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21 AUGUST 2009 SOUTH AFRICA EDITION 108
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from the editor 21 AUGUST 2009 ISSUE 108 ISSN 1995-4476
South Africa Gareth Stokes – Editor Julie Brownlee – Deputy Editor Annabel Koffman – Publisher Editorial & Production Gary Booysen, Karin Iten, Jeremy Miles Subscriptions and marketing Tel: +27 11 699 6530 Advertising sales Shaun Besarab – Tel: +27 82 725 8355 Paul Vidas – Tel: +27 82 926 3429 MoneyWeek is published in South Africa by Fleet Street Publications (Pty) Ltd, Unit 2, Block B, Northlands Business Park, Newmarket Street, Northriding.
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21 August 2009
A parting gift set to rev up the South African economy Reserve Bank Governor Tito Mboweni’s parting gift will have put a broad smile on your face if you pay instalments on a house or car. In his final Monetary Policy Committee meeting before vacating the hot seat for incoming Governor, Gill Marcus, Mboweni slashed another 50 basis point from the bank repo rate. Prime is now at 10.5%, a level last seen in April 2005 and the lowest it’s been since a brief stint at 9% in mid-1981! You’ll now pay R2 666 per month less on a R750 000 mortgage loan when compared to the interest rate cycle peak of 15.5%! Of course, you can’t expect an immediate residential house price party. It’ll take months for South Africa’s battle-weary consumer to revert to previous spending patterns. Investors shrugged off the disappointing June manufacturing production (down 17.1% yearon-year) and retail sales (down 6.7%) numbers released last week. This sent local equities above 25 000 points. Can this equity market rally continue unabated? In his weekly Sunday Times column, Bull’s Eye, Jeremy Thomas reminds us that “the average Joe’s sense of greed kicks in at absolutely the wrong time”. In other words: The herd stampedes into equities moments before the crash. Before you hastily commit your hard-earned cash to a mixed bag of local equities, consider that the JSE All Share Index has surged 38% since its March 2009 low. Equities could go higher if sentiment holds; but there’s a good chance punters will panic when the appalling earnings numbers at the country’s top companies sink in.
earnings pressure. Investors must have gasped at the 58% increase in credit impairments to R7.1bn although the drop in earnings was expected, Apart from the usual defaults on personal home and vehicle loans, there was an increase in impairments in the group’s corporate unit. With rising unemployment, you might dismiss the bank’s upbeat assessment of impairments going forward. The bank’s claim that most of the “damage” is already in the numbers may yet prove a trifle optimistic! What about earnings per share results at other companies? City Lodge reported a surprising 31.41% decline despite the glut of international sporting events recently held in the country. Gold Fields surprised us with a 45.86% decline, while platinum counter Aquarius, uranium outfit Uranium One, heavy machine manufacturer Bell Equipment and long-term insurance giant Liberty Holdings all reported heavy losses. It was left to construction bell-weather Group Five to impress us with a 21.59% improvement! Against all odds, the group announced pipeline projects to the amount of R72bn at 30 June 2009. Project cancellations in the Middle East have been easily replaced. Whether or not the market is “overbought” remains to be seen. Until then, concentrate on sectors that will punch above their weight should the expected pullback occur. Food retailers, construction shares, food producers and drug manufacturers seem unfazed by recent market volatility. To find out if you should still invest in these sectors turn to page 16 and read this week’s Round Table. We ask a handful of the country’s top market analysts and economists where they’d position their portfolios today!
Standard Bank’s 34.37% drop in earnings per share for the first half of 2009 illustrates this
Gareth Stokes Editor, South Africa
In this issue 6 Markets Commercial property is still a mug’s game; China stalls.
right for you?
21 Personal finance Is debt counselling
7 Sector Can solar power still deliver sizzling returns?
23 Travel Three remote destinations to escape from life in the fast lane.
11 Strategy The best profit figures to follow; why the Dogs will disappoint.
24 Toys Has Alfa Romeo released the
20 Entrepreneurs The gambling genius of an anti-vice campaigner’s grandson.
28 Last word Bill Bonner on why the
world’s most desirable car?
world’s governments can’t turn back time.
news much faster than expected. Now it looks like the same story all over again.
