerschner Continued overleaf
network will also help! There are some concerns in the group’s jewellery division, but Taste says it’s fortunate to “be at the value end of the segment”. It believes NWJ is “the strongest value proposition among the country’s top four chains”. It’s a riskier small-cap opportunity, but certainly worth a look at just 41c/share.
Continued from previous page and turnover remain on a sharp growth curve as more branches open throughout South Africa. Group revenue surged 303% to R136.3m in 2009, with a 29% increase in headline earnings per share, to 10.2c. The company boasts strong cash flows from growing top-line sales and we expect similar revenue growth in coming years as consumers gorge on fast food. South Africans across income classes are spending less time in the kitchen in search of quick and easy dinners. Maxi’s rollout into the Caltex
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People might forego purchasing jewellery and accessories when the paycheque gets squeezed, but they can’t do without clothing. We expect the average consumer to continue the migration from the high-end retail establishments housed in Foschini, Truworths and – to a lesser extent – Woolworths, to clothing discounter Mr Price Holdings (JSE: MPC). The group, which includes Mr Price Home and Mr Price Sport, increased turnover by almost 20% (to R8.9bn) in the year to 31 March 2009. This allowed the group to pay a final ordinary dividend of 92.8c/share. In contrast to many locally listed firms, Mr Price is upbeat for the 2010 financial year. The group says consumers should be revitalised as the debt burden reduces in a falling inflation and interest rate environment. It believes the Mr Price brand is “well positioned to capture further market share with fashionable merchandise at everyday low prices!” At R30.40/share, investors can lock in the 5% forecast dividend yield at a reasonable 12.06 price to earnings ratio. Continued overleaf
cover story Continued from previous page UK household spending v the savings ratio
of Global Wealth Management on CNNMoney. “Consumers aren’t just being frugal – they’re being thrifty.” And this “isn’t just a cyclical retrenchment. We’re seeing a shift from ‘conspicuous consumption’ to ‘conscious consumption’.” Pimco’s Mohammed El Erian calls it the “new normal.” So how will this savings drive play out? The charts on the right show what’s been happening to the savings ratio (the percentage of household disposable income stashed away) and consumption over the last 50 years. The dark line in each case shows the savings ratio, which in both Britain and America was on a progressive decline from the low to mid teens 30 years ago to zero by 2007. In other words, consumers weren’t saving any net money out of their incomes. That hadn’t been seen in Britain since 1959, and was a new experience for the US. Meanwhile, consumer spending just kept on going. The dotted line shows the real (inflation adjusted) year-on-year change in private consumption. We’ve inverted it to show how consumers tended to spend more even as they saved less. Until the latest recession, that is. The savings ratio in both countries has rebounded off zero, and consumption fell off a cliff. But the reason it’s different this time is that, on previous occasions when consumers retrenched, they at least had
UK ‘real’ household spending yr/yr % change (inverted) (LHS)
-4.0%
10.0%
0.0%
8.0%
2.0%
6.0% 4.0% 4.0% 6.0%
2.0%
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UK savings ratio % (RHS)
10.0%
-2.0%
US personal consumption v the savings ratio -2.0%
US ‘real’ personal consumption yr/yr % change (inverted) (LHS)
15%
0.0% 10% 2.0% 5%
4.0%
6.0%
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0%
US savings ratio % (RHS) 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
some cash in the kitty eventually to kick start another spending spree. But now the cupboard is bare and it looks like a long-lasting shift has begun. “It would not be at all unusual for savings to go to 9% or more in a few years,” says Mauldin. “That means consumer spending will drop by 9%.” A long-term rise in the savings ratio will mean homeowners staying put for longer; cars being driven for another year or two; shoppers hunting for value; and more holidays at home, or ‘staycations’, as Ravi Dhar of Yale’s Centre for Consumer Insights tells
Warmly clothed and fed, we expect thrifty consumers to stick with essential healthcare products in the immediate future. As consumers nurse their net pay, they’ll have less money to spend on medicines. This means a generic pharmaceutical company like Aspen Pharmacare Holdings Limited (JSE: APN) should continue to outperform. A second argument for investing in Aspen is the increased contribution to revenue from offshore operations. Foreign revenues exceeded local for the six months to December 2008. And government played into Aspen shareholders’ hands recently when it announced a 13.2% hike in the standard exit price for pharmaceutical manufacturers. This increase should “provide relief from sharply higher supply costs,” and boost margins and profitability at Aspen in the second half. The group will soon complete its R1bn capital expansion programme in readiness for an expected surge in demand from domestic and international markets. We don’t, however, expect Aspen to repeat its recent performance. The share climbed 72% in the 12 months beginning 1 July 2008 and is among the best performers on the JSE for that period.
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0.0%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Continued from previous page
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14.0% 12.0%
-2.0%
SmartMoney. Less cash being splashed in shopping malls, high streets or online will be bad news for a wide range of retailers and their suppliers. But it won’t be bad news for every company. “The idea again is a focus on thriftiness, on long-term value and savings,” says Professor Kerschner. “People aren’t going to be talking about 20% returns from the hottest initial public offering or hedge fund. They’re going to be considering the value of their investments.” In a nutshell, this requires a new approach to selecting and buying shares. ‘Cyclical’ stocks, such as commodity producers and industrials, which have driven the global stockmarket rally since 9 March, depend on improving economies for their profits. With “the global crisis morphing again”, says El Erian, “threatening the potency and credibility of the economic policymaking apparatus, the economy will continue to struggle”. That’s bad news for cyclical stocks’ earnings – and their share prices, too. So what should you buy? We’ve been banging the ‘defensive’ drum for a while now. These are firms that don’t need economic growth to make their money, like pharmaceuticals, utilities and telecoms. Now could also be the right time to invest in businesses that will prosper from the ‘new normal’ – stocks that will benefit from newly ‘thrifty’ consumers. We look at five options in the box below.
