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14 AUGUST 2009 SOUTH AFRICA EDITION 107

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from the editor 14 AUGUST 2009 ISSUE 107

Pencil in an 18% year-on-year decline

ISSN 1995-4476

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As local investor confidence surged, the All Share Index cracked the 25 000 level last week. Is this recovery sustainable?

We can’t deny a sense of euphoria as the world’s largest economies show signs of exiting recession.

But, at the same time, we’re a bit concerned with how quickly share prices are recovering.

Many blue chip shares have more than doubled in value in the five months since midMarch this year. And yet, investors are lining up for more. Do these investors expect business activity to suddenly return to mid2007 levels?

These equity bulls must realise we’re entering a period of consolidation, rather than resurgent economic growth. Demand from emerging economies like China and India will keep the engine ticking, but we need a strong US and Eurozone before the world returns to growth rates experienced in the last five years.

Before you bet the farm on local equities, you must consider a number of factors. The rand suddenly lost its confidence in the last week, slipping back to R8/$ instead of heading to R7.50 as many analysts expected. This reversal will have the resources bulls licking their lips, but it could have negative consequences for domestic consumers. A weaker rand will combine with a higher oil price (Brent crude crept back over $73 a barrel last week) to place upward pressure on fuel prices with the usual knock-on effect on inflation. Factor in the inflation-plus wage settlements and horrible noises being made by electricity supplier Eskom – the group wants to push through 40% plus increases in each of the next two years – and you’ll appreciate the pressures on the manufacturing and consumption sectors of the local economy.

With the August 10 public holiday behind us, you’ll want to carefully watch this week’s data releases. We’ll soon discover how mining and manufacturing production and retails sales performed in June 2009. Standard Bank Economics expects manufacturing and mining production numbers to disappoint in the current “strong rand and weak global demand” setting. They’ve pencilled in an 18% year-on-year decline in manufacturing, with similarly depressed performances from mining production and retail sales.

Pressure’s building in equity markets and we fear a short-term correction is inevitable. If you’ve missed the first 35% of positive price action, now is the time for renewed caution.

One investing strategy is to stick with defensive stocks rather than the financial and resource shares that have led this recovery.

Another is to find the niche sectors of the economy that’ll outperform over the next five to ten years. In today’s feature article, Eoin Gleeson investigates global investment opportunities as the world embarks on a journey to a “cleaner and greener future”.

Turn to page 16 to find out how to profit as motor vehicles go electric.

Gareth Stokes Editor, South Africa

In this issue 6 Markets What the latest sugar rush says about commodity markets.

13 Briefing Will Rupert Murdoch’s latest

7 Politics

19 Blogs Let your kids pick your stocks.

200 days down the line, Obama drops in the polls.

8 Who’s tipping what

This defensive share’s a must-have in your portfolio.

14 August 2009

After the long running battle with household debt, the consumer is whipped. There are plenty of new foes on the horizon. Ignoring the massive cost-of-living increases in municipal rates and other services, local consumers worry about future attacks on their take-home pay as government implements further social interventions. These expenses contribute to sticky inflation and despite a surprise in the June 2009 inflation number – Standard Bank Economics expects “no interest rate action” when the Monetary Policy Committee of the Reserve Bank meets.

gamble backfire?

20 Entrepreneurs

The man making a

fortune from shutters.

11 Strategy Which ratios can you trust,

23 Travel There’s more to Switzerland than

and when?

skiing.

news British economy

Another dose of new money: Will it work?

Britain’s “sanguine summer has suddenly turned unsettled”, said Ian Campbell on Breakingviews.com. “Not for the first time, the Bank of England has changed the weather.” Optimistic markets were rattled when it announced an extension to its quantitative easing (QE) programme – injecting money to bolster the economy by buying gilts and corporate bonds – from £125bn to £175bn. This is needed to ensure that inflation rises to the target rate of 2% in the medium-term, said Governor Mervyn King. He added that while growth looked set to resume, the recovery will be “fragile” and we will “find ourselves in a difficult position for a long time to come”. Enter the latest greater-than-expected jump in the unemployment rate, to a 13-year high of 7.8%, which Howard Archer of HIS Global Insight deemed “ghastly”.

QE has yet to work

annual % change

20%

Net lending to non-financial corporations

15%

10%

5%

Money supply

0%

2007

2008

‘09 Source: FT

The Bank is worried that without QE there could be a deflationary spiral as plummeting housing wealth, falling incomes and rising unemployment intensify the deep recession, said Larry Elliot in The Guardian. But its attempts to spur bank lending through QE have had scant impact as banks – wary of future losses – continue to hoard cash.

The measure of the money supply the Bank watches to see if QE is kicking in remains weak, said Roger Bootle of Capital Economics, while the nonfinancial sector is paying back more than it’s borrowing (see chart).

In which case, will more cash help? The Bank, after all, “can’t make banks lend or people spend”, said Campbell; demand for credit isn’t exactly soaring either. And King himself noted this week that it will “take several years” for banks to repair their balance sheets. So QE may not avert a deflationary spiral, while the other main worry is that it will pave the way for a sharp eventual rise in inflation if applied for too long. Note that “there are no real examples of it working successfully in taking an economy out of modest deflation into modest inflation”, said Buttonwood in The Economist. Past results have either been failure (Japan) or hyperinflation (Weimar Germany).

In the meantime, there could be more unpleasant side effects. Thanks to QE the Bank owns around 20% of all gilts, which has reinforced the impression that “one of the tacit goals of QE is for the Bank to finance the borrowing of a government that has lost all sense of economy”, said the FT’s Lex. Fears

that the budget gap is being filled with printed money mean that foreign investors would be likely to demand higher interest rates for holding British assets, thus undermining growth.

Following the announcement of more QE, the worry is that the economy is “either far worse … than most imagined or will get worse soon”, said Lex. “Possibly both.”

SA economy

Where does JZ think he’ll find R2.4bn?

Government will set R2.4bn aside in a national job fund to help employers and workers weather SA’s recession. That’s the verdict of our president, Jacob Zuma.

And we’re hoping, as an alternative to layoffs, it’ll curb the looming threat of a retrenchment explosion.

While the idea’s commendable – the fund will be used to pay workers a 50% (or a maximum salary of R6,239) “training allowance” – you have to wonder where the funding will come from? To date, government has remained mum on the subject.

Why the need? Well, a breakdown provided by Stats SA reveals that “there were 360,000 fewer people employed in June ‘09 than in June last year”. Trade union, Solidarity has tracked 64,000 retrenchments this year so far. And, of this total, “more than 38,000 represent permanent jobs”.

The bottom line £330,000 What ‘24’ star Kiefer Sutherland (right) will earn per episode for the next series, making him America’s highest paid TV star.

R333 The poetry prize

© GETTY IMAGES

offered by a prisoner’s newspaper, that is about to be cancelled. The inmates are continually trying to win the prize through plagiarism reports The Inside Times.

3

£73,000

How much some professional beggars are said to be making a year.

14 August 2009

$18m

The price that Playboy magnate Hugh Hefner got for the house next to his Playboy Mansion.

€963,000 This is the lottery winnings that an Italian businessman will be sharing with his employees. Marco Colombo had shouted,” If I win, we’ll share it” to his workers a few days before entering last Saturday's SuperEnalotto draw. He won and, true to his word, distributed it evenly among his staff of metal workers.

£1,500 The value of a diamond a pig has eaten. Ginger pulled the diamond off the hand of a visitor to York Maze. The owner of the diamond was attempting to pet Ginger at the time.

$12.6m The average wealth among the 400 richest people in America in 1955. The figure today is $263m.

R250,000

The standing reward that’s being offered for any “information which leads to the arrest and conviction of the perpetrators" of the seven robberies that have rocked malls across Gauteng over the past week.

news Frighteningly, even before the announcement, the Industrial Development Corporation (IDC) had already received 47 company applications to the value of R1.2bn. And, according to Business Report, there are about “24 applications about to come through the system involving a further R2.6bn”.

But Zuma assures us the plan, to be set in motion in September, will be unveiled in the coming two weeks. And standing surety for its legitimacy is congress of the South African Trade Unions secretarygeneral Zwelinzima Vavi who “will be working closely with the business sector to put plans in place so that layoffs would not be abused”. Only time will tell…

Companies

Struggling transporter sinks Interpol’s teeth into Angolan fraudster

(including tipper and tanker trucks) plus 100 construction vehicles. It occurred after “two Super Group executives bypassed a directive of the group’s board to be wary of any credit risk or exposure to Angola,” states the Business Report’s Roy Cokayne. Basically, when the trucks arrived on the other side, “no proper controls and proof of payment” were in place.

Last Friday, group chief operating officer, Adam Cracker told reporters he’d held several meetings with Interpol to organise an international arrest warrant for the unnamed individual and his partner.

This is just one incident in a long line of events that’s plagued the group recently.

On Friday, ratings agency, Fitch, downgraded the struggling group to a negative rating thanks to “expectations that the group’s leverage would remain at elevated levels in the medium-term,”

Vital numbers % change

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

*4716.76 10435.00 1005.81 1998.72 3507.24 5350.09 22231.00 24588.00 11.46 13.42 8.12

**0.56 0.45 0.88 1.30 0.85 -0.37 -1.76 -1.83 -1.28 1.05 2.56

*12 Aug ** since 06 Aug

Best and worst-performing shares Winners

% change Price

14 August 2009

Losers

% change Price

Delta (DLT)

37.67%

1239c

MicroMega (MMG)

-16.67%

150c

CIC (CCI)

37.80%

110c

Tongaat (TON)

-16.50%

8500c

Ellies (ELI)

25.18%

174c

DiamondCP (DMC)

-15.25%

250c

SilverB (SVB)

22.22%

165c

Trnshex (TSX)

-12.28%

350c

TWP (TWP)

15.00%

690c

Freeworld (FWD)

-9.83%

826c

B&W (BWI)

14.71%

156c

Stefstock (SSK)

-8.84%

907c

Cenmag (CMG)

14.00%

285c

Cenrand (CRD)

-7.60%

231c

Mazor (MZR)

13.17%

275c

Comair (COM)

-7.57%

171c

ARB (ARH)

13.09%

216c

Eastplats (EPS)

-6.90%

405c

FiUranium (FUM)

11.41%

2900c

NuWorld (NWL)

-6.67%

1400c

Weekly change to JSE stocks as 12 August 2009

4

Meanwhile, the fraudulent pair is sitting pretty in Mauritius… Whether or not they’ll be brought back to the country for prosecution will be seen.

The way we live now

© GETTY IMAGES

The scam involved 350 Powerstar trucks

One of Fitch’s biggest reasons for the demotion is the fact that the group expects a loss of between R1.12bn and R1.37bn in the year to June. But, thanks to a deft decision to restructure the company – by ridding itself of non-core operations like Mica and Emerald Insurance – all is not lost. The restructuring will leave Super Group with “an operational profit of R1m to R5m after taking into account higher borrowing costs, restructuring charges and the impairment of the carrying value of investments”. This good news saw the share close up 1.22% last week.

A footballer is launching a website to help fellow players avoid being ripped off.

Middlesborough defender Andrew Taylor’s Platinum Players will be a directory of retailers, financial advisers, lawyers and builders. These are firms that Taylor has had personal experience of or that have been recommended by other players as reputable firms, which don’t try to fleece wealthy sportsmen. “There are car dealers, for example, which see footballers as a way to make easy money,” said Taylor on BBC News. “They’ll think: ‘He’s a young lad with plenty of cash, he won’t miss £5,000, let’s do him over.’”

Transport company Super Group (JSE:SPG) is “pursuing criminal charges against a relative of one of Angola’s most powerful generals over his failure to pay for commercial vehicles and parts worth close to R200m,” reports the Business Report.

The charges? The group believes the general and his partner “fraudulently” bought these items.

reports Business Day. Just a few months back, the group hung on a knife’s edge – playing a dangerous game with its debt burden and liquidity challenges.

the markets

fundamentals”, which If people had paid remain lousy. “We are attention to Jeremy in for seven lean years Grantham over the past … following about two years, their seven overstimulated portfolios would be in very fat ones.” much better shape, say Russell Pearlman and The stimulus packages, Jonathan Dahl in Smart which essentially boil Money. In early 2007, down to treating Grantham, who excessive borrowing oversees institutional and spending by doing investment management yet more of both, will firm GMO, warned that only provide a there was a global temporary lift. “This is bubble “everywhere, in like when you revive everything”. Once the crisis broke, he said that Grantham: warned of a global bubble the drunk: he staggers down a few blocks, “at least one major then falls down again.” Once it wears bank” would fail. In March, he noted off, a protracted period of “sub-normal that the S&P 500 was 30% below fair growth” beckons as consumers and value, while global equities were even businesses gradually work off their huge cheaper. It was time to buy. debts. “We will save more, spend less, waste less.” Without the stimulus from The key driver of the S&P’s rebound was cheap lending, the developed world will the unprecedented monetary and fiscal have to settle for growth of around 2% stimulus in the US. Stocks are always over the next few years, instead of the much more sensitive to huge increases in 3.5% “we used to aspire to”. liquidity than the economy, so a sharp rally could take the S&P all the way up Lacklustre growth will bear down on to 1,000-1,100 from 660, he wrote in profitability and consequently on May. With the S&P now in this range price/earnings ratios. While we may well and way past his fair value estimate of have seen the bottom, stocks are likely to around 880, what happens next? struggle for years and it will be a long time before the S&P reaches a new high.