Global economy
Unexpected recovery in Asia – can it last?
Part of Asia’s recovery is thanks to improvements elsewhere in the world. Cyclical industries are a big part of many Asian economies; this led to huge falls in output at the end of 2008, but also made for quick recoveries as demand stabilised. The freeze in global trade finance had exacerbated the export plunge; this has thawed. But much credit must also go to Asia’s domestic strengths. “India aside, the Asians entered this downturn with far healthier government finances than rich countries, allowing them to spend more money.”
Emerging Asia is once again surprising the world with the speed of its recovery. The five countries that have reported second-quarter GDP – China, Hong Kong, Indonesia, Singapore and South Korea – grew at an average annualised rate of more than 10%. Economists were also taken by surprise by positive, if weak, growth in France, Germany and Japan; all three were expected to recover after the US, which is still mired in recession.
Banks were in better shape than Western counterparts and have been able to continue lending. And households have lower debt burdens, making them more willing to carry on spending. Indeed, the “relative resilience of consumption has played an important role”, said Standard Chartered; for example, Hong Kong’s rebound came from a revival in private consumption, with only limited recoveries so far in investment and trade.
©BLOOMBERG
“Forecasters always seem to underestimate the ability of the Asian tigers to rebound from recessions,” said The Economist. In the aftermath of the 19971998 crisis, many argued that the region’s success had been a complete sham and that many countries were doomed to a decade of lost growth. “Instead, the tigers came roaring back.” The recovery after the tech-driven recession of 2001 was also
Asia’s tigers are roaring again
Unexpected growth isn’t just happening in emerging Asia. Elsewhere too, the “drumbeat of recovery seems to grow stronger”, with the improvements in France, Germany and Japan, said the FT’s Lex column. But don’t celebrate too soon. In Japan, there isn’t yet “a convincing picture of an economy that is on its way to sustainable recovery”; government spending drove the rebound, with business investment and residential construction “still in a swoon”. France
and Germany were buoyed by a “perky contribution from net exports”, which was really the result of falling imports – a sign of weak domestic demand. The global economy is stablising, but recovery outside emerging Asia is likely to be muted, said Capital Economics. Even there, the “heady growth of the second quarter will not be sustained”. But the growth should be solid enough for central banks to start hiking interest rates across the region over the next year – “well ahead of likely rate moves in the US and Europe”.
SA economy
Does your medical aid have enough cash to pay the bills? “More than half of South Africa’s R8m medical aid members are either broke or fast running out of funds to cover dayto-day medical expenses.” That’s the consensus of a recent Sunday Times study. Just last week, industry experts warned that “even a top-end comprehensive medical aid was no longer a guarantee of adequate coverage”. They claim, that “as early as March, members had exhausted their medical savings, from which most out-of-hospital expenses come.” What’s even more concerning is they’ve left us (the payers of these funds) utterly in the dark. According to the Council of Medical Schemes, last year it received “more than 1,000 complaints about
The bottom line reached on Wednesday to buy the crypt above Marilyn Monroe’s (right) final resting place.
£900,000 What Formula One star Jenson Button is selling his Bugatti Veyron for.
R200,000
The amount Johan Paul Kleynhans, a board member of Nissan SA is suing consultant Brian Reid for calling him a “Typical f***ing Dutchman”. Brian is counter suing for R250,000 after being called a “Soutie” and a “k****boetie” in an altercation outside the Woodhill Golf Estate.
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21 August 2009
Apparently, he said the first term didn’t worry him as he was proud to be a soutpiel.
$35m This is how much South Africans are suing KPMG for in a failed foreign exchange scheme. 889 citizens have grabbed their pitchforks and torches and, led by Durban businessman, Sergio Domiro, have laid a class action lawsuit against the global auditing giant.