Penny pinching consumers will probably do whatever they can to trim the fat from the monthly budget. A great way to save a couple of hundred rand each month is to look at bank charges. There’s a solid argument for cash strapped individuals to move their accounts from the country’s big four banks to a cheaper provider. We think Capitec Limited (JSE: CPI) is perfectly positioned to profit from this trend. The group has leveraged its small base in recent years to post fantastic results. Net fee income climbed to R1bn in the latest year and headline earnings per share soared 41% to 366c/share. Although management advocates “caution and prudence,” it’s identified numerous growth opportunities. The group will open 40 branches through 2009 and is confident of leveraging the slump in retail rents to improve its footprint nationwide. The company’s confident it can secure the finance required to fund its wholesale and retail book. And that leaves clients’ ability to service their loans as the major stumbling block. Capitec’s price to earnings ratio to February 2010 is 10.53 times, which compares favourably to the country’s top banks, especially when the more aggressive growth prospects are factored in.
the best blogs What the bloggers are saying
Japan is too blasé about its problems
©AFP/GETTY IMAGES
www.slate.com Japan strikes me as “strangely passive about the huge change it is facing”, writes Daniel Gross. The population peaked at 127.8 million in 2004 and is forecast to fall to 89.9 million by 2055. Meanwhile, the ratio of working age to elderly Japanese has fallen from 8 to 1 in 1975 to 3.3 to 1 in 2005. By 2055, it might be as low as 1.3 to 1. By then, “people will come to work when they have time off from longterm care”, said Kiyoaki Fujiwara, a director at the Japan Business Federation.
Swine flu fears are overdone
“Maybe the robots will take care of us”
These changes are “cataclysmic for an indebted country that values infrastructure and personal service”. Increasing immigration and the birth rate has “proved difficult, even impossible, for this conservative society”. Perhaps the answer lies in technology. As one official in Toyota City – where 90% of the welding work is automated – only half jokes: “Maybe the robots will take care of us.”
Weed can ease California’s debt worries http://gregor.us Debt-ridden California is looking to tap a radical source of revenue – marijuana. Last month the state introduced legislation that would legalise it and allow the state to regulate and tax sales. This is “good news”, says Gregor Macdonald. First, it shows “some in California are ready to deal with their new negotiating partner: reality”. The state is carrying a horrible debt load and it needs every source of income it can get. Second, California is an ideal place to legalise pot. The state is already a leader in the production of medical marijuana and the climate in many parts
of the state is perfect for the crop. It would also dampen, if not deaden, some of the drug trafficking incentives which have been in place for over 40 years along California’s border with Mexico. By some estimates marijuana crop production in California already accounts for $14bn in gross sales – double that of the second-largest agricultural commodity, milk. Taxation could yield the state as much as $1bn a year. That won’t close the budget gap of $26bn. But it will signal a shift away from “fantasy-based debt creation to a reality-based era of resource maximisation”.
www.bbc.co.uk/blogs/thereporters/stephanie flanders No one has a clue what the eventual cost of a swine flu outbreak would be. A scary starting point is a World Bank study that suggests a global epidemic would end up costing nearly $3trn. “Really?” asks Stephanie Flanders. The World Bank scenario is based on a repetition of the 1918 Spanish flu outbreak which infected one third of the world’s population. Today’s anti-viral drugs should prevent that kind of catastrophe. Indeed, they may stop swine flu becoming even as bad as China and Hong Kong’s Sars outbreak in 2003. That killed 700 people and cost the region between $18bn and $60bn. The doomsters predict that the financial impact will still be huge as “our global economic immune system has already been lost to the recession”. But surely the economic cost would be a lot higher if so much output hadn’t already been wiped out by recession. “If unemployed people are forced to stay at home for a few weeks, that has a smaller economic cost than if they were all in work.” And if people have already cut back on restaurants, cinemas and the like, the extra fall in consumption may be fairly small. Retail sales might drop initially, but many will be made up later – as they were in 2003 – when people make purchases they previously put off. We would certainly be better off without this threat, but my guess is “the costs will be a lot less than some fear”.
The economics of obesity http://business.theatlantic.com/
So why don’t Americans just spend less, eating less? This is where the ‘elasticity of appetite’ comes in. Humans have no idea how hungry they are. So they just respond to growing portion sizes with growing appetites. Somewhere between our brain and our stomach, “the word ‘stop’ is swallowed along
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©STEPHEN WILKES/GETTY IMAGES
Why are Americans so fat? The lazy answer is, “because they eat too much”. But according to Elizabeth Kolbert in The New Yorker, it’s not that simple. Although compared with other goods and services food has indeed got cheaper in the US, “fatty foods have gotten a lot cheaper”. The price of a typical soft drink, for example, has dropped by more than 20%, and they now account for 7% of all calories consumed in the US.
with the extra calories”. Add in our instinct to buy things that are cheap and it’s little wonder Americans are fat. It’s also no surprise that of the six countries with the highest obesity rates, four also have the most McDonald’s per capita in the world.