Given that there are still plenty of For now, the only appealing stocks are institutional investors who feel “left US blue-chips, which have been behind” by the rally, it could continue for overlooked in the run-up, while emerging “longer than reasonable investors markets and commodities remain expect”. But this isn’t a long-term bull promising long-term bets. But developedmarket. Investors should now take some world stockmarkets in general face “long, profits as the rebound has “nothing to do drawn-out disappointment”. with the logic of long-term

5

A worrying warning from the 1930s The US market is “way ahead of itself”, says David Rosenberg of Gluskin Sheff.

The S&P 500 has now rallied by almost 50% in five months. There hasn’t been such a rapid rise in such a short time – and “without anything more than tentative signs of economic improvement” – since the bear rally of 1930.

Since 1950, every time stocks reached the 50% mark, corporate profits had, on average, grown by 12% and GDP by 4.5%.

S&P 500 index

150

March 9 ,2009 to current

140 130

1929 to 1930 cycle

120 110 100 90 80 20

60

100 140 180 220 Days away from the trough

260

Employment had revived strongly and bank lending was expanding at a 5% clip.

But not in this rally; all these key economic numbers are still “trying to make a cycle low”, says Rosenberg.

It also bodes ill that valuations both now and then never reached levels typical of long-term, bear-market bottoms, as the FT’s John Authers wrote. Just as they did in 1930, stocks look pricey again after their latest run-up. But the most worrying sign is that this rally has tracked the 1930 rally very closely. The latter saw a 48% jump in five months – almost exactly where we are now – before sliding to new lows.

The big picture: poor countries’ lifeline frays

The cost of the financial crisis could reach $11.9trn, says Edmund Conway in The Sunday Telegraph – around 20% of world GDP and equivalent to R24,000 per person. This is the total sum governments have made available; it includes direct capital injections as well as liquidity facilities offered by central banks and state guarantees of bank debt guarantees, not all of which will be called upon.

“Remittances provide a lifeline Mexico’s remittances (% change on a year earlier) to many poor countries,”says 30% the World Bank’s Dilip Ratha.

20% Money sent home by migrant 10% workers adds up to 34% of Moldova’s GDP, for example.

0% Last year, global remittances -10% grew by 15% to $328bn, but -20% now they are following -30% developed-world growth 2008 2009 downwards. Mexico’s Source: FT Source: The Economist/World Bank/Thomson Reuters remittances, dominated by money earned in the construction sector, mirror the trend in US housing starts with a lag of four months, says The Economist. Immigration restrictions, triggered by rising jobless figures, are not helping. Overall, remittances could fall by up to 10% in 2009, says the World Bank.

Mexico’s remittances

Statistic of the week

14 August 2009

Source: Haver Analytics, Gluskin Sheff

We face “seven lean years”

the markets

This sugar high will last for some time yet expected to rise 3% this year despite higher prices. According to the International Sugar Organisation, global consumption will exceed production for the second year in a row in 2009-10, and the two-year shortfall marks a record.

… so prices could rocket

© REX FEATURES

Commodities are on a roll, with zinc, copper and oil all recently reaching their highest levels of 2009. But the raw material hitting the headlines now is sugar. Benchmark raw sugar futures this week reached a 28year high of 22 cents per pound, up 76% this year. Only during the price spikes of 1974-75 and 1980-81 has sugar traded higher; it hit a record 66 cents in 1974. And the uptrend is unlikely to be over just yet.

While many commodities are being boosted largely by overall risk appetite, the key feature of the sugar market is a “genuine shortage”, says Eugen Weinberg of Commerzbank.

Sugar is in short supply…

The El Nino phenomenon, a warming of the Pacific that shifts weather patterns around, is the main problem. This has led to a drought in India and unusually wet weather in Brazil, countries that account for around 40% of global production.

India has suffered its driest June in 83 years and the monsoon rains have continued to disappoint.

Production estimates for the 2009-10 season (beginning at the start of October) have been continually revised down and are currently expected barely to exceed last year’s figure, which undershot consumption by 8 million tonnes. For the second year in a row, India will have to import sugar, and according to Dhampur Sugar Mills, imports may be four times higher than last year’s figure.

The weather has not been kind to sugar There is also “increasing uncertainty” over Brazilian production, which many had hoped could make up any shortfall from India. But unusually high rainfall, thanks to El Nino – expected to continue into August – is delaying the harvest and lowering the sugar cane’s sucrose yield, which reduces potential output. What’s more, as Axel Herlinghaus of Deutsche Bank points out, production capacity is limited as most of the new mills set to come on stream can only process ethanol.

Initial estimates of Brazilian output now look too high and so the projected sugar deficit in 2009-10 is “growing by the day”, says Barclays Capital.

That’s also because production elsewhere, including Russia, Mexico, China and the EU – which has swung from exporter to importer following reform of its sugar market – is falling short. Demand, meanwhile, is “relatively inelastic”, says Lex in the FT. In India, for instance, it is

China is creating a zombie While banks in the West remain reluctant to increase lending no matter how much the authorities want them to, China has forced its banks to lend $1.1trn in the first half, close to India’s annual GDP. Easy money, however, fuels speculation, and some of the liquidity has found its way into stocks and property, leaving both asset markets now 50-100% overvalued and in bubble territory, says former Morgan Stanley analyst Andy Xie. In the longer term, with the government unlikely to clamp down on lending significantly for fear of derailing the recovery, bad loans are likely to increase sharply, says David Barboza in The New York Times. “Forced lending tends to be foolish lending,” as John Foley points out on Breakingviews.com. The banking system looks “well capitalised enough to absorb a fair amount of pain”. But while “systemic collapse” is unlikely, the danger is that banks would be allowed to “endlessly” roll over troubled loans in the hope of eventually getting their money back, leading to Japanstyle “zombification” of the banking system. Earnings would suffer and banks would be loath to make new loans. Bad loans could therefore hamper the “immature banking system” and hence growth for years.

6

14 August 2009

History shows that whenever production falls short of consumption for two years in a row, inventories become seriously depleted and the price of sugar “starts to take off”, says Manraaj Singh, chief investment strategist at Profithunter.co.uk. The ratio of inventories to usage this year will drop to 11%, the lowest since 1975, says the US Agriculture Department, which also expects India’s inventories to fall to under three months’ consumption. Globally, stocks are estimated at close to record lows, says Chris Flood in the FT, and food companies and governments “have had to compete for tightening supplies”.

Speculators have also discovered the sugar story, says FAZ.net; bets on rising prices have climbed to an 18-month high.

Given all this, another sugar spike may be building; Mizuho Corporate Bank is pencilling a price of 30 cents per pound.

As the FT’s Lex puts it, “this sugar high looks set to run and run”. For those tempted to risk a punt on this volatile commodity, JSE listed Tongaat Hulett (JSE:TON) offers access to the sugar market at 8,500c.

Gold watch The US dollar is currently the key driver of gold, says David Levenstein on Mineweb.co.za. So as the greenback rebounded slightly following betterthan-expected US employment figures, gold slid back below $950. The medium-term outlook remains positive, however, not least because European central banks have announced a lower ceiling than expected for their gold sales during the next five years. Central bank selling fell 73% year-on-year in the first half, according to precious metals consultancy GFMS.

politics & economics

Has the shine come off Obama? ‘great recession’”. Second-quarter GDP declined by only 1% compared with a drop of 6.4% in the first quarter. House prices have stabilised, big banks are recovering and fewer jobs were lost in July than expected. Six months in, Obama looks lucky. But that could change. The “scariest possibility is that the runaway deficit leaves Obama with the worst of both worlds: exploding debt and flat-lining growth”.

by Emily Hohler Two hundred days after he took office, the “hiss of air escaping from the Obama balloon is audible”, says Rupert Cornwell in The Independent on Sunday. A recent Quinnipiac poll showed his approval rating has fallen from the mid-70s to 50%, shaving seven percentage points off his figures for June. The slump is attributed in particular to his Health Bill, a $1trn idea that promises affordable healthcare for all Americans but has stoked conservative fears that their country is “lurching towards socialism”, says Imre Karacs in The Times.

Healthcare reform is proving highly contentious – as it was for the Clintons in 1993-74. But Obama is attempting to do so much more, said Cornwell. There’s the ambitious green energy bill, tough new regulation of the financial markets, the overhaul of foreign policy – and all this when American is trying to extract itself from an economic slump. “In a way, it’s surprising his ratings haven’t fallen further.” Obama’s $787bn economic stimulus package has not proved an “instant miracle cure” and “trillion-dollar deficits stretch as far as the eye can see”.

“Mega-deficits are bad politics,” says Niall Ferguson in the FT, and a closer look at polls reveals that voters are especially nervous about Obama’s handling of the economy. A recent Today/Gallup poll showed that 59% of

‘No Drama’ Obama: he’s doing all right Americans think that government spending is excessive – and with good reason. The deficit this year is likely to be £1.8trn and the administration has no plan to balance the budget. Its own projections forecast a trillion-dollar deficit as far ahead as 2019. But Obama also deserves some credit. His stimulus bill has made a “significant contribution towards stabilising the US economy” and although levels of household debt are still close to record highs and late mortgage payments and business defaults are rising, there is evidence that the economy has “passed the nadir of the

In the “frenzy” of reporting about Obama’s poll numbers, it’s easy to forget that he’s only just begun, says Justin Webb in The Daily Telegraph. Obama could govern for four, quite possibly eight, years and “the truth is that, at this early stage, ‘No Drama Obama’ is doing all right. Neither as successful as his backers claim, nor as unpopular as his opponents hope, the president plods on with his domestic agenda.” And while the Americans may have “cooled towards the president”, they aren’t exactly embracing his opponents. In a CNN survey, 44% of Americans blamed the Republicans for the nation’s economic troubles, and 23% the Democrats. The GOP has a “mountain to climb” if it is to damage the president seriously. Yes, agrees Ferguson. “Between Sarah Palin’s baffling decision to quit as governor of Alaska and Mark Sanford’s Argentine affair, the Republicans look not just leaderless but clueless.” The party has “traded in Newt Gingrich’s 1994 Contract with America for a suicide pact with itself”.

Will Britain run short of food?

The UK government’s Food Security Assessment published this week reveals yet another failure by this administration to think strategically, says Simon Heffer in The Daily Telegraph. After energy, education and immigration disasters, this time they’re learning that “if you ignore the plight of farmers, you’ll end up with little food”. Hence we now discover that self-sufficiency in indigenous food has fallen from 82% in 1998 to 73% in 2008, and between 1997 and 2008 land for vegetable production fell by a quarter. Blame – at least in part – Tony Blair for failure to honour promises made before the 1997 election to extricate us from the European Union’s Common Agricultural Policy, “which militates against the efficiency of our farmers in subsidising the inefficiency of so many abroad”.

Leaving aside the blame game, how worried should Britons be? asks Martin Hickman in The Independent. Very: the United Nations Food and Agriculture Organisation estimates that world

7

14 August 2009

food supplies need to rise by 70% by 2050 to feed a larger global population of nine billion. Climate change, diminishing energy sources and depleted fish stocks all mean that we “can no longer be complacent about our ability to feed ourselves”.

The good news is that Britain is in a better position than most and they could switch to a system that is “both healthier and more productive”. Britons overeat, with heavy costs for the NHS, while their current production and use of food is “hugely wasteful”. Around 25% of fresh produce doesn’t reach the shops because it fails to meet the cosmetic standards set by supermarkets, some crops are over-watered and it is estimated that they throw away 30% of the food bought each year.

Globally, “the problem is not that there is not enough food, but that the poor cannot afford it”. Increasing British production – which is part of the UK’s new plan to ‘play a full part’ in hitting the UN’s 2050 target – “will ease the strain on global markets, thus lowering the price of food into the reach of millions”.

who’s tipping what Julie Brownlee, MoneyWeek’s analyst, picks the best – and worst – tips from the press and brokers’ reports, and suggests a share for the brave.

A perfect defensive stock – profits going up with the smoke Tip of the week: “BAT is thriving,” say the Financial Mail In late October last year, the first tobacco company listed on the JSE. You could almost feel the excitement in the air! British American Tobacco (JSE: BTI) debuted in a furore of speculation. This giant, with its then R516bn market cap, made the majors on the JSE look like mere minnows in comparison, exceeding the largest listing at the time, BHP Billiton, by over R200bn.