$101,500
What an Olympic gold medal is
worth at auction. Gold medals are actually just silver medals coated in no less that six grams of gold, but that didn’t stop swimming sensation Otylia Jedrzejczak. She managed to raise this amount for a Polish children’s hospital when she sold her medal.
£5,000 What Tesco believes it lost when one of its cash machines started paying out double the amount requested. A long queue built up at the cash machine in Hounslow, west London, which wasn’t taken out of service until five hours after the glitch developed.
©SAM SHAW/REX FEATURES
$4.5m What bidding had
news schemes that were not paying bills”. Did you hear about that? Me neither. But is this situation really as drastic as it sounds? According to Alain Peddle, head of research and development at Discovery Health, last year “only 17% of Discovery members had run out of funds by May, and 42% by September”. This, coming from the largest medical scheme in the country – with over 2m beneficiaries – is worrying indeed. So what do we do now? First, ignore the advice of Fedhealth principal officer, Peter Jordaan who believes “you get what you pay for”. What rubbish! An independent study performed by claims administrator, Anesh Moodly, shows you need more than “R6,000 a month” to cover the annual day-to-day expenses of a family of four. Parliament’s health portfolio will meet with medical aid providers to discuss the erosion of member’s benefits in the next few weeks. Till then, sit tight… and be prudent with your available funds.
Brazil mean the world will not have enough sugar for a second successive year.” And analysts predict that come September next year, “global demand will exceed output by as much as 5-million tons” – leading to a record two year shortfall in sugar supply. That’s serious. But can you make any money from this situation? If you believe the hype from local sugar producer, Illovo (JSE:ILV), yes you can. In the last six months, the price of sugar has rallied so quickly, it’s shot up “more than 70%,” reports Fin24’s Shaun Harris. And, just last Tuesday, Illovo reported that it expects to produce 1.98m tonnes of sugar this year. That’s a
Add this to the fact that “the rand is unlikely to strengthen significantly,” and the current situation is sure to put a “spring in the step” of this sugar producer. In the six months to end-September 2008, Illovo reported a 30% rise in revenue and a 31% increase in its operating profit. Its net profit for the period increased 35% to R385.5m. Now that the fundamentals are turning in its favour, analysts expect Illovo’s annual results to reveal a handsome 25% increase in headline earnings.
The way we live now California’s hotels have seen occupancy rates plunge in the recession. Some hotels are battling this with extra services and amenities, but one has done the exact opposite. The Rancho Bernardo Inn sells rooms on a sliding price scale based on what you’re prepared to live without. Rates start at $219 per night dropping to $159 without air conditioning, or $109 without sheets and pillows. The lowest rate is $19, for a room with no bed, no toilet paper or towels and only one lightbulb. But you still get access to the hotel’s leisure facilities, including a spa and golf course. So far, 240 people have booked rooms at the rockbottom rate.
Companies
Can you make money from the sugar shortage? 22 cents. Doesn’t sound like much. But, that’s the current price for a pound of sugar on the open market. It’s the highest the global sugar price has been in 28 years. And it’s creating quite a stir... According to a report in the Business Day: “Damaged crops from India to
Vital numbers
62% increase in production from the previous year. At the current sugar price, that’s a whopping R443.5m in expected revenue.