entrepreneurs
Why I bought a van full of smoked sausage “I didn’t have any idea about forms for customs. I just bought two tons of product, £6,000 worth, for a van that was only supposed to take 1.25 tons. The tires were burning the whole way home and by the time we got to the last section of the M25 it was a bit touch and go.”
by Jody Clarke Mike Shaw, 41, isn’t a particularly big fan of Polish food. “I prefer Italian,” he says. But if it wasn’t for smoked sausages and strudel jabłkowy (apple strudel), he might still be an unemployed IT worker. Instead, he and Mariola, his Polish other half, run Malinka, a £3.5m-a-year chain of Polish food stores, stretching from Cheltenham to Southampton. And he owes it all to a supermarket visit in 2002. The son of a British steel worker, Shaw grew up in Guilden Sutton, Cheshire. After studying economics at Wolverhampton Polytechnic, he got a job in IT in 1989. He worked in the industry for ten years before being posted to Warsaw in 2002 to install text message services for ERA, one of Poland’s biggest mobile-phone companies. He was struck by how cheap food was compared to the UK. “You could get a week’s shop in at the local supermarket for less than £10. And that was without being tight.” With Poland set to join the European Union, it seemed like a business nobrainer to Shaw. His plan was to import cheap food to Britain, where the only existing Polish food shops were based in London. Because Poles are quite particular about their foods, he reasoned that he would have a ready market once they started emigrating to Britain after joining the EU. “They eat vast amounts of smoked sausages and dairy by-
MY FIRST MILLION Mike Shaw, Malinka products, such as buttermilk and curd cheeses, which you couldn’t really get in Britain at the time.” So when Shaw was made redundant in August 2004, he didn’t waste any time. He leased 25 square metres of space beneath a commercial law practice in Reading for £6,500 a year. He kitted it out with new wooden floors, a £2,000 deli counter and two secondhand dairy counters from London. Then he hired a Luton pick-up truck and drove to Poland.
Within a week, he’d sold all his stock for £16,000, despite his reservations that he’d bought too much. “We were a little taken aback by how popular it was.” But with his competitors almost exclusively based in London, Shaw’s store had a near-monopoly on Polish food in the local area. After a year, the business was turning over £350,000 and they decided to open a second branch in Slough. “Four to five pallets a week cost an awful lot more per pallet than filling a whole lorry. A full articulated truck could carry eight times as many goods for double the price. It just made sense.” In 2007, Malinka hit £1m in turnover. Shaw opened in Southampton and then Cheltenham the following year, after his research told him both towns had large Polish populations but no Polish shops. The business is now set to hit £4m in sales as he starts supplying other stores around the UK. While many Poles have returned home in the recession, he says these “tend to be migrant workers with low-paying jobs. A lot of our customers have full-time jobs and have settled. So business isn’t as high as last year, but not many businesses would say otherwise.”
The MoneyWeek audit: Bruce Forsyth
©JONATHAN HORDLE/REX FEATURES
• How much was in his first pay packet? In 1942, a 14-year-old Bruce Forsyth began performing as ‘Boy Bruce, the Mighty Atom’. In return for tap-dancing and playing the accordion, Forsyth received 60p per performance. For over 20 years he toured around Britain. Then in 1958 he got his television break appearing on Sunday Night at the London Palladium. After performing on the show, Forsyth was asked if he would present the programme for a sum of £85 a week. Two years later, he was earning £1,000 a week and had the impressive title of Britain’s highest-paid entertainer.
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• What else has he made money from? In the late 1990s, Forsyth’s TV career stalled when Play Your Cards Right was cancelled. But he kept the pounds rolling in with after-dinner speeches – for which he earned £11,500 a time in 1998, making him one of the world’s top-earning speakers – and by penning his memoirs. In 2001, he received a £300,000 advance for his autobiography. • How much has he earned from Strictly Come Dancing? Forsyth returned to TV in 2004 as co-host of Strictly Come Dancing. The show has been such a hit that in 2007 he earned £618 for each minute he was on our screens. His pay peaked at £660,000 for last year’s series. Cuts at the BBC mean his pay has been cut to around £500,000 for this year’s series. Despite accepting a cut, he was indirectly embroiled in the BBC spending scandal. Last year, the director-general charged a £99.99 bottle of champagne for Forsyth’s 80th birthday to the taxpayer. Yet despite being 81, he’s never claimed a state pension.
personal finance
10 ways to buff up your credit score by Karin Iten “Banks are pretty choosy about who they take on as customers. So your credit score is more important than ever,” says MoneyWeek correspondent Ruth Jackson. Apply for a current account, credit card, bond or even a cell phone contract and it’ll be checked. So this week, I’m showing you how to ensure your credit score is as high as possible. First, get to know your credit report. And don’t forget to check it on an annual basis – this way, you can ensure everything’s accurate and sort out any errors promptly. Visit www.mycredit.co.za to apply for your annual free report. Essentially, there are two main credit agencies in South Africa who work out individual credit reports for each credit holder. Both bureaus, Experian and TransUnion, receive account information from various sources, including primary retail stores, banks, phone companies, finance companies and members of the Consumer Providers Association (CPA). In addition, they receive all application details and repayment histories for loans granted by micro-lenders from the National Loans Register (NLR). It’s like George Orwell once said: “Big brother is watching!” Once you’ve checked your report, sort out any problems with it. Unless you’ve had serious debt problems in the past (such as being declared bankrupt), it’s relatively easy to improve your credit score. Check you have as much information as possible on your report (it’s not unusual for firms to reject people because they don’t have sufficient credit history). So confirm that your bank’s passed on information about your current accounts, credit cards and any other products. If you’ve parted ways with someone with whom you shared a joint product, like a bond, make sure both credit agencies are aware of this. In the case of a property, ensure that you change the name of the owner on the title deed and file this with the South African Deeds Office. A divorce lawyer should do this for you, but it doesn’t hurt to double-check. If you don’t, and your ex subsequently racks up a bad debt, it’ll reflect badly on you.