“Having a customer base that is profoundly addicted to your product,” says Jamie Carr in his Diamonds & Dogs column in the Financial Mail, is a major bonus. And in these credit crunch

times, the stress is likely to have more people reaching for their packs rather than quitting.

Regardless of the ongoing anti-smoking campaigns and rigorous amendments to smoking laws the world over – the market’s huge and nothing’s holding it back. It’s estimated there are about 1.1bn smokers globally. Manufacturers produce about five trillion cigarettes each year and smokers suck down around 15 billion daily!

China inhales about a third of the market. 63% of its population smokes. In Cambodia, 80% of men smoke. So there’s definitely a very high demand coming from the East. As Carr highlights, “BAT is thriving, demonstrating

Gamble of the week: African Dawn Capital Limited (JSE: ADW) Financial stocks may seem to be a dangerous bargain fishing ground at the moment, but this one’s a bit different...

African Dawn Capital Limited (JSE: ADW) is listed under the JSE’s AltX. Its aim is to help the thousands of South Africans living in townships. How? By providing small loans to allow home improvements and renovations. Unfortunately, most of the “big” banks will shake their heads at the mere suggestion, but not AfDawn. It’s recognised the need and filled the gap!

AfDawn is a specialist finance group. It falls between the banks and micro-lenders. Its target market earns between R4,000 and R12,000 a month, have their own home and are struggling to get a loan. Where can these people turn to? Well instead of running

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that the human capacity for selfdestruction remains unpaired”.

British American Tobacco is the world’s most international tobacco group, selling its product in more than 180 countries!

to a loan shark, who’ll charge exorbitant interest rates and terms, AfDawn provides an alternative.

Not only is AfDawn concerned with the small loan market, it also provides bridging finance to RDP home developers. This is a massive business. We’re all aware of how South Africa lacks affordable housing.

AfDawn has also linked up with MTN and Standard Bank to collaborate its cell phone banking offering. This could prove a profitable area for the company.

And don’t think that it’s all about money. AfDawn’s also benefitting from the introduction of the National Credit Act (NCA). Why, you may ask? Well, AfDawn is heavily involved in financial education, which is a direct component of the NCA. It even has a financial literacy division – and this is directly rewarding the group.

who’s tipping what If the thought of “supporting” a tobacco producer grates against your ethics, here’s another way of looking at it.

Through the tax added to tobacco sales, government rakes in about R8bn a year.

So, in an indirect way, it’s helping the economy.

In its half yearly report to June 2009, financials look rosy. Revenue increased 24%. Profit rocketed 22% to a whopping £6.78bn. And basic earnings per share nudged up a healthy 17%. So, despite global markets being in complete chaos for over the past 18 months, nothing seems to be standing in British American Tobacco’s way. It clearly looks like its profiting from the angst.

the long run. It currently has a 90% share in the South African cigarette market. There’s no sign of a decline in the number of smokers for the foreseeable future, adding some security to the future of British American Tobacco. As Carr notes, “BAT will continue to keep the loot rolling in”. Buy. Recommendation: BUY at 25175c Market capitalisation: R509.869bn

Turkey of the week:

We could be concerned about the smoking bans now becoming commonplace across much of Europe and the US. But developing countries are mopping up any drop in that market.

“Wait for the ka-ching before buying” – Finweek In our tech-junkie society, companies providing “toys” appear to be in demand. Just look at the hustle and bustle created when Apple launched its new i-Phone a couple of months ago.

People were queuing up to get their hands on the latest model, despite the hefty price tag.

On a recent trip home to Scotland in January, I could hardly believe my eyes.

Despite the temperature well below freezing – the smokers were out in force, loitering outside bar and restaurant entrances. On an evening out, some “clever” establishments had even rigged up some outdoor heating equipment to keep their smokers cosy. One had even erected a hotdog stand in the outdoor smoking area! This just goes to show that where’s there’s a will, or should I say, addiction, there’s a way.

But, don’t let that fool you into thinking that anything technology related is going to do well. Beget Holdings Limited (JSE: BEE) is a case in point. Regardless of being a high-tech firm, this company’s share price has bounced about between 2c and 4c for the past year. Looking back at its share price history, it peaked at 18c when it listed on the JSE. But it’s been downhill from there. Just have a look at the chart. It’s clearly a highly illiquid stock.

Stocking up on British American Tobacco looks like a solid investment for

Beget specialises in GSM (global systems for mobile communication) technology

AfDawn generally provides short-term loans of between six months and two years. In some cases, it lends the money directly to the supplier, of say a new roof, rather than directly to the applicant. This makes financial controls much easier.

The share’s been on a rollercoaster ride over the past year. But it finally seems to be getting itself together and ready to rocket higher. If director’s dealings are anything to go by – buy! Directors are swiping as many shares as they can get their hands on, according to company announcements. CEO, Marcus Van Tonder, has purchased a staggering R50m of the company’s ordinary shares since the beginning of 2009! If that’s not a confidence booster, what is?!

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software, applications and solutions. It focuses on GPRS (global pocket radio service) technology allowing data to be sent via cellular networks. So if your phone connects to the internet – this is what it uses.

So, what’s going on? And why doesn’t the market like what it sees? Beget’s latest results, to the year ending 30 April 2009, actually don’t look too bad at all! Gross profit and revenue increased. But, “the most worrying aspect of Beget remains its inability to generate cash flow,” as Marc Hassenfuss notes in Finweek. Begs the questions if Beget is getting the cash out of its clients.

Beget is worth watching until it starts getting a bit more liquid and the price starts to react to developments. As Hassenfuss notes, “simply put... it’s no-go without cash flow”. Avoid for now.

Recommendation: Avoid Market capitalisation: R22.856m

AfDawn’s a rapidly growing company. Equally so, it’s doubled its headline earnings each year! And, it has delivered on its promises too, which the market will reward for. With its rapid growth, the company’s even contemplating shifting its listing from the AltX over to the main board. If this happens, it will boost the company profile exponentially and put it in the realm of the institutional investors.

In AfDawn’s latest results, to end May 2009, headline earnings per share increased 45%. It’s clear this little firm has has shrugged off all the global financial worries.

Recommendation: BUY at 167c Market capitalisation R372.287m

best of the financial columnists

Jeff Randall The Daily Telegraph

The new food colonialism Paul Vallely The New Review

MBAs no longer a fast track to riches Melinda Liu Newsweek

Gene profile deflation is good news Steve Connor The Independent

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The positive vibrations emanating from the Square Mile aren’t likely to be felt by the rest of us, says Jeff Randall. Unlike the banks, most people who have made poor decisions cannot ‘write down’ their losses and “move on to the next whirligig of self-indulgence”. That is why the party hats in the bit of Barclays that deals with ordinary folk “were kept tucked away” during the investment bankers’ recent “knees-up”.

Barclays Capital’s profits may have doubled to more than £1bn, but profits at Barclays’ retail division fell by 61%. Nor is the 33% rise in the FTSE over the past six months a “sign that happy days will soon be here again”. During the 1980s recession, when unemployment more than doubled from 5.3% in 1979 to 11.9% in 1984, the stockmarket followed suit. And for good reason: “The massive shakeout of labour enabled management to restructure businesses and slash costs” and profitability was restored at many firms that had been “industrial dodos”. “I suspect we may be about to experience something similar.”

Money talk

A new form of colonialism is rampaging across the world, says Paul Vallely, with rich countries and international corporations buying swathes of agricultural land that poor nations can ill afford to sell. The buyers are wealthy countries that have large populations (China and South Korea) or are unable to grow their own food (the Gulf states). In the past six months, they have targeted an area half the size of Europe’s farmland. Behind this stampede lies the food crisis of 2007-08, when rocketing cereal prices increased worries about food security and the threats from a rising global population, oil prices and climate change.

In theory, land deals should bring much-needed investment, technology, infrastructure and jobs to the rural poor, but hungry locals often don’t see it this way. A deal struck between Madagascar and Daewoo led to the government being overthrown earlier this year and armed resistance has been threatened over Kenyan land offered to Qatar. When it comes to food, neither side is going to give up without a fight.

“If it ended tomorrow I would hope to have enough money to go and keep bees in New Zealand and try to be happy.”

Actor Dominic Monaghan (pictured), quoted on Sky News

Chinese graduates are finding that expensive advanced degrees are “no longer the fast track to riches, or even employment, that they once were”, says Melinda Liu. It’s not just that MBA programmes have been devalued by over-subscription – they don’t provide people with skills that are desirable in the marketplace any more. Last year, more than 12% of university graduates failed to find jobs. By contrast, less than 5% of graduates from two- to four-year vocational programmes were unable to find work. This explains why applicants for university dropped by 500,000 to 10m this year while more than 8.6m are expected to enrol at vocational schools (compared with 6m graduates from them in 2008). Vocational training can be much quicker and rural workers find that even a one-month course in basic computing can dramatically increase their job prospects. Bright students may be bidding farewell to a glamorous post in a multinational, but in tough times “just finding work is accomplishment enough”.

President Bill Clinton’s announcement in 2000 of the first draft of the human genome was a momentous event, says Steve Connor. For the first time, we were able to begin to read our full set of genetic instructions. “But it didn’t come cheap.” A decade ago, the cost of deciphering the entire three billion letters of a person’s DNA ran into hundreds of millions of pounds. Now, it costs around £31,000 and soon will be done for a couple of hundred pounds; one day, perhaps, “for the price of a haircut”. The importance of this deflation cannot be underestimated: Once affordable, DNA sequencing paves the way for ‘personalised medicine’ where drugs can be tailored to a patient’s particular genetic profile. This matters because evidence suggests that a person’s response to drugs can depend on their genes and thus much time, money and suffering could be avoided if their suitability for the drug could be established prior to use. With the NHS under financial strain, the question is whether it will be able to afford it. Let’s hope so.

© PA PHOTOS

Party won’t extend beyond City

“The Lloyds team have done a spectacular job.”

Eric Daniels, chief executive of Lloyds Banking Group, on paying staff bonuses despite a £4bn loss, quoted in The Mail on Sunday “They have been paying a wallop of council tax for many years and now they feel entitled to a return on that.”

Joan Bakewell speaks out against plans to scrap free bus passes for some pensioners, quoted in The Mail on Sunday “I never imagined any of my children would have a private education. But the truth is, a better class of people send their kids there.”

Debbie Daley, mother of diving champion Tom Daley, quoted in The Times “I do not need sex, the government f***s me every day.”

The T-shirt slogan that got a Croatian cameraman fired after he wore it at a goverment press conference, quoted in The Guardian

investment strategy

When can you trust a ratio?

Deciding which ratios to use on different sectors can look daunting. Don’t be put off. Here’s our guide to the most widely quoted ratios.

strength of a firm’s balance sheet into account. One way of doing this is the Altman Z score, which assesses the risk of a firm going bankrupt within two years.

A Z score of above three is considered safe.

The price/earnings ratio

Investing for income

Investors usually start with this measure of the current share price, say R25, compared to one year’s earnings per share, say R5, to give a ratio of five. It is a useful measure of whether a share is cheap (a low p/e) or expensive (a high p/e). But watch out for the traps.

The third way to think about valuation is focusing on the income the stock will pay.

Dividend yield is the favoured way of valuing utilities and other low-growth stocks. But it is also an important complement to the p/e when assessing any industry with fairly stable cash flows, such as telecoms or healthcare. Again, sustainability is key; check how many times one year’s earnings covers the dividend (you usually want at least two times, but utilities can get away with much less). And note that the yield is of little use for small growth firms, which often don’t pay a dividend.

Earnings per share often includes noncash items such as paper gains from the sale of property or stocks. So by relying on a high p/e in isolation you may be overpaying for non-recurring earnings.

Also beware volatile profits. If you are analysing cyclicals, such as chemicals or mining, you need to think about where we are in the cycle. A miner may look cheap on a p/e of ten, but the earnings used may be the peak earnings which are set to slump. Equally, a high p/e of say 50 may not always be expensive because earnings are depressed now but will rebound. Sectors such as consumer staples have fairly steady earnings, so p/es will vary much less.

A handy ratio to look at alongside the p/e, especially for growth stocks, is the PEG ratio – the p/e ratio divided by the forecast yearly earnings growth, typically over the next five years. A firm with a PEG of one is often said to be fairly valued. While extremely crude, this is a reasonable rule of thumb for stocks expecting double-digit growth. For lowgrowth stocks, however, the PEG is largely meaningless.

Investing by the book Another widely quoted ratio is the price/book (p/b) ratio. Book value (also known as net asset value or shareholders’ equity) means the value of the company’s balance-sheet assets less its liabilities. In theory, a firm with a p/b of less than one is a bargain; it’s selling for less than the net value of its assets. Unfortunately, reality is a bit more complex. First, there’s the question of what the firm’s assets are really worth. For example, p/b is often used on property companies where a p/b of, say, 0.5 might look like a bargain. But if the book value relates to property

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© CORBIS

by Cris Sholto Heaton

So many tools, but which ones work best?

“Avoid woolly ratios such as ‘price per click’ or ‘price to eyeballs’ prices at the top of a bubble, the stock may be one to avoid. The ratio also falls down when firms carry high levels of intangible assets such as brands, so the p/b is generally useless for firms that lack physical assets.

What’s more, unless you’re concerned with the break-up value of a firm, p/b alone doesn’t tell you much. Since earnings come from the return a firm earns on its assets, return on equity (ROE, net income divided by shareholders’ equity) is a useful addition.

High ROE firms should trade on higher p/bs than low ROE firms, because they eke out more profits for shareholders from the same amount of shareholder capital. So ROE is a useful way to compare how efficient businesses are.

However, ROE can only be compared between firms in the same sector. And cyclical firms will have a much higher ROE at share price peaks than troughs.

And since ROE focuses on net assets, a firm that piles on debt while interest rates are low will boost its ROE. As a result, it may look better than a less-indebted peer, but be less well placed to survive when times get tough.

So, whether looking at p/e, ROE or any other ratio, you should also take the

Beware of banks Provided you take account of where a firm is in the economic cycle, the ratios considered so far work for most sectors. The exception is financials. Bank earnings, for example, regularly include large non-cash items, such as revaluation gains or losses on assets, provisions for bad debts or higher payouts on policies.

Many investors use p/b for financials, but to be thorough you also need to consider a number of industry-specific measures such as combined ratios (policy payouts plus expenses divided by premiums earned). In short, valuing financials is difficult; a simpler approach is to treat them as income plays and value them on the dividend yield, being careful to avoid any firms lending or expanding recklessly.

Ratios that deserve a health warning Valuing companies that have little or nothing in the way of earnings or assets is most difficult of all. But that does not stop creative analysts having a go. So you will sometimes see ratios such as the share price to one year’s sales (price/sales) quoted. This can be used to put a high valuation on exceptionally low-margin or unprofitable businesses.

You should also avoid even woollier ratios such as the dotcom era favorites ‘price to eyeballs’, or ‘price per click’.

These can support lofty share valuations for firms that have no earnings, cash flows or assets. A high number is a red flag, not a reason to buy.

personal view

Markets have run up strongly, but we’re still knee-deep in water What I would invest in now Although we’ve seen a nice run up of 34.34% since March, I’m still erring on the side of caution when it comes to investing. While global markets may have reacted to some (seemingly) good news, there’s still some pretty big issues out there.

This week, Grant Watson, Co-head of OMIGSA Quantitative Investments, tells MoneyWeek where he would put his money.

To find out where the market’s going, we need to consider how this negative data affects us.

There have been 72 US bank failures this year alone. That’s huge – and it’s the most number of banks that have failed on a yearly basis in the last 17 years! In fact, the US regulator Federal Deposit Insurance Corporation (FDIC), which backs deposits up to $250,000, has seen its reserves reduce by $15bn thanks to these failures. The FDIC’s reserves now stand at $13bn against deposits of $6trn.

Yes, it names the general economic slump and unemployment figures as the two big reasons behind this, but it’s still concerning. It shows just how fragile the American banking system actually is. And it’s just one of the many reasons why China and other Asian countries are questioning the dollar’s status of “global currency”. And this could well mean that resource companies will fly up fast from here.

But it’s not just America where the problems lie.

Europe’s struggling too. Its production price index (PPI) is down, falling in June at the fastest rate in 28 years; retail sales are plummeting and, with all the money the Bank of England’s pumping into the system, you just have to wonder how much longer before liquidity dries up and the run begins to head downhill.

great opportunities right now. The first comes from commodity shares, the second from interest rate sensitive shares. Let’s look at each in more detail.

Resource companies have been particularly hard hit by the global sell off. And, with the potential demise of the dollar looking ever more likely, they could stage a comeback soon.

That’s why my first share pick is gold miner GoldFields (JSE: GFI). Remember, historically gold and the dollar have an inverse relationship. When the dollar dips, gold tends to do very well (and vice versa). So, not only will the company profit from any dollar instability, but it’ll provide you with a great inflation hedge too. At the current price of R97.25, it’s a great deal.

Another commodity giant to keep your eye on is Sasol (JSE: SOL). On a share price of R280.00, it’s currently 55% lower than it’s 12-month high. It’s a steal and should present decent returns going forward.

But it’s not just commodity shares presenting good value right now. Another place to look for great returns is interest rate sensitive shares. Yes, banks may still be reporting hefty bad debts, but if you stick to cash-based retailers, like Mr Price (JSE: MPC), you should profit from this environment. In fact, any retailer that’s less reliant on credit sales to turn a profit should do well. Mr Price has been trending up sharply over the past few months and has jumped a massive 88.12% from its July 2008 low.

The shares Grant likes: The situation remains precarious. But that doesn’t mean there aren’t ways to profit from it.

Here in SA, we can take advantage of two

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GoldFields Sasol Mr Price

12mth high 12mth low Now R125.00 R53.25 R97.25 R433.79 R216.50 R280.00 R31.45 R18.00 R28.50 * Share prices as at 12 August 2009

investment briefing

Can newspapers survive?

Rupert Murdoch, stung by heavy losses, is making plans to charge for online news content.

But will people pay for what they can get free elsewhere? David Stevenson reports.

What’s going on?

“Having changed the face of British newspapers in the 1980s and 1990s, media mogul Rupert Murdoch has now turned his attention to the world of online news,” says Tony Bonsignore on Citywire. For years, readers have paid for hard copy, with online access free. But that means readers can opt to visit news publications’ websites “rather than splash out for the physical thing, which often feels out-of-date by the time you’ve bought it”. But websites are expensive to run and Murdoch has now had enough. “We intend to charge for all our news websites,” he says.

send in the ground troops,” says Patrick Smith on Paidcontent.co.uk. “Now the FT is experimenting with iTunes-style micropayments [ie, a pay-per-piece] model, and just about every other paper is looking at ways to get readers to pay for online news.” It’s “no coincidence that newspapers, many of which have seen a third of their income wiped out, are again contemplating raising the ‘paywall’”, says The Guardian’s Robert Andrew. “Not because they want to – it would instantly diminish their editorial influence – but because they have to. Reader payments may be the only sure-fire cash generator left at the moment.”

What’s prompted the move?

Money. Murdoch’s global media giant How much money could it raise?

News Corporation has just reported a “In theory, online subscription should offer massive $3.4bn net loss compared with last a torrent of cash, provided newspapers can year’s $5.4bn profit. Huge charges totalling bear the apparent shame of plummeting Murdoch: lost $3.4bn this year $9.2bn, relating to drops in the value of the hits,” says The Guardian’s Simon Jenkins. group’s assets – notably for Dow Jones, The Wall Street The New York Times paywall generated $10m a year while it Journal’s parent – did the main damage, but weren’t the only lasted. Even if reader numbers fall by 90%, he says, 250,000 culprit. Full-year operating profits dropped by almost one-third, devotees at, say, £100 a year could mean life or death for a with advertising revenues plunging and income from films, publication. newspapers and magazines all falling, too. Murdoch’s admitted that his newspaper business model “is on the edge of the cliff That’s why “consultants on both sides of the Atlantic are now face”, says Elizabeth Knight in BusinessDay, and “that it needs working round the clock on how best to design paywalls, to be changed or face commercial extinction”. portals, ‘freemiums’, micro-charges and pay-per-reads. Lawyers are meanwhile fighting the oldest game in publishing: how to guard copyrights (at least for 24 hours). If Dickens and Kipling And Murdoch’s not alone. The newspaper industry has always could crack it, I am sure they can.” derived most of its revenues from advertising. And last year was the worst-ever for all US papers, as total advertising revenues dropped almost 17%. This year’s little better. Last month, the Is this the only solution?

Daily Mail said third-quarter national advertising revenues fell As Chris Ahearn at Thomson Reuters notes, “the internet isn’t 12%, with the regional equivalent plunging 33%. Yet the highkilling the news business any more than TV killed radio, or cost printed newspaper delivery system has remained, says radio killed the newspaper. News business leaders haven’t been Knight. Printed ad revenue simply doesn’t support the cost of keeping up.” The long-term solution must be “learning the providing the paper, the ink lesson of the most tightly and, above all, the journalists. competitive medium of all: popular music”, says Jenkins.

Music online is all but free, but Who will be charging?

Has Murdoch got it right? live stuff costs a fortune, and Murdoch’s first paper to start “At present, loyal print buyers appear to be subsidising a young people will pay more for charging for online access, growing army of online freeloaders”, says Press Gazette editor a gig in a club than for a Led maybe by November, will be Dominic Ponsford. “By charging for online, Murdoch could Zeppelin CD. Meanwhile, The Sunday Times. Content prove to be the saviour of British journalism”. But his view “local newspapers are quietly will be split off from the main isn’t widely held. Trinity Mirror chief executive Sly Bailey points dying when they should be paper to a new website. Other out that “a paid online model already exists for unique, highstaging everything from News Corp titles, including value and well-differentiated content”. So she “very much commercial fairs to sporting The News of the World and doubts” publishers will be able to charge for general news events and arts and book The Sun, will charge for web content when it’s given away free by the likes of the BBC and festivals. There is money in all access within a year. “I believe ITV. And as The Telegraph’s Shane Richmond says: “This is a of them. Newspapers should that if we’re successful, we’ll be great opportunity for the Mirror, the Daily Star and producers not be investing in fancy followed by other media,” he of pictures of topless women to hoover up those Sun readers printing presses but in live says. “If monetising news who aren’t sure whether they want to pay. Murdoch’s made the enterprise, with the printed websites is a war, it looks like wrong choice this time.” word as a mere core activity.” the big publishers are about to 13

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opinion

Investors should prepare for a nasty September Surprise The spring has always been a scary season for the stockmarket.

From the Great Crash of 1929, in October of that year, to the crash of 1987, also in October, Matthew Lynn to the collapse of Lehman Brothers, in September last year, it has always been the season when investors step up to the abyss, look down, and for some odd reason decide to hurl themselves straight into it.

Global view

collapse of Lehman Brothers. Back in September 1931, stocks fell by 30%, wiping out all the gains from the bounce back after 1929.

Even if you happen to get through September unscathed, there is always October to worry about. The precedents of 1929 and 1987 suggest that can be just as brutal a month for investors.

Of course, just because the spring has often been hard on the markets in the past doesn’t mean that it will be this year. Still, there are four reasons for thinking there is an unpleasant surprise in store for investors this September.

No one can have failed to notice the strong performance of the markets in the last five months. In the US, the S&P 500 index has rallied by 49%.

Most of the other markets around the world have performed just as strongly.

China’s Shanghai Composite Index, the best performing major index, is up by 78% so far this year. Even the UK’s FTSE, which hasn’t been one of the better performing markets for years, is up by 11% over the last six months despite the British economy showing few real signs of climbing out of recession.

The MSCI World Index, probably the most accurate gauge of global sentiment, has climbed 54% from a 13-year low touched in March.

But can it last? The historical precedents aren’t good. September has always been the worst months for US stocks: taking an average of every year since 1928, stocks have fallen by 1.3% during that month. The only other month that is such a consistent loser is February. Some of the Septembers along the way have been pretty scary. Last year, for example, the S&P fell by 9% following the 14

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Thirdly, this rally has been led upwards by the emerging markets. It is the Chinese, Brazilian, Indian and Russian markets that have led the upswing, the so-called Bric economies. No surprise there. With high-saving rates, rapid industrialisation, and hard-working labour forces they look a far better bet than the developed economies of Europe and North America. Yet they remain volatile, and gains of 70% or more in a year are likely to be checked. When they are, investors around the world will take fright. Without the Brics to drive it, there are very few reasons for feeling optimistic about the global economy. © CORBIS

And this year? Get ready for a September Surprise. After the strong rally of the last six months, the markets are poised for a brutal spring correction.

Indeed, the next two months promise a bumpy ride for investors.

much about their underlying health. It would be a surprise if big increases in government spending, central banks printing money like crazy, and record-low interest rates, had not revived the economy. But governments can only shift spending from one period to another.

They can’t permanently increase it. Over the next six months the impact of all that stimulus is going to fade out of the system, revealing economies that are weak. When that happens, investors are going to have a nasty fright.

Equity investors should avoid the looming abyss

Firstly, companies are desperate for cash.

Lloyds Bank suggested last weekend it would be tapping the markets for money to replace the British state as a shareholder, and that is just one example among many. There are lots of battered balance sheets out there, and the stockmarket is just about the only place where funds can be raised to put them back into shape. Already there have been 315 initial public offerings this year as deals frozen in the credit crunch get bought back to life. But all that extra stock coming onto the market is going to soak up available funds, and will stop prices from rising as fast as they have been.