Finally, “don’t fall into a vicious circle of rejection. Every time you apply for a financial product, a firm checks your credit record”, says Jackson. This leaves a “footprint” on your record. Rack up too many and they’ll reject you purely because other firms will worry that you’ve applied for too many products. “So if you get rejected by any firm, check your credit file straight away, find out what the problem was and then resolve it before applying for another product. In short, when it comes to credit, try and stay squeaky clean.” To help you do this, I’ve put together ten steps that’ll not only help you preserve your rating, but redeem a flagging one as well: 1. Pay your accounts/bills on time. Although simple to do, it shows lenders you take your debts seriously and this goes a long way to improving your credit rating. 2. Pay the full instalment, as opposed to the minimum requirement, every month. This will lower the amount you owe and help keep the interest you’re paying in check. It’s especially important when paying off clothing store accounts, which charge between
25% and 35% a year in interest. 3. If you’re unable to make a payment, for any reason whatsoever, phone the relevant company and let them know. They’ll be able to assist you in making different arrangements to pay back what you owe. 4. Buy on credit only if you can afford to settle the repayment. 5. Obtain a copy of your credit report at least once a year. 6. Use your credit report to renegotiate the interest rate you’re currently paying. 7. Check your credit report for any faulty or fraudulent activity on your accounts. 8. “Pay down” your debt. Try to use no more than 50% of your limit. 9. Never ignore a demand for payment or a summons for non-payment. 10. Don’t lie on your application form – credit companies check your details, so lying will show a level of dishonesty and lenders will feel they can’t trust you. Remember, it’s a lot harder to regain a good rating than it is to maintain one! By sticking to these easy-to-follow steps, you’ll be able to maintain and improve your creditworthiness.
Tax tip of the week 3 easy steps: Get your foreign tax credit today! The Income Tax Act protects you from double taxation if you’ve already paid taxes abroad by granting you a foreign tax credit.
How do you ensure you get your credit? Step 1: Prepare a statement with the following information: • • • •
The foreign tax year when you received the income (or it accrued to you); The names of tax and the country; The law which imposed the tax; and Whether the tax was levied by the national government, a state or local authority.
Step 2: If the tax was withheld at source, provide certified copies of either: • A certificate of tax withheld; • A copy of the receipt issued by the revenue authority; or • A notice issued by the relevant revenue authority requesting payment (if any).
Step 3: If the foreign tax wasn’t withheld at source, provide certified copies of: • The relevant parts of the foreign income tax return containing the calculation of taxable income and taxes due, schedule of provisional payments and your signature; and • The calculations of any foreign provisional tax payable. Matsika Vengesa, TaxConsulting, matsika@taxconsulting.co.za
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profile This week: Mike Ashley
The secretive retail kingpin thrust into the limelight over a £1.5m ‘dirty tricks’ claim Mike Ashley was once one of Britain’s most secretive billionaires. Despite owning Britain’s largest sportswear empire – incorporating such illustrious names as Lillywhites, Slazenger and Dunlop – Ashley had never uttered a word in public until forced into a few stammering words when Sports Direct went public in late 2006. The only existing photograph of the shadowy entrepreneur dated from the 1980s when he won a teenage squash competition. Yet within the dog-eat-dog world of sports retail, Ashley was already notorious, says The Guardian. Rivals learned the hard way not to underestimate him. He was once famously warned off by the most powerful northern boss, Dave Whelan of JJB Sports. “There is a club in the north, son, and you’re not part of it.” His revenge was swift. In 2000, he shopped Whelan and his cronies to the Office of Fair Trading for price-fixing, which landed them with multi-million-pound fines. A decade on, Ashley is the kingpin in a still-incestuous web of rivalries, feuds and cross-shareholdings. He doesn’t care much about the money, a source told Retail Week. He gets his kicks from “the game and the intrigue”. What, then, possessed the former Next chairman, Sir David Jones, one of Britain’s most highly respected retailers,
to accept a £1.5m personal loan from Ashley in the autumn of 2007, just as he took a directorship at arch-rival JJB Sports? That discovery, and Jones’s subsequent inability to repay on time, is all the more embarrassing, says The Sunday Telegraph, because Jones (later elevated to chief executive) was brought in to JJB “on an anti-sleaze ticket”. Moreover, the timing of the leak – just as the deeply-troubled company was hoping to raise £50m from the City – couldn’t have been worse. Many in the JJB camp suspect “dirty tricks” (see box). True or not, from the moment Jones naively took the cash, Ashley had him by the short and curlies. Born in Walsall, and brought up in Buckinghamshire, Ashley, 44, left school with just one ‘O’ level and worked briefly as a squash coach. In 1982, his parents mortgaged their bungalow to raise £10,000 towards his first sports shop in Maidenhead, says The Daily Telegraph. They now rarely see their celebrated son. Ashley expanded quickly by acquisition, hard work and aggression. “He was reputed to block suppliers’ cars in the Sports Direct car park until sales were agreed – on his terms, of course.” After floating the company, he broke every governance rule much to the fury of shareholders, who saw their holdings decimated, says Retail Week. Having pocketed £900m,
Ashley dismissed them as “cry babies” and a critical analyst as a “moron”. The high point of Ashley’s career was probably 2007 when he bought Newcastle United. But after hefty losses and death threats from fans, he is desperate to sell. Elsewhere in Ashley’s empire, things look equally dicey, says The Times, after a 91% collapse in Sports Directs’ profits and hefty losses from his other retail shareholdings. With Ashley’s back against the wall, the vicious game of sports retail may get a good deal dirtier.