Lastly, the UK has some political turbulence ahead. Gordon Brown’s government will limp miserably into the last political season before its demise. Don’t assume that Brown will survive: the Labour Party shows little will to live right now, but it must know it is being led to slaughter. Even without a change of prime minister, as the election campaign gets underway, as it will once the party conference season opens, the currency and gilts market may well wobble. Neither party shows much willingness to discuss the scale of the fiscal crisis the UK faces, and at some point that will make anyone holding assets in sterling feel nervous.

Secondly, the initial impact of the stimulus programmes put in place by governments around the world will start to fade. Even a patient near death will perk up if given a massive injection of adrenaline, but that doesn’t tell you very

Whether the last five months were just a bear market rally, as the sceptics will tell you, or whether they were the foothills of a genuine bull market, stocks are due a correction. And September is the most likely time for it to kick-in.

investing in property

Why be a property developer when you could own one?

by Gary Booysen “Property development is hazardous!” says Patrick Flanagan in Financial Mail’s property handbook. It takes high levels of professionalism; access to massive amounts of capital – which often leaves the would-be investor with a highly geared and excessively risky asset; and, most importantly, it’s incredibly time consuming. But there’s a way around this...

Simply share the profits with an established developer The listed property sector boomed for about four or five years before tapering off sharply. (This was partly because of the ratcheting up of interest rates and partly because of the global downswing.) “The market has seen tremendous growth in the size of the sector over the past five years, with a great deal of consolidation, as well as double digit distribution growth”, says Flanagan. In South Africa, this growth was fuelled by a massive shortfall in demand. But as with any massive influx you get the good with the bad. This period of consolidation has provided a sturdy platform for the industry to continue moving upwards.

And we’re not going to have to wait long. “The JSE's R95bn listed property sector has posted a strong rally in recent weeks and remained a better bet for income chasers than cash, bonds or equities,” says Joan Muller at Fin24. In July, the South African listed property index (SAPY) rose 7.84%. This is after being solidly in the red for both May and June. For the investor that’s thought about a property investment but was unsure of the type, buying into an established company could be the answer.

But be careful which company you to go for. Figures coming out of Catalyst Fund Managers show the difference in total returns between the best and worst property shares was a massive 47%. As Catalyst Fund Managers Investment Manager Paul Duncan puts it: “Stockpicking has now become the name of the game.”

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Redefine, the stock that’ll knock your socks off!

For those looking for a property punt, out of the 20 investment property counters, Redefine is undoubtedly the king. It’s increased a massive 27% since the beginning of the year. The company is split in two halves. One invests in physical stock property portfolio and the other in listed property, (dominated by its 30% holding in Hyprop). It has more than 350 buildings across the country, as well as exposure in the UK. It also has diversified interests across the various property sectors. About 50% of physical property holdings are offices with industrial and retail each taking around 25%.

The real value behind this investment, however, isn’t the great exposure, but an exceptional management team. They have all but closed a massive merger with ApexHi and Madison – both of these were also top property performers this year with 21% and 19% gains respectively. This merger will make it the largest listed property share in South Africa and bring in the talents of

businessmen like Marc Wainer and Wolf Cesman. Evan Jankelowitz from Finweek, says “if they continue on the ambitious road they have been on to date, they will also need to hold onto the skills set of senior staff such as Brain Azizollahof, Mike Flax and the operational excellence of David Rice.”

Azizollaff has pioneered the merger and will undoubtedly form an integral part of future decisions.

The aggression and dynamism of the company has no doubt got it to where it is and, while a settling period is required after the merger has taken effect, they’ve taken full advantage of the current rebound. How will they ride this new elephant they’ve created over the thorny ground ahead? With flair, style and ever increasing profits.

There’s a reason this company is a favourite among the countries top asset management companies. (Stanlib, Investec and Old Mutual each own around a 13% stake.) And this settling period might provide the savvy investor with a good entry point.

cover story

On the road to a cleaner, greener future The electric car has been a long time in the making – but now it could be set to take off. Eoin Gleeson looks at how you can profit.

When electric vehicles first hit the roads in the late 19th century, they caused mayhem. Drivers had to navigate between cyclists and panicky pedestrians. Horses regarded them with intense suspicion – rearing and bolting whenever these silent vehicles drove up alongside them. And it wasn’t long before battery-powered vehicles were competing for space with other ‘horseless carriages’ – cars with gas engines and vehicles run on steam. Something had to give.

The race to become king of the road came to a head on 11 June, 1895. That morning, 22 horseless carriages pulled up side by side at Versailles to start a widely-

publicised race that would put the competing vehicles to the ultimate test – a 1,130km round trip from Paris to Bordeaux. As they sped down the poplarlined Route Nationale, the limitations of each car soon became apparent.

A Belgian-built electric vehicle called La Jamais Contente, which had set a land speed record of 109km/h took an early lead. But it discharged its batteries after an hour. Another lead-acid battery car crept ahead, stopping to change its batteries every 39km. But it never made it to the finish. It was the gas-powered cars that triumphed – the winner finished the race in 48 hours and 48 minutes, at an average speed 23km/h.

The limited range of the electric vehicles

had sealed their fate. The discovery of Texan oil 25 years later killed off the electric car completely. As the price of oil plunged, gas-powered cars became affordable for the average American.

It no longer made sense to pay out $3,000 for an electric carriage when you could get a Ford Model T for $650.

The electric car goes mass market But oil is not cheap today. When petrol tipped $4 a gallon last year, Americans had a rapid change of heart about the long-range monster vehicles they’d been driving for the last few decades.

This year, they have driven a total of 198 billion fewer kilometres than last, the Continued overleaf

China’s lithium war China spent 15 years fighting tooth and claw to corner the market in rare earth 60 metals. Now it’s gearing up for battle 50 over a new metal, this time in the Figures in dollars 40 desolate salt-flats of south-western Bolivia. It is wrestling with Japan for 30 rights to mine the region’s vast deposits 20 of lithium – a mineral used in batteries that power everything from laptops to 10 electric cars. A reliable source of lithium Jan 2008 would allow the Japanese to continue producing batteries for the world’s laptops, digital camera and mobile phones. China on the other hand spies an opportunity to seize control of the electric-vehicle market as the US and German car industries struggle with the recession.

But president Evo Morales is in no mood to relinquish rights to such a prize resource. The Salar De Uyni salt plain is home to half the planet’s known reserves of the metal, so he can afford to wait for the best deal. According to Leo Lewis in The Times,

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Beijing’s efforts to butter up the authorities in La Paz have already included a donation of cash to help build a school in the town where Morales was born and a gift about 50 military vehicles. The loser will almost certainly be forced to scour the earth for other lithium deposits. With the auto-industry looking to bring lithiumpowered cars to market over the next Jan 2009 two years, the handful of outfits who control the market in this scarce metal could have a field day. “There are enormous possibilities for profits,” says Steve James on Reuters. Sociedad de Chile (NYSE: SQM) – based in Santiago, Chile – is a world leader in the production of lithium carbonate and a number of other speciality chemicals, and leads the world in lithium production, too, with a more than 30% market share. It’s not cheap – valued on forward p/e of 20 and offering a 2.5% dividend – but given its prime position in this important market, it looks worth having some at least some exposure to.

SQM

cover story Continued from previous page

equivalent of taking eight to ten million drivers off the road. “We are witnessing the beginning of a fundamental shift in driving habits,” says Ed McMahon of the Urban Land Institute. With the price of oil remaining around $70 a barrel and threatening to spike in the longer run, Americans will have to adjust to taking fewer journeys and living closer to where they work.

Western governments are just as keen to wean their economies off oil. In the US, 70% of oil demand stems from transport.

If electric vehicles go mainstream, the US could cut oil imports by as much as 3.7 million barrels a day, says Thomas Becker of the University of California.

That’s roughly the amount it imports daily from the Persian Gulf and Venezuela. That’s why the US Energy Department has just handed out $8bn in loans to Nissan, Ford and Tesla to finance green car programmes.

It’s not just governments who are throwing their weight behind electric vehicles. The car industry is already showing off affordable electric cars that may be less than a year from market.

Just this week Nissan unveiled the first mass-market electric vehicle, the Leaf.

It plans to produce 200,000 a year by 2010. By 2020, one in ten cars sold will be electric, said Nissan’s chief executive Carlos Ghosn last week.

As well as the car manufacturers, electric vehicles have other powerful industrial backers – battery makers and utilities. As electric cars go mainstream, these industries will be transformed. Even Bolivian president Evo Morales is rubbing his hands with glee (see box on page 16) at the prospect of mass-market electric vehicles. So how can investors profit from the move to bring electric vehicles to the masses?

1. The car industry There’s a long history of conspiracy theories around the electric vehicle.

A 2006 documentary, Who Killed the Electric Car?, accused General Motors of working with the oil industry to destroy the electric car. GM had produced 800 prototypes of the electric model EV1, lending some to Hollywood stars such as Mel Gibson and Ted Danson. But the car giant suddenly recalled the prototypes and crushed them in Californian scrap yards. Cue dark mutterings about corporate malevolence.

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Way of the future: the Tesla Roadster is the first fully-electric car to come to the market this year But in truth, the failure of electric cars to take off was probably down to something more prosaic: cost. The EV1 prototype was a tiny two-seater that cost $80,000 to build, about twice the guide price of the actual car. Since then, advances in battery technology have slashed production costs. GM’s forthcoming Chevy Volt – a plug-in hybrid vehicle, powered by an electric motor with a back-up petrol engine – will seat four and is set to cost half as much as the EV1 to produce. The cost of the battery will also keep falling by 6%-8% a year, according to consulting firm McKinsey. Elon Musk, whose company Tesla Motors will bring the first fully electric car to market this year, reckons Tesla will turn a profit in a matter of months.

That’s good news. But will consumers be able to afford these cars? Very few are buying right now. In the US, registrations of new hybrid vehicles fell 13% last year, although that’s against an 18% fall in overall car sales. But electric cars can be made to be just as affordable as gasfuelled cars, says Becker; it comes down to the pricing model. These vehicles are unlikely to be priced like gas-fuelled cars.

One system, already adopted in Israel and Denmark, is to sell cars on a pay-perkilometre contract – a bit like a mobile phone. So the manufacturer subsidises the initial cost of the car, then incorporates the financing into a service contract which pays for the electricity and battery costs.

has already introduced stricter fuelefficiency measures than the US, and has set a goal of producing half a million electrified cars by 2012. Meanwhile, US president Barack Obama’s stimulus bill includes a $7,500 tax credit for vehicles with at least a 16kWh battery.

And if the oil price remains at current levels or higher over the longer term (which seems likely, although we expect it to weaken in the shorter run) electric vehicles will become all the more affordable compared to gas-fuelled cars.

In Europe – where petrol costs more due to taxes – hybrids could be just as cheap to run as a gas fuelled car with an oil price of $60 a barrel, says McKinsey. In the US, they’ll be cheaper when petrol rises above $4 a gallon again. As a result of all this, JP Morgan reckons the global electric car market will grow from 740,000 cars this year to 12.9 million by 2020.

Not that we would dream of tipping a big car firm right now. A firm like GM is not about to be redeemed by an electric vehicle. If you’re interested in buying a car manufacturer, the most exciting play looks like being Tesla Motors. An initial public offering is expected from the company later this year, but we suspect it may be overhyped. It’s one to watch, but we wouldn’t want to be among the first to buy in. There are better plays on electric cars, which we’ll look at below.

2. Battery manufacturers Government subsidies will also make a big difference, says McKinsey. China, for example, has said it will cover $8,800 of the cost of each electrified vehicle bought by more than a dozen of its big-city governments and taxi fleets. The country

The biggest obstacle to electric vehicles going mainstream is infrastructure. In the 1890s, fuel for gas-powered cars had to be bought in two-gallon cans, available Continued overleaf

cover story Continued from previous page

from chemists and ironmongers. The first petrol station was built in 1907 in St Louis, Missouri. But it was another 30 years before many Americans could confidently leave the petrol cans at home when they embarked on a long journey.

That can’t happen with electric vehicles.

The infrastructure must come first.

The lithium ion battery used by the Tesla Roadster, for example, has a range of 392km. You can charge the car up at night in your garage. But if electric vehicles are to go mainstream, drivers will need ways to charge the cars en route.

That means building recharging stations.

This is already happening. China’s State Grid is speeding up plans to build charging facilities in at least three of its largest cities by 2011, while the Israeli and Danish governments are rolling out a plan to build nationwide battery exchange stations where you can drop off a depleted battery and pick up a freshly charged one.

This is great news for battery makers – much of the same battery technology used in laptops and electronics works just as well backing up an electric motor.

They will be the big winners from electric vehicles. Particularly as the US Energy Department is set to hand out some $2bn in grants to create a domestic industry for electric car batteries.

The promise of government funding is already spawning a nascent US battery industry. Ravaged by the decline of its car industry, Michigan is mounting an aggressive effort to develop an advanced battery industry – recently promising $544m in tax incentives for four local companies. Those four are already investing $1.7bn themselves in new battery-manufacturing plants.

They will face stiff competition. Battery manufacturing long ago moved to hot spots for consumer electronics groups in Korea and Japan. But when it comes to automotive-grade batteries, the race is still open. Today’s hybrids, such as the Toyota Prius and the Ford Escape, use nickelmetal hydride batteries, mostly made in Asia by the likes of Panasonic and Sony.

But next-generation vehicles, including the Leaf and the Tesla Roadster, will have a more powerful lithium-ion battery under the bonnet.

Here US outfit Ener1 (AMEX: HEV) leads the way.“Lithium is probably the future of the battery industry,” says analyst Carl Firman at Virtual Metals.

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Charge her up: support technology will be essential to the advent of the electric car

“The infrastructure must come first” “Nickel hybrids don’t have the same power density as lithium batteries.”

Under JP Morgan’s scenario of 12.9 million cars on the road by 2020, the global lithium-ion battery market would grow from the current $180m to around $15.9bn a year by 2020. Ener1 has been using nanotechnology to solve some of the problems with early lithium batteries, such as overheating. It is two years ahead of rivals with a factory already churning out lithium battery cells to power 30,000 electric vehicles. Both Nissan and Tesla have recently partnered with the group, so it is not dependent on the $480m loan from the Fed. But not all electric cars will be running on expensive lithium batteries, says John Petersen on AltEnergy Stocks. Lead-acid batteries are far cheaper, and fully recyclable. They will work just fine for stop-start hybrids – cars that conserve energy by shutting down the engine at stop signs and traffic lights. This system is being used in vehicles due from PeugeotCitroen, Daimler and Ford. Advanced lead-acid battery maker Axion Power (OTC: AXPW) has just signed up with battery giant Exide International.

The $38m market cap company could be a big winner under grants announced last week by the US government.

3. Utilities Electric vehicles have thrived in Japan.

A big part of that success is down to the Tokyo Electric Power Company.

The group has been investing in charge stations and leasing electric vehicles for years. In the US, Northeast Utilities is

following its example, using US Department of Energy money to build a network of 575 charging stations in Connecticut and Massachussetts over the next two years. Why? Because utilities like the idea of selling electricity at night.

If 20% of the cars and trucks sold in a local market such as California over the next decade have electric drives, recharging them could boost electricity demand by 2%, reckons Becker.

If vehicles were charged mainly at night, utilities could satisfy much of this demand without adding significant generation capacity.

That’s if vehicles are charged at night, of course. But drivers may decide instead to plug in their vehicles as soon as they get back from work, during peak power usage. So there’s every chance the grid will struggle with the power surge – get ready for the six o’clock brownout.

Worse still, electric vehicle owners, especially in the early years, will probably cluster in affluent areas. A surge in demand from plug-in vehicles could blow out transformers and require substantial new investments in transmission.

That’s why utilities are installing smart meters to monitor and control the time when vehicles can charge. Itron (Nasdaq: ITRI) is a market leader in smart meters, making products that monitor everything from electricity to water usage. It’s been hit hard by the housing market slump but it reported a 38% rise in quarterly profit in the first quarter. It’s up 20% since we last tipped it in February, and trades on a forward p/e of 16. Smart meter penetration is expected to grow to 13.6 million by next year and more than 33 million by 2011, according to Bill Ablondi of Park Associates.

the best blogs What the bloggers are saying

Let baby pick your stocks http://stumblingandmumbling.typepad.com The efficient markets hypothesis (EMH) is taking a bit of a drubbing, but the facts tell a different story, says Chris Dillow. Figures from fund analysis site Trustnet.com show that, after fees, only a minority of unit trusts in the UK All Companies sector (91 out of 254) have outperformed an index tracker fund during the past five years. “This means that the key prediction of the EMH is correct: it is incredibly hard to beat the market.”

© GETTY IMAGES

Wall Street is grossly overpaid

He’s as much chance as anyone else In other words, you’d probably be better off employing a baby to pick your stocks. Successful fund managers are often just lucky.

“Now, this doesn’t mean that prices are always ‘right’.” Maybe there are inefficiencies in the market that fund managers can exploit. Unfortunately, their “herd mentality stops them spotting them”. So, the notion that an expert can beat the market is, “at best, highly improbable”. But don’t expect the industry to tell you.

“There are lots of people – brokers, talking heads and increasingly politicians – who have a vested interest in avoiding this fact.”

Bad businesses shouldn’t blame their tools http://www.slate.com “Balance sheets are tools,” writes Daniel Gross. “And a good craftsman never blames his tools.” But businesses are lining up to slate them as the reason they went bust. Six Flags, the amusement park company, and Eddie Bauer, the clothing retailer, have all blamed bad balance sheets for their respective bankruptcies. At the same time, they insist that they are good businesses. “But this balance-sheet excuse just doesn’t hold water.”

If an enterprise is managed in such a way that it fails to keep up with its payments, that points to bad management. Iceland is a giant case in point. It “sustained an admirable quality of life through the use of debt that it couldn’t service. Is that a case of a good country with a bad balance sheet? Or of a poorly managed economy?”

Ultimately, the balance sheet “can’t be divorced from the underlying business”: every firm has to manage its debts. If it can’t, it’s not a well-run one.

http://www.thenation.com The news that Citigroup’s head energy trader may collect a $100m bonus for profits his team earned trading oil in 2008 raised “quite a media hullabaloo”, says Jeff Madrick. Oddly, though, the reason that everyone is up in arms about this is that free-spending Citi is still a ward of the state (it has received $45bn in bail-out cash). Instead, “what should really have the public upset” is that these star traders and bankers do not deserve so much money in the first place, “bail-out or not”.

Mainstream economists are finally confirming how grossly overpaid Wall Street has become. A “striking” study by Lawrence Katz and Claudia Golding of Harvard tracked the careers of Harvard students graduating in the early 1970s, early 1980s and early 1990s. Not only did increasing numbers go into finance, but they earned on average 200% more than other graduates. Similarly, Thomas Philippon of New York University has found that since the late 1990s, finance pay “has risen far faster than in previous periods, including the flamboyant and highly speculative 1920s”. Adjusting for factors such as the risk of being sacked, Philippon calculates that Wall Street remuneration has been 50% greater than it should have been based on finance’s contribution to the economy. “It is increasingly clear that these bonuses are not justified. They are the fruits of unfair economic privilege.”

The odd silence on celeb greed Forget larcenous bankers. What about money-grabbing celebrities? asks Eamonn Fitzgerald. Every week, bankers are “put in the public stocks and pelted for their greed. And rightly so.” But “there’s been nary a word about the extraordinary greed of the ‘creative’ classes”. Take the photographer Annie Leibovitz, being sued for not paying a $24m loan despite earning a seven-figure salary from Vanity Fair. Then there’s the $275m earned by TV host Oprah Winfrey (pictured) and the $300m made by Harry Potter author JK Rowling.

“The preachy editorialists, the chattering category and the Johnny-come-lately socialists are oddly silent about these inconceivable sums.” In the coming months, we can expect to

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© REX FEATURES

http://eamonn.com/

hear from a “troupe of actors, rock stars, and, no doubt, footballers” on war, peace, poverty and climate change. The least that we can do, after listening to these inane sermons, “is ask them to hand over half of their outrageous incomes to the needy. If celebrities can fight hunger, they can fight greed.”

entrepreneurs

How I seized a window of opportunity shutters from Canada and ship them to customers for self installation. This would keep costs low by removing the need for expensive showrooms and a network of installers across the country. And because there were so few shutter operations around, there was little need for advertising: “As soon as the website went up, we were one of the first companies to come up on a search on Google”.

by Jody Clarke High-street sales may be plummeting in this recession, but so are shipping costs.

And for shutters importer Murray Clark, 36, that makes business a lot easier.

“Eighteen months ago it cost £3,500 to ship a 40ft container door to door from China,” says the founder of Brightonbased window shutter business The California Company. Today, the same 31-day trip costs £1,800.

“So there’s an upside to the recession.”

The son of an engineer with Scottish Nuclear, Clark grew up in Clarkston, a well-heeled suburb of Glasgow. Always looking for ways to make money, he had a paper round at the age of nine, “which sounds a bit Dickensian”. He later graduated to selling bootleg computer games and music compilation tapes at Williamswood high school.

After university, he moved south, gaining a Masters degree in air transport management at Cranfield University before working with Virgin and then American Airlines. But the September 11th attacks led to cutbacks, more restrictions at work and less travel. So Clark decided to leave and set up his own business from home in Brighton. “I thought of opening a bar or a restaurant.” But he soon hit a snag: It was “very hard to get firms who sold shutters in the UK. The ones that were around were very expensive, and they were very snooty in their approach

MY FIRST MILLION Murray Clark, The California Company to customer service. I felt there was a gap in the market to do it better, in terms of price and customer service.”

So using up some untouched airmiles with American Airlines, he hopped on a flight to North America and found a firm who could make them for him in Toronto. With £1,500 in start-up costs, he built a website, working off an old Ikea desk from the spare bedroom of his home in Preston Park. The plan was to take orders online then request the

Customers also paid upfront, which removed cash-flow problems. The ordered shutters were initially delivered onto his driveway and put into the garage. But “after a couple of times watching neighbours faces falling when a 40ft truck pulled up outside”, he moved to an office in nearby Hove in 2005.

Turnover was £150,000 in the first year “and we were just breaking even”, thanks to only part-loading containers.

However, after shifting manufacturing to China in 2006 to bring costs down, “things really began to motor”.

Sales will hit £3m this year as Clark opens a US base in Las Vegas, Nevada, in November – a state chosen for being more business-friendly than nearby California. “I’m not saying it’s all trotting along like Mary Poppins, and it’s wonderful every single day. But there are lot of areas where you can grow your business and cut costs.” Expanding in America carries risks, but could turn out to be one of his best moves yet.

The MoneyWeek audit: Catherine Zeta-Jones

© REX FEATURES

• How did she start out?

At the age of ten, Catherine ZetaJones launched her acting career at a Butlins talent contest.

Two years later she earned £85 a week playing Annie in a Swansea production of the musical.

Throughout her teens she appeared on stage, but it wasn’t until 1991, when she played Mariette in The Darling Buds of May, that she won national acclaim. Her breakthrough role came in 1998’s Mask of Zorro. The film was a huge success, taking $233m worldwide and launching a Hollywood career.

• What has she made from films?

In 2000 Zeta-Jones earned $3m for her role in Traffic. But this

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quickly jumped to $8m for 2002’s Chicago – her most successful film to date. After winning a host of awards for her all-singing, all-dancing performance, she now commands $10m+ per movie.

Zeta-Jones is also one of the best paid actresses in the world when it comes to advertising. In 2003 she had a £5m contract as the face of Elizabeth Arden. She was once paid £12,000 a second for a Japanese shampoo advertisement – taking home £1m in total. But her biggest payday was in 2002, when she received £11m for a two-year advertising deal with T-Mobile. She now earns around £8m a year from her advertising deals.

• So what is she worth now?

In total, Zeta-Jones is estimated to be worth £60m. But her combined £170m income with her husband Michael Douglas makes her Britain’s richest actress. A prenuptial agreement states that Zeta-Jones gets $1m for every year of marriage should they divorce. And it is rumoured that the amount increases should Douglas – a former ‘sex addict’ – stray.

personal finance

Your 10 step plan for debt-free living

by Karin Iten

Step #4: Cut back Just like alcoholism, chronic spending (aka "shopaholism") is an addiction. And although it doesn't take a 12-step plan to get over this problem, it's vital you take the necessary steps to get out and stay out of debt traps.

Now that you've made a list of your expenses and prioritised them, you'll discover where you can cut back costs.

You can use this extra money to pay off any outstanding debt you may have.

Step #8 : Seek professional help Step #5: Don't panic

But how do you know if you’re in danger of being overwhelmed by debt? Well ask yourself, do you suffer from one (or more) of these symptoms?

•

• • •

You continually over spend your budget and use your credit card limit to get you through to the end of the month.

You're always borrowing money to make it to your next payday.

You use this month's salary to pay off last month's debts.

Your repayments only ever cover the interest charges on your account, but never manage to reduce the actual amount.

If this sounds like you, read on to find out how you can get yourself out of the debt hole, before it threatens to cave in and bury you!

Step #1: Get out your scissors If you've maxed out any of your credit or account cards, cut them up. As a rule, you should have no more than ONE credit card and should never use it unless you absolutely HAVE to.