A master of the long game
©PAUL GILHAM/GETTY IMAGES
Mike Ashley loves to take a punt, but they have a nasty habit of back-firing, says The Scotsman. His contrarian spread bet on HBOS left a nasty dent in his fortune. He then forfeited several hundred thousand more when he lost a game of spoof with bankers from Merrill Lynch to settle a fee-payment dispute.
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Still, the “Jones Loan” affair – he lent Jones £1.5m in 2007 apparently to finance a family-run tech venture – marks him out as a master of the long game. The timing of the recent loan leak came in very handy for Ashley. Not only did it undermine Jones and his reformist efforts to clean up the sector, but it also distracted attention from Sports Direct’s dire results and the worrying news (for Ashley) that Bill and Melinda Gates’s Foundation Trust had decided to invest in rival JJB.
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While Ashley has always formally denied that he’s interested in acquiring JJB Sports, his links with the company are, to say the least, intricate. Sports Direct was both a rival and supplier to JJB and had a 4.76% stake in the company. What’s more, Ashley is a close friend of JJB’s former chief, Chris Ronnie – a former director at Sports Direct. Eyebrows were raised when Ronnie, bankrolled by Icelandic cash, bought a controlling interest in JJB Sports in 2007. “There were suspicions that he was on a secret mission for his former paymaster.” And when Jones arrived on the scene, it was Ronnie who suggested he might look to Ashley for the cash he needed. The whole affair “raises fresh questions” about the murky nature of the trade. Jones hangs on in his job for the moment – but there’s no doubt who’s the fall guy.
Spending it Travel
Serenity in the south of France By Ruth Jackson
Finding the perfect holiday combination of peace, luxury and fine dining can be tricky. But head to the south coast of France and you can get all three. The medieval village of Eza winds around the top of a hill overlooking the Mediterranean. It’s situated between Monte Carlo and Nice, but feels as though it’s a million miles from the flash, brash crowds of the rest of the south of France. The narrow streets mean that most of the village is inaccessible to cars, so you can wander the slopes in peace. Yet it still manages to cram in two luxury hotels, a Michelin-starred restaurant and fantastic views of the Mediterranean. Sitting right at the top of the village is the luxury boutique hotel Chateau Eza. It has just ten guest rooms, in buildings dotted around the village. Each is individually decorated in a style sympathetic to the medieval buildings and most offer unrivalled views out across miles of coastline. Opt for the suite and you can even enjoy the view from your own private hot tub on the balcony. But the pièce de résistance is the hotel’s Michelin-starred restaurant. Situated in a
room that practically hangs over the edge of a cliff looking out over the Med, it offers stunning views and delicious French cuisine without the pomp and ceremony of many other French restaurants. If you tire of the peace and quiet on offer in Eza, Monaco – where another great Michelin-starred restaurant awaits – is just a ten-minute drive away. Monte Carlo is Eza and the Mediterranean: a serene retreat from the tourist crowds mainly a tax haven for for its fabulous fresh fish. The the hugely wealthy, so there are relatively Mediterranean sea bass is particularly few things for tourists to do – in fact, you tasty and worth the €45 (R510) price can cover everything in a day. The main tag. As you eat, you can enjoy the view sights to take in are the palace, the main of the port and the roads that become casino and, of course, the various highthe Formula One race track once a end forms of transport docked in the year – the Port Palace is Monte Carlo’s marina or parked by the side of the road. only hotel to look directly onto the course. After a day’s yacht-spotting, settle down on the terrace at the Restaurant Rooms at Chateau Eza cost from Mandarine at the Port Palace hotel €280 (R3,180). For more information, and prepare for another great meal. visit www.chateaueza.com. This restaurant earned its Michelin-star
Wine of the week: A port that’s completely different De Krans Pink Port R49 at most retailers Calitzdorp is the self declared “port capital” of South Africa and every other year it celebrates with a fun-filled port weekend. So in May 2011, put on your woolies and head for the Eastern Cape!
by Marilyn Cooper Port styles, such as, White, Ruby, Tawny, Vintage and Vintage Reserve, are all made in South Africa. Most adhere to the South African Port Producers guidelines, which recommend using traditional Port varieties like Tinta Barocca, Tinta Rotiz, Touriga Nacional, Souzāo etc. And most of you have probably drunk many of these styles.
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But here’s something absolutely different – Pink Port. It’s sold in the most stylish frosted 500ml bottle and should be served chilled. Made specifically with the South African climate in mind, it can be enjoyed with a wide variety of food, or as an aperitiff. It was paired with ostrich egg paté recently at a de Krans wine and food evening – held in an enchanting new restaurant in Braamfontein called Narina Trogen (after the bird). For something less exotic, try it with a paté of your choice.