Step #2: Keep a credit diary At first, entering every single cent you spend into a credit diary may seem tedious, but it'll give you a good idea of what you're spending your money on and how much you're wasting. Let's say, for example, you buy a cup of coffee on your way to work every day at R11 a cup. This means, every month you're spending R242. (That's an estimated R2,860 a year!). Now I'm not suggesting you deprive yourself of these simple pleasures, but you could buy a tin of Nescafe Gold for around R60. Not only will it last you at least a month, it'll also save you tons of money in the long run.

Step #3: Categorise your spending Group your spending into needs, likes and wants. This way, you'll be able to budget appropriately and make sure your needs are taken care of before you splurge on luxuries.

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fixes never last. To keep yourself out of debt in future, you must pay back what you owe. You must also change your mindset and the way you manage your money.

Being in debt can be very stressful. The best thing to do is get a clear idea of how much money you actually owe. To do this, take out all your outstanding bills and compile them into a list indicating the total balance, minimum repayment and the interest rate you're being charged.

Then, manage your repayments effectively and ensure you don't slip up and forget to pay someone.

Step #6: Take action Don't just stand around worrying about your financial situation... start paying your debts off today. Not only will this lessen how much you owe, but being proactive will help you sleep at night, reducing the amount of weight pressing down on your shoulders.

Sometimes you simply can't do it alone.

Seek the help of a financial advisor or debt counsellor if you can't find a way out. For a free online assessment, visit www.creditmatters.co.za.

Step #9: Prepare for a rainy day Try keeping some money aside for unexpected, emergency expenses.

Often, people get into debt because of something they didn’t expect. Open up a separate bank account where you can put any spare money to insure any unexpected knocks don't land you in hot water.

Step #10: Rinse and repeat

Step #7: Don't expect a quick fix

Don't give up. The process of getting out of debt get's easier as time passes. Over time, you'll refine your budget and spending and this will help you stay out of debt in the future.

Chances are it didn't take you a day to sink knee-deep into debt, so don't expect to get out of it that quickly either. Quick

And remember, being debt-free is not impossible!

Tax tip of the week Are you the reason SARS won’t pay you interest on your Vat refund?

SARS must pay you interest on any Vat refund you haven’t received within 21 business days of completing your return. You calculate the interest rate from the 22nd business day to the date you get the refund.

But before you write an angry letter of demand to SARS, remember you can’t start counting the 21 business days in the following cases: • • • • • •

Your return is incomplete or defective You have outstanding returns SARS can’t access your records to verify your refund Your banking details are incorrect SARS decides to set-off your refund against outstanding taxes You’re using a third party bank account but haven’t submitted your VAT 119i indemnity form.

So until you fix-up these outstanding issues, you have no right to claim interest from SARS... even if it takes a year to pay you your refund!

The lesson? Make sure your ducks are in a row so SARS has no reason to shortchange you.

Matsika Vengesa, TaxConsulting, matsika@taxconsulting.co.za

profile This week: Simon Fuller

Talent manager who gave us the Spice Girls storms into fashion and sport

Fuller, 49, has twice left an indelible mark on the entertainment industry, says The Observer: first with the Spice Girls, and then with Pop Idol – “the most successful franchise in TV history”.

Only the Oscars and the Super Bowl attracted more viewers than the 2007 final of American Idol and Fuller’s net worth is calculated at some £450m, “good going for a headmaster’s son from Hastings”. As a result, the “softly spoken” Fuller certainly does not suffer from false modesty. “I understand popular entertainment better than anyone,” he proclaims. Critics perceive him as a “sinister svengali... a permatanned puppet master who peddles lowest common denominator fare”.

Singer Amy Winehouse once described him as “practically shining... that’s how plasticky he is”.

“It would be great to be able to say Simon was this Machiavellian monster, but he was just very likeable,” says a former school friend. Fuller began his career as a sixth-former, staging gigs on

Hastings Pier. In the early 1980s, he joined Chrysalis, branching out on his own at 25 to score an unlikely number one hit with Paul Hardcastle’s 19, now the title of his company. And while he may not have discovered the Spice Girls, says The Observer, he turned the group into a brand. After being ousted in 1997, he then repeated the trick with S Club 7.

From there, it was a short step to launching Pop Idol in the UK in 2001 and American Idol the following year.

Fuller’s great inspiration was “the fifth Beatle”, Brian Epstein. Yet he has long since eclipsed him in terms of record sales, says Billboard. In the process, he has enriched his stars, notably ‘Brand Beckham’ (now worth a joint £125m).

He helped turn David into a global sex symbol and when Victoria’s recording career hit the rocks, he engineered her transformation into a fashion designer.

That was thanks to another big name he “looks after”: the photogenic French designer Roland Mouret, originator of the “superstar” Galaxy frock. Signing Mouret was Fuller’s first move into fashion and it seemed “an odd collaboration”, says The Guardian. But Fuller – who launches a fashion website, Fashionair.com, next month – sees clear synergies between the two worlds. And, indeed, sport. Andy Murray is his latest coup, says The Times. “In Murray, he has a young superstar with an edgy

© REX FEATURES

Has Simon Cowell been trumped by the ‘other’ Simon yet again? Simon Fuller’s company, 19 Entertainment, has just taken a controlling stake in the Storm model agency in a move that consolidates the pop impresario’s position as the world’s leading talent manager, straddling music, sport and fashion.

personality, a dry wit and the sort of street cred that Tim Henman could never master.” Insiders at 19 say the surly Scot’s earnings “could surpass the Beckhams”.

“Power in the entertainment industry is shifting dramatically towards the artist, so, by association, managers have more power,” says Fuller. But you won’t find Fuller sharing the limelight. “There is no upside to fame,” he once remarked. “It’s so weird... celebrity is even afforded to business people. To Simon Cowell, for chrissakes!”

The prize asset landed by Fuller

Doukas, who stands to make millions from the deal, has always been an entrepreneur, says The Observer. After working as a model in the 1970s, she sold antiques on the King’s Road, managed a punk band and set up a clothing company before cutting her teeth as a model booker. After recruiting Kate Moss as a 14-year-old at the check-in queue of JFK airport, Doukas

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14 August 2009

went on to recruit “some of the most enduring names in fashion”.

Although renowned for her maternal qualities (she considers Moss “her fourth daughter” and has housed several fledgling beauties, including Angelina Jolie, in her Battersea house), Doukas is a hard-headed businesswoman, notes The Australian. Having recently lost valuable “cover business” to celebrities, she responded with her own show biz division, advancing the career of Harry Potter actress Emma Watson, among others. “It’s like being a trader in the City [except that] you are dealing with a live commodity,” she declares.

Fuller couldn’t have put it better himself.

© REX FEATURES

19 Entertainment already has one supermodel on its books: Claudia Schiffer. But the deal to gain control of the Londonbased Storm agency hands Fuller a list that includes Kate Moss, Lily Cole, Cindy Crawford and Carla Bruni, says The Sunday Times. However, the prize asset is perhaps the agency’s founder, Sarah Doukas (pictured), who started Storm from her spare bedroom in Battersea in 1987.

Spending it Travel

Visit Switzerland for a sporty summer

By Kevin Cook-Fielding Think of St Moritz, and the first thing that comes to mind is the Cresta Run and winter sports. But St Moritz is keen to prove it’s not just for holidays in the snow – it’s now reinventing itself as a year-round resort. So how does it measure up?

The holiday starts with a stress-free – and punctual – train journey from Zurich to St Moritz. It’s a four-hour trip, but don’t worry, you won’t get bored – the constant stream of breathtaking scenery as the train meanders up into the heart of the Swiss Alps ensures the journey flies by.

Lake Silvaplanersee and the cosy Chesetta chalet I stayed in the tiny village of Silvaplana, 3km south-west of St Moritz, at the only fully-staffed summer chalet, Chesetta.

Built on the site of the former village blacksmith’s, Chesetta is a seven-bedroom boutique chalet, consisting of two separate living areas interconnected by the lower ground floor. The chalet is served by a gourmet chef, Bettina, who prepares delicious local dishes, such as my particular favourite, buendner gersetnsuppe: A cream and barley soup with Viennese sausage.

The chalet oozes comfort and style.

Wood panelling gives it a modern alpine feel, while antiques and numerous fake fur throws make the place much more homely than your average alpine hotel.

As well as a gym and sauna in the basement, there’s a home cinema for those who’d rather relax than work out.

But with temperatures of 18°C to 20°C between July and August, you’ll want to

get out and about despite the comfort of the chalet. One activity worth trying is kite surfing. At an altitude of 1,791m, Lake Silvaplanersee is one of Europe’s highest sailing and kite-surfing lakes.

Predictable wind speeds of up to five knots across the water make it ideal for being dragged on a surf board by a kite.

In fact, the resort hosts the world kitesurfing championships here every summer. It’s great fun, although be warned that by the end of the lesson you may feel as though your arms have been torn from their sockets.

There is a smattering of nightlife in Silvaplana – most hotels such as the Julier Palace have a bar or club attached.

But the real fun is along the lake in St Moritz. The Roo Bar is a lively restaurant and bar located in the Hotel Hauser. Particularly popular is the selection of meats you cook yourself on a hot stone.

On a more cultural note, in the nearby town of Sils Maria you can find the former summer residence of philosopher Friedrich Nietzsche, now known as the Nietzsche Haus. Here you can find the permanent Nietzsche exhibition and, frequently, special modern art exhibitions.

And in St Moritz Dorf, the Segantini Museum, which is dedicated to the works of Italian artist Giovanni Segantini, is worth a visit. Segantini was raised for part of his life in the Alps and drew heavily on the mountains for inspiration.

He used pointillism – a painting technique whereby lots of tiny dots are used to make up a picture.

Summer rates start from R2,345 pppn, based on 12 staying. That includes all services except food. For more, see www.chesetta-stmoritz.com. Flights to Zurich from R5,460 with Flight Centre; the train to St Moritz from R940 for a return.

©SWISS-IMAGE.CH

Activities: Summer Alpine sports

23

Kite surfing

Mountain biking

Hiking

www.kitesailing.ch Silvaplana’s kite sailing school offers private and group lessons to beginners and advance.

There is also a well equipped hire shop.

www.engadinmountai nbiketours.ch Offers tours of the mountains with overnight hotel stays, as well as short excursions and lessons.

Silvaplana to Lej de la Tscheppa and back Walk through a romantic landscape of mountain lakes.

Suitable for more experienced hikers.

14 August 2009

toys

Jaguar’s radical new saloon The new Jaguar XJ is aimed squarely at Mercedes and BMW types, says Jay Leno in The Sunday Times. And from the outside, it “certainly looks the business”. Most buyers will probably take one look at it in a showroom, fall in love and buy it, crossing their fingers and hoping that it will be reliable.

The good news is that this new XJ is a rational choice too, not just an affair of the heart. Leno drove a pre-production model and, if you drove it blindfolded, you’d not be able to tell if you were in a big Mercedes S Class or Audi. It feels “very secure” and “warm”, unlike the

coldness of the German saloons. It’s also sporty, fast and “has that classic Jaguar ride”. In short, it “has all the characteristics you would expect from a really good car, and then some”.

expect, is also adorned with “a completely new style of dash”. There are virtual 3D instruments, a media hub to control CD and DVD players, and a new voice command system.

It’s a stunning new model and will be on sale at the end of this year, says What Car?. It’s also a surprising departure for Jaguar: the new car is as radical and modern as its predecessor was traditional and conservative. Outside it looks like “nothing we’ve seen from the company before” and inside, the “seductive” interior, while fitted out with the wood and leather Jag buyers

It’s a sensational cabin, agrees Tim Pollard in Car, and the looks are “startling”. Jaguar is hoping the car will be distinctive enough to warrant a £52,000 (R700,000) price tag, positioning the car somewhere between a Mercedes S Class and a Maserati Quattroporte.

Jaguar sold just 5% of the cars BMW did last year. But “the edgy new XJ could be about to land the killer blow”.

Wine of the week: enjoy a glass of world-class Sauvignon Blanc 2008 Jules Taylor Sauvignon Blanc, Marlborough, South Island, New Zealand R175.

The Marlborough region had a huge Sauvignon Blanc harvest in 2008 and a large number of wines were made from diluted fruit. This is why you may have come across a few weedy 2008s in the past six months or so.

by Matthew Jukes With more judicious pruning, the energy from the roots can be focused into fewer grapes and the wine quality leaps up.

But greed takes over and less scrupulous producers make underwhelming wines (but more cash, one assumes, in the short term). It’s not long before these charlatans get found

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out though – the proof is in the glass, after all. So this week I have chosen a paragon of virtue: the lovely Jules Taylor and her stunning 2008 Sauvignon.

It is strange to think that a relative newcomer should make what I deem to be a totally and utterly benchmark version of Marlborough Sauv – but she does, and you should drink it.

Forget the other big names: enjoy a glass of this honest, brilliant-value, world-class wine today. ● Matthew Jukes is a winner of the International Wine & Spirit Competition’s Communicator of the Year.

blowing it

The software swapping super yachts for submarines take them off, or on a boat.