Marilyn Cooper is a Cape Wine Master and Managing Director of the Cape Wine Academy.
toys
Porsche’s roomy family saloon The Panamera is Porsche’s first luxury saloon, says Ben Barry in Car, and it’s a “highly appealing car – fast, comfortable, practical, frugal and very well built”. The basic idea was a very good one: Wrap a Porsche 911 in a gran turismo body. You’ll get what Porsche was trying to do the moment you climb into the very-911-like interior. And from the outside it looks much like a 911 too, albeit with its 4.8-litre, V8 engine in the front. It doesn’t, however, drive like a 911 and that’s not necessarily a bad thing. It’s smoother at low speeds, the ride is more reminiscent of a Mercedes, and it’s not as sporting as its stablemates – making the car a more relaxing place to be for driver and passengers. It will still, however, do 0-100km/h in 5.5 seconds and go on to a top speed of 283km/h (for the ‘S’ model). The four-seater layout, with its excellent build quality, gives the car an “airy, loungelike ambience”, says Ben Barry in Car. Each passenger can feel it’s almost a bespoke fit, says Stuart Birch in The Daily Telegraph, with generous head and leg room.
And it really is a proper, big saloon, says Stuart Birch in The Daily Telegraph. It’s roomy inside, and each of the four occupants “can feel part of the whole driving experience in an ambience of leathery luxury, comprehensive infotainment systems and detailing that Porsche immodestly calls ‘opulent’”. The car’s ability to “mix whopping performance and confidence-inspiring dynamics” makes it a “very satisfactory solution to the enduring Porsche clan’s problem of creating a family sports saloon. After 50 years: Sorted.”
The best cameras
drop it from a height of 1.2 metres safely. It also features a 2.5-inch LCD screen, optical image stabiliser, plus face and blink detection. The zoom is “weedy”, but the pics “superb”. Price: R4,999. Contact: www.canon.com. The “ultimate dinky snapper”, with all the “fancy image tech
If you need a camera that can take the rough with the smooth, then the Canon Powershot D10 is the one for you, says Stuff. It’s waterproof to 10 metres and is as “tough as a prize conker” – you can
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you could want”, is the Fujifilm F200EXR, says Stuff. It has a 12-megapixel sensor that’s larger than average to reduce picture noise and will automatically alter picture size in low light, so you get “the best possible pic regardless of size”. Screens “don’t get much sharper” than its 3 inch LCD, and it has a 5x zoom. Price: R3,999. Contact: www.fujifilm.com. Can one camera really offer all things to all people? Sony certainly seems to think so with its DSCHX1, says Stuff. It’s a
“super-zoomer that’s also trying to be a high-definition video camera”, and all for the price of an entry level SLR (single-lens reflex) camera. Its camera and video talents may be pretty average, but that you can get them together in one package is what makes it “great”. Price: R6,565. Contact: www.sony.com.
blowing it
What on earth’s wrong with a bit of shopping? have made them hunt more for bargains it hadn’t killed their enthusiasm.
I’m not a great shopper. A year or two ago, I took my family on a sailing holiday in Croatia. When we went ashore in the ancient town of Split, it took me a moment or two to tie up the dinghy. Fatal. By the time I had climbed up to the quayside there was no sign either of my daughters or my wife. They had vanished.
©PHOTOLIBRARY
Then I saw a row of fashionable stores set back from the waterfront and the mystery was solved. They were in Topshop – trying on hats.
Good. Capitalism would be in dire straights if everyone behaved like me (although, come to think of it, I do my bit for the consumer society by owning a ridiculously un-costeffective boat that requires constant expensive repairs and new parts).
The experience was not an unusual one. Show my teenage daughters a clothes shop and they’re in it. I, on the other hand, will just pace about impatiently waiting until they’re finished. Neal Lawson, the author of All Consuming, would approve of my behaviour. He says that buying stuff is the “heroin of human happiness”. In our frenetic consumer society, he argues, we have to go on and on shopping because otherwise the whole system would grind to a halt. Instead we have to be sold “just enough to keep us going, but never enough that our wants are satisfied”. Geoffrey Miller, a professor at the University of New Mexico, comes to much the same conclusion in another new study. Runaway consumerism, he
Recession hasn’t killed our urge to shop thinks, “offers little more than narcissism, exhaustion and alienation”. How did we get here, wonders The Times’s Carol Midgley. “How did we get to a point where shopping became the premier leisure activity, where we gladly boarded the work-to-spend treadmill, the insatiable pursuit of ‘more’, which resulted in there being, for example, 121 mobile phones for every 100 people in the UK by 2008?” Midgley went off to a busy shopping mall to find out. The young designer-bag-laden consumers she talked to weren’t very enlightening. They said they loved shopping, that it got them out of the house, that while the recession might
Of course, the shopping habit can be taken too far. Television advertising undoubtedly encourages foolish shopholics to spend too much. And perhaps Professor Miller is right that some of this spending has to do with people endlessly repackaging themselves with fancy new dresses and Rolex watches in a desperate and usually pointless effort to attract the opposite sex. But there’s nothing really wrong with shopping and, unlike heroin, it doesn’t kill anyone. I may not enjoy it, but lots of people do – it’s not called retail therapy for nothing – and I’m sure my daughters don’t find it exhausting, alienating or even narcissistic to buy a new dress or two from time to time.