And worn with socks are super hell.” Written in 1964, this all remains true except possibly the first sentence. For years, Amies wrote a column for Esquire magazine while carrying out his duties dressing the Queen.

The current style editor of Esquire, Mansel Fletcher, concurs with the advice. Socks with sandals are a “bit German bible camp”, he says. As for short-sleeved shirts: They’re only acceptable if “you’re flying a plane”.

Perkins based his boat on an “aborted 1960s concept” to relaunch clippers like the 19thcentury Cutty Sark, says The Sunday Times. But to me the Maltese Falcon lacks the elegance of the Cutty Sark and since the sails are computercontrolled – Perkins wrote some of the software himself – she can’t even be that much fun to sail.

©R.G.WILLIAMSON/REX FEATURES

Tom Perkins, the American venture capitalist, has finally sold his strange-looking super-yacht, the Maltese Falcon.

The 289ft boat fetched R800m, although he was originally asking R1.2bn – which is roughly what it cost him to build it in Turkey four years ago.

The Beeb loves its perks As yet another story about BBC extravagance comes to light – apparently executives have been renting a luxurious villa above Cannes for £20,000 (R270,000) a week – the BBC should learn a lesson from its former deputy chairman, Lord Cocks.

Restless US mogul Tom Perkins’ Maltese Falcon cost R1.2bn to make

Still, she’s fast: She can cross the Atlantic in ten days and has what David Pelly of Boat International Magazine calls a “fabulous art deco interior”. Perkins may even have broken even on it, since he regularly let it out for more than R4m a week.

So why is he selling? As the owner of an Elizabethan house in Sussex, he is one of the men who helped found Silicon Valley and, like a lot of techno-wizards, he’s restless. According to Pelly, his interest has now switched to a personal submarine that has wings and, says The Sunday Times, “resembles Stingray from the children’s puppet series”.

But while he lost money on his sale, the overall state of the super-yacht market remains healthy enough, with the current number of 3,500 expected to rise by the end of this year to 4,162.

Clothes maketh the man The Victoria & Albert Museum is reprinting Hardy Amies’ ABC of Men’s Fashion, the influential style guide for men buying clothes.

“Always wear a collar and tie in a town,” advises the legendary designer, “even if it’s by the sea, after six o’clock. Never, ever wear shorts except actually on the beach or on a walking tour. All shortsleeve shirts look ghastly. Sandals are hell, except on the beach where you want to

His widow, Lady Cocks, told The Times that when the one-time Labour Chief Whip joined the Beeb “someone phoned up and said: ‘Come and choose your new furniture for your new office.’ I said, ‘Marvellous.’ He said: ‘The office is fine as it is. I’m only there two days a week.’

They said: ‘Every deputy chairman has a car and a chauffeur.’ I said: ‘Great’. He said: ‘We live in Westminster. There is a bus stop outside our house.’”

Tabloid money… Soldiers’ wives starve while union bosses feed at the trough ■ British army families have been reduced to charity handouts.

The Sun says, “Forces pay is so pitifully low that service wives cannot make ends meet when their husbands are sent to fight in Afghanistan.” Hunger charity Foodbank, based in Salisbury, “has had to help 245 struggling military spouses and children in three years”. In most cases, the men were in Afghanistan or Iraq. And the number of urgent handouts could be in the thousands nationwide, campaigners believe. “It is shameful that men risking life and limb 3,500 miles away have the added worry of whether their families are being properly fed back home”.

■ The recession is hitting everyone. The only way to defend profit when you can’t increase revenue, is to cut costs.

Independent Online explains this is being done in a million little ways: Food products are repackaged into slightly smaller packs, or reformulated to use less of the expensive ingredients; customer reward programmes are being tweaked to make

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14 August 2009

customers spend more for fewer rewards, and new "admin" fees are being introduced for services that were previously free.

Journalist Wendy Knowler points out that one of the more outrageous sneaky line items that has appeared on her Nedbank statement is a R12.50 charge if you pay your account by cheque.

"I already pay for the (cheque) service," said Solveig Dolby of Cape Town, another Nedbank credit card account holder. "Now I am expected to pay for paying my account!"

■ In Britain, “lefty union chiefs sneer at bankers’ bonuses but are not backwards in coming forwards when the trough is in front of their noses,” says Fergus Shanahan in The Sun. “Union leaders accepted rises of up to 20% while their members lose jobs or have wages cut. Bob Crow, leader of the RMT rail union, had an 8% rise in 2008 to R1.2m, while asking members to sacrifice wages and risk their jobs in a futile strike. For the size of his salary, Bob doesn’t seem to be giving his guys good advice.”

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

PUNTS

26

Company

Media

Reason

Current price

ARB Holdings (ARB) Electronic Components

Financial Mail

This cabling and power group “has done well under the circumstances”, says Larry Claasen at the Financial Mail.

Although demand has dried up and sales have fallen as a result, its saving grace is its liquidity. It has R200,000 in the bank and, as Claasen says, that’s “nothing to be sneezed at”. It’s currently trading on a PE of 6.99. Buy. 216c

Group Five (GRF) Construction and materials

Summit TV, Adrian Saville, Cannon Asset Managers

Cannon Asset Managers have said they like the look of Group Five and have begun including it in many of their portfolios. This is against their traditional investment strategies and it’s the first “raw construction” play they’ve looked at in a year. Adrain Saville says, “this is against a backdrop of 2007 when earnings multiples got up to 25 or 30 times trailing earnings. You’re now seeing more sensible multiples being applied to Group Five.” Its earnings are up 25% and it’s very liquid. He says: “The balance sheet looks good and management has what we think is necessary to keep the business pushing forward in a tough environment.” Buy. 3547c

Merafe Resources (MRF) General Mining

Financial Mail

Merafe’s primary business is to supply ferrochrome to the stainless steel market. And its share price took quite a bashing when it closed some of its smelters down to bring production in line with demand. Merafe has brought these smelters back online and the resultant uptick has begun. Matthew Hill at the Financial Mail says, “Business is picking up and Merafe is a buy at this cheap price.” Buy.

147c

AngloGold Ashanti (ANG) Mining

Financial Mail

“Most of the pick-and-shovel brigade may be moaning, but the gold diggers are kicking along very nicely as the ingot of last resort once again proves its value to investors who have run out of other ideas”, says Jamie Carr in the Financial Mail.

AngloGold Ashanti has just had another record quarter, but the really great news according to Carr is: “The company has finally got the trimmers out and has got vigorously stuck into the poisonous hedge that was strangling its ability to make money. This, largely inherited from the Ashanti merger, had locked the company into gold prices of between $300/oz and $400/oz.” This is great considering the current gold price is $953.60. Buy. 29150c

Universal Industries (UNI) Diversified Industries

Financial Mail

Universal Industries is another company that’s shown prudence in the economic slowdown. Its numbers don’t look great, says Larry Claarsen in the Financial Mail, but with liquid cash on hand of R147m and rising, it’s a survivor. Those looking for an industrial punt could see huge returns when the global conditions improve. With a PE of 6.14, it’s cheap. Buy.

14 August 2009

70c

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

DOGS Company

Media

Liberty Group (LBH) Life Assurance

Pinnacle Point (PNG) AltX

Reason

Financial Mail

Financial Mail

Current price

“Hedge position losses and losses on foreign exchange holdings as well as a sharp uptick in policy lapses detracted from a credible sales performance”, says Stephen Cranston in the Financial Mail. He reckons Liberty’s price should be R55 or less. Avoid.

6428c

Jamie Car believes, “It would be a terrible thing to indulge in professional stereotyping... but there is something about the property development game that does appear to attract those whom the Texans might describe as all hat and no cattle.”

Pinnacle has had to raise a quick R250m just to keep operating.

And Absa rode to the rescue with a bridging facility that should keep Pinnacle in the game.

15c

Reason

Current price

WATCHLIST Company

Media

Old Mutual (OML) Life Assurance

Finweek

The horrendous trading conditions in the US are showing promise, which bodes well even though the Skandia profits were disappointing. Sales are down, but this is an annuity based business. South African profits remained strong and the share price has recovered. This is a mixed bag investment and, even though Bruce Whitfield at the Finweek says “making a call on a continued rally now may be foolhardy”, Old Mutual’s worth keeping an eye on. Hold.

1195c

Investec (INL) Finance

Finweek

Award winning journalist, Bruce Whitfield, says, “Investec has strongly outperformed its rivals over the past two months and the good news for tardy investors who missed the rally is the counter still appears to have legs.” It’s buying back its debt at a significant discount by issuing 22m new shares. It has, however, also issued a profit warning that first half earnings would decline by 25%. The share price rallied anyway. Its private banking and asset management divisions are under severe pressure, but analysts remain impressed by the way this company is handling the down turn. Hold

5315c

**Closing prices as at 12 August 2009

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14 August 2009

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last word

Junk yard economics Vandalism as public policy...

Last week, the US extended its ‘cash for clunkers’ programme.

It calls for destroying car engines. So, mechanics pour sodium silicate into the crankcases. “It just don’t make sense,” said a used-car-parts salesman in Dayton, Ohio. This week, we open up the hood and take a better look.

Does it really make sense, we ask? In answer, we guffaw. Then we invite dead economists to guffaw with us.

Bill Bonner

“Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate

©GETTY IMAGES

Richard von Stigl, among others, pointed out in 1923 that there is a big gap between real economics and the vulgar economics that drives policy decisions. On the one hand, serious observers study what happens in a pure, natural economy and draw their truths from its crystal streams. On the other, the meddlers distort the economic world so much that the observations of the old economists hardly matter. Downstream from the meddlers’ camp, the water is not even fit to drink. In theory, as well as in fact, the planners never know what they are doing: “The... knowledge of the circumstances of which we must make use never exists in concentrated or integrated form,” began Friedrich Hayek in 1945, “but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”

lured to buy a new car. The central planners may be pleased. They see the effect they desired – more auto sales. But what don’t they see? We invite Frederic Bastiat for an opinion (1850):

A ‘good’ is a good only insofar as it is good to the person who wants it. The public servant – as able and self-less as he may be – has to guess. History and theory tell us what happens; he usually guesses wrong. Only the individual knows what he wants and how to get it. He compares one good against others – using prices to guide him to where he gets the most good for his money. But when the government steps in with its subsidies, it effectively dams the flow of price information. Now, the consumer, with no clean signal to guide him, makes mistakes. He may be 28

14 August 2009

Can scrapped cars really save the economy? consequences are fatal, and the converse.”

But who listens to Bastiat or Hayek? Ten countries have taken up ‘cash for clunkers’ programmes. In Britain the government puts up £2,000 to grease the deal... with a total of £300 million earmarked for the programme. In France, buyers get €1,000 toward the purchase of a new car. Everywhere, the programme is hailed as a success – it is widely thought not only to boost auto sales, but to help revive the economy, reduce pollution, cut oil imports and even lower highway deaths. We haven’t heard that buying a new car contributes to weight loss, but we haven’t read the papers this morning.

Even ‘free market capitalists’ such as Larry Kudlow say they like it: “The cash-for-clunkers rebate programme is working. ... And the price tag of the program is a mere $2 billion compared with the trillions of dollars Washington has been wasting. So, for once in our lives, Washington spending

is giving us a good bang for the buck.”

Bastiat knew better. He described a scene where a careless boy had broken a shop window. The store’s owner was annoyed, until a foolish economist pointed out that the broken window was a blessing in disguise. It gave work to the glaziers and glass makers. The glaziers then could buy other things… and thus did the whole economy enjoy a bounty from this single act of vandalism. But wait; Bastiat wanted to know: if you could improve the lot of mankind by breaking windows, why not smash every window in Paris? And if you could improve the lot of mankind circa 2009 by destroying cars, why not crush them all? And planes. And trains. Heck, destroy everything. Think of the boom that would accompany the rebuilding!

Obviously, it doesn’t work that way. Replacing broken windows, or cars, takes resources away from some other uses. Lured by phony price information, buyers send phony signals to the rest of the economy. The automakers produce more cars. Steel, which might have gone to refrigerators, is used for car doors. Oil, which might have been used to generate electricity, is used to stamp out fenders. Savings, that might have been invested in new industries, go to prop up an old one.

Kudlow allows himself a peek at the unseen consequences: “… yes, it’s quite possible that government rebates today will steal car sales from next year. But let’s cross that bridge next year...” Then, he even wonders, briefly, at the obvious foolishness of it... almost as though he were a serious thinker: ‘Well, why not just spend another $100 billion and give consumers cheques for everything?’ Or, ‘Why not spend another trillion?’ Well, I don’t want to go there...”

No one wants to go there. Real economists and used auto parts dealers shake their heads: ‘it doesn’t make sense,’ they say. But who gives a damn?

For more from Bill, sign up to Money Morning’s free email at www.moneymorning.co.za.