Tabloid money… meet the new Frank Abagnale Jr ■ Churchill presided over a War Cabinet of just nine people, says Leo McKinstry in the Daily Express. Today, 35 politicians sit round Brown’s Cabinet table. It shows how dramatically the professional political class in Britain has grown. Research by the BBC shows Britain now has 30,000 paid politicians, compared to just 3,000 in 1980. The huge increase is the result of Labour measures, such as the introduction of full-time salaried councillors, the creation of new assemblies in Scotland and Wales and the growth in the number of political advisers at all levels of government. “The total bill for all this subsidised careerism is now more than £500m (R6.5bn).” MPs and ministers cost at least £167m (R2.2bn); municipal representatives cost taxpayers £254m (R3.3bn). Britain currently has more professional politicians than ambulance staff. Yet in the late Victorian age, when MPs were not paid at all, they governed a quarter of the world, while now they do very little, having “surrendered Britain’s independence”, and most of their power to make laws, to the EU.
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■ It turns out history does repeat itself. As Independent Online reports; “A York teenager was questioned by police after tricking British aviation executives into believing he was an airline tycoon.” This boy, going by the name Adam Tait, got away with his scam for six months but was finally caught by Essex police when he tried to charter three seater jet from Southend airport. This mirrors Frank Abagnale Jr, made famous by the Spielberg movie, Catch Me If You Can. Not only did he forge and con his way through about $2.5m worth of bad cheques in 26 countries, but he flew over 250 flights by posing as a Pan Am pilot. ■ Home affairs minister, Nkosozana Dlamini-Zuma, told Derek Watts on Carte Blanche that the situation at Home Affairs was tragic. No kidding! When Memolene van Blerk was finally arrested on 25 counts of fraud, she had faked her own death twice, falsified her identity five times and stolen R220 000 from her company.
shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news
PUNTS Company
Media
Reason
Current price
Sasfin (SFN) Investment banking
Financial Mail
Andrew McNulty at Financial Mail writes that a global financial and credit crisis isn’t an easy time for any small bank to raise capital for expansion. And yet, Sasfin managed to raise substantial capital from the International Finance Corp (IFC). It has a historical PE of 5 and a dividend yield of 8%. But, with R756m market capitalisation and one of the highest bank capital ratio’s in the business, Financial Mail sees value. Buy.
3170c
Billiton (BIL) Summit TV This is a “fantastic” share going for a bargain, says Vlad Metals and minerals Vlad Anuchin, Anuchin. It has great management and it’s well diversified. In RMB Asset Managers the long run, quality shares are what count and Billiton is a good choice. And, with a PE of 8.69, this share is going cheap. Buy.
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19036c
Anglo (AGL) Financial Mail Metals and minerals
“The snake strikes at its prey, injecting cytotoxic venom into its bloodstream, then backs off and simply waits for its victim to die.” This is how Matthew Hill in the Financial Mail describes the proposed merger of Anglo and Xstrata. Mick Davis, CE of Xstrata, has his fangs out and is pushing for a merger of equals, but the strength of Anglo’s new man Sir John Parker speaks volumes. FM rates Anglo a buy. 23441c
Naspers (NPN) Media
Financial Mail
The sun always shines on TV and Multichoice’s parent company, Naspers, is no exception. Naspers’ pay television division has managed to boost revenue by 30% in severely adverse trading conditions. Buy. 23980c
Metmar (MML) Non-ferrous metals
Finweek
“The imminent conclusion of the sale of PGR 17 Investments (PGR) to Kermas will boost the coffers of PGR’s 21% shareholder – commodities trader Metmar – by a whopping R390m,” says Sikonathi Matshantsha in Finweek. This is a tidy profit considering it only paid R51m for it. With this windfall, Metmar is free to expand, possibly by taking over AltX fellow commodities trader Insimbi Alloys & Refractory Supplies. Buy.
400c
Massmart (MSM) Retailers
Financial Mail
“Steady sales numbers across the board for the year to end June may not represent a bonanza for Massmart, but this is a tidy performance in a retail market that’s been looking more prone to a sharp contraction than Roger Federer’s wife”, says Jamie Carr in the Financial Mail. The way to make the long-term wins in this brutal market is to pick companies that’ll survive. Out of the retailers, this cut-price, cut-throat group has what it takes. Buy. 7625c
Richemont (CFR) Personal goods
Summit TV Craig Pheiffer, Absa,
Absa’s Craig Pheiffer reckons Richemont looks good in the longer-term. Everyone expects its earning will be bad when it comes to report its results, but “valuations seem around 29 to 30 Swiss francs. It’s [currently trading] around R22 to R23 at the
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shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news
Company
Media
Reason
Current price
moment.” This share will run when the global economy picks up, and it will eventually pick up. It’s a good, solid company. If you’re willing to bide your time, you’ll reap the rewards. Buy.
1809c
DOGS Company
Media
Hospitality Prop Fund B (HPB) Real estate holdings and development
Finweek
Reason
Current price
After an announcement last month that payouts will drop 20%-30% to June 2009, Hopitality Prop Fund B’s share price has collapsed. While some would see this as an excellent buying opportunity, Evan Jankelowitz, co-head of Stanlib’s property franchise, says: “Investors have been so blinded by the 2010 Soccer World Cup fever that few expected Hospitality’s earnings to take a dive in the run-up to that event.” The short-term earnings look bleak, while revenue per available room was down 11.3%. Sell.
1440c
Reason
Current price
WATCHLIST Company
Media
ElementOne (ELE) Media agencies
Delta EMD (DTA) Electrical equipment
Financial Mail
Finweek
Former Johnnic Communications (Johncom) ElementOne faces some challenges by remaining listed on the JSE. Without a controlling interest in its investments, “the company does not have a reason to exist”, says Matebello Motloung of the Financial Mail. Since its listing, its share price has collapsed 31%, which may represent good value should it manage to up its 33.6% stake in Caxton. So far, exploratory discussions have been disappointing. Hold.
1050c
Formally known as Delta Electrical, this company has been “short-circuiting” for years, according to Shaun Harris at Finweek. It’s had tax losses of R275m, but has managed to turn a profit of R89m over the last financial year. The market has have taken note of its improvement and the share price has picked up more than 10%. Delta is facing unfavourable exchange rates – it makes high-grade manganese dioxide used to produce alkaline batteries – and it’ll also be affected by lower commodity prices. As such, it’s not expected to improve its margins. Hold.
800c
**Closing prices as at 22 July 2009
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last word
From Romulus and Remus to Stimulus A brief history of monetary madness from ancient Rome to the present day made up of displaced small landowners and out-of-work labourers, needed bread and circuses – which drained the treasury.
Those whom the gods would destroy are granted stimulus. When a man wins the lottery, it has a stimulating effect on everyone around him. He usually spends the money quickly – often before he gets it. But no matter how much he wins, he is usually broke within a few years – often even broker than before he bought the winning ticket.
Bill Bonner
The first financial crisis of the imperial period came early. Caesar Augustus tried to solve it with more stimulus. Neither paper money nor the printing press had yet been invented. Augustus increased the money supply in the only way he could; he ordered slaves in the silver mines in Spain and France to work around the clock. This did not bring prosperity; it
The phenomenon is little different when it happens on a national or even imperial scale. Any money you don’t earn is stimulus. But without the sweat of honest toil on it, easy money seems almost worse than none at all. This kind of stimulus has a long, sordid history. But there are no examples – none – where it produced genuine prosperity. Instead, when a nation suddenly runs into some easy cash, it’s soon spending more than it can afford and getting into trouble. The Roman Empire is in some measure a stimulus story. It conquered. It grew. Each conquest brought more booty – gold, silver, land and slaves. Each led to more conquests, bringing forth more booty. But the stimulus of this booty did not stimulate real prosperity – it undermined it. First, slaves bought by rich landowners destroyed the free labour market and ruined small farmers. Then imported wheat from the provinces – paid as tribute – put the large-scale farmers out of business too. Italy was then dependent on foreigners for its food. In the first century AD, Roman conquests reached the point of diminishing returns; the stimulus came to an end. But borders still had to be protected. And Roman mobs, 28
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©PHOTOLIBRARY
A recent example from the British press: one of the first Lottery millionaires punched a plumber and ended up in court, says The Daily Telegraph. Michael Antonucci won £2.8m in 1995. But he “blew his entire fortune”, reported the paper last month. The amount in dispute was just £400, billed for a “gigantic ceiling mirror fitted above a whirlpool Jacuzzi”. He had the mirror installed when he was flush. Now he’s broke, he can’t pay. Hence the altercation.
The conquistadors: ‘stimulus’ in action caused price inflation. In a period of about three decades, Rome’s consumer price index almost doubled. When mining output could be increased no further, Augustus’s great-nephew, Nero, found a new source of stimulus; he reduced the silver content of the coins. This source of stimulus proved ineffective, but enduring. By the time barbarians took over, the silver denarius contained almost no silver at all. Rome itself was played out too. Another early example of stimulus-inaction came in 16th-century Spain. The conquistadors grew the supply of money in time-honoured fashion – by stealing it. Galleons brought treasure from the Americas, increasing the Spanish money supply substantially – and fatally. The Spaniards had so much stimulus that they
downed their tools. Why work? They could buy things. The discovery of a mountain of silver – Potosi – in the mid16th century insured a supply of stimulus that would last nearly a century. In the “price revolution” from 1540 to 1640 the cost of living rose across Europe. In England prices went up 700%. And Spain, although it covered 40% of its state budget with this easy cash, still defaulted on its debts about once every 15-20 years, from 1557 for the next ten decades. Spain, like Rome, welcomed stimulus; but it never recovered from it. Now we turn to the biggest misadventure in stimulus ever – the period after the US ‘closed the gold window’ in 1971. In the 150 years before then, nations could stimulate their own economies with cash and credit, but only to a point. They could overspend; but they had to settle up in gold. But after 1971, the sky was the limit – especially in the US. It could settle its bills in paper, which was then used by foreign central banks as monetary reserves. Since foreign banks were eager to add to their supplies of reserves, there was no effective limit on the amount of stimulus available. And, whenever the system was challenged, the feds rushed to stimulate it some more – with even easier cash and credit. The Fed’s adjusted monetary base grew 900% since 1985, and has more than doubled this year alone. Total US debt more than doubled – as percent of GDP. As in Rome and Spain, more stimulus stimulated spending and speculation, not real output. During the 2001-07 period, for example, credit in the US increased by $22trn. The nation’s GDP grew by only $4trn. For every extra dollar of output, Americans took on $5.50 of debt. Now the bubble has blown up. What do the authorities offer? More stimulus! Cometh a report this week that $23trn has already been put at risk in the various bail-outs and credit guarantees. As for the US public debt, it is expected to increase until the country goes broke. Future economic historians will look at these staggering efforts with awe and wonder – they will wonder what the hell we were thinking. To read Bill’s thoughts, sign up to Money Morning’s free email at www.moneymorning.co.za.