Best and worst-performing shares Winners
% change Price
Losers
% change Price
% change
FTSE 100 Nikkei S&P500 Nasdaq CAC40 Dax Top 40 All Share Rand/Euro Rand/Pound Rand/US$
*4689.67 **-1.38 10204.00 0.46 996.46 -1.61 1969.24 -2.00 3450.34 -2.10 5231.98 -3.13 21873.00 -3.35 24260.00 -3.00 11.38 -0.80 13.29 -0.20 8.03 -0.07 *19 Aug ** since 13 Aug
Winhold (WNH)
9.09%
120c
Reunert 5.5%P (RLZP)
-25.00%
150c
Wooltru 6%P (WLOP)
8.91%
110c
SilverB (SVB)
-21.21%
130c
Hwange (HWA)
8.00%
540c
DiamondCP (DMC)
-20.00%
200c
Glenmib (GMB)
7.45%
101c
Shoprit6%P (SHP1)
-19.33%
121c
NEPI (NEP)
7.14%
2475c
Blue (BFS)
-11.11%
200c
Cenmag (CMG)
7.14%
300c
Putprop (PPR)
-10.00%
450c
S.Ocean (SOH)
6.54%
163c
Angloplat (AMS)
-9.56%
63395c
Metmar (MML)
6.25%
425c
Sentula (SNU)
-9.37%
300c
Sable (SBL)
5.88%
1800c
JDGroup (JDG)
-8.89%
4100c
Brimston-N- (BRN)
5.45%
580c
B&W (BWI)
-8.39%
142c
Weekly change to JSE stocks as 19 August 2009
4
21 August 2009
5
the markets
Is the dollar doomed? “Just a week after the Trade-weighted US dollar exchange rate dollar hit its lowest level Alt-A for ten months, the main and the US trade balance talking point in foreign-$25bn 120 exchange markets is -$30bn US trade balance (LHS) whether the US currency 110 -$35bn Trade-weighted US dollar is about to strengthen,” -$40bn exchange rate (RHS) 100 says Peter Garnham in -$45bn -$50bn the Financial Times. 90 -$55bn After a payrolls report -$60bn showed that the US 80 -$65bn economy lost far fewer 70 -$70bn jobs than expected in July, the greenback was Jan Jan Jan Jan Jan Jan Jan Jan 2002 2003 2004 2005 2006 2007 2008 2009 Source: Source Deutsche Bank/ OECD buoyed by speculation that America is past the bands, also suggest undervaluation, says worse and could recover before Europe Lex in the FT. So while many factors can and Japan. cause currencies to move in the shortterm, fundamentally “the dollar now Given those improving growth prospects, looks a good bet”. the dollar now looks undervalued against both the euro and the yen, says Philip Some of this reasoning may be optimistic, Wee of DBS Bank. Ongoing weakness is says John Higgins of Capital Economics. “inconsistent with the improvement in America is likely to grow faster than the US current-account deficit and the most developed countries next year, but deterioration in the current account of “not by as much as the consensus now both Eurozone and Japan”. The trade expects”. And “the Fed will be in no deficit has shrunk to levels not seen since hurry to raise rates”. “Investors expecting 2001 on lower imports, stronger exports the dollar to receive some support from and lower fuel costs. relative interest rate differentials are also likely to be disappointed.” Meanwhile, the eurozone deficit in the first five months was €64.7bn (R756bn) But the dollar isn’t doomed. Rising risk against a full-year deficit of €93.8bn appetite has led many investors to (R1trn) in 2008, while for the first time dump dollar assets and pile into riskier since 1980 Japan has run a deficit for ones abroad. Yet the global recovery is three straight quarters. In addition, two likely to disappoint, “which could other indicators, the difference between trigger a fresh wave of safe-haven interest rates in the US and the Eurozone demand for the US currency”. So even if and the weighted average of the dollar US growth is weak, the dollar “still has exchange rate against major trading ample scope to rally”. partners compared to historical trading
5
What diving dividends tell us about stocks Tumbling dividends have left investors “damned to give more than they get in return”, says Jeremy Warner on Telegraph.co.uk. In the first half of this year, UK-listed firm raised some £51bn (R677bn) in new capital, according to an analysis by share registration firm Capita Registrars. At the same time, they paid out just £28bn (R372bn) in dividends, down 10% on the same time last year. Such a gulf is “rare, if not unprecedented” – “even in the recessions of the early 1980s and 1990s, it didn’t happen”. Unsurprisingly, banks were the worst offenders; they accounted for most of the new equity raised, while their total dividend cut of ‘only’ 29% was propped up by relatively strong payouts from HSBC and Standard Chartered as RBS. Lloyds and Barclays dropped their dividends altogether. Now, with profits down and firms hoarding cash, “the pressure on dividends looks set to continue well into next year”. There might be a more positive way to look at this, says Lex in the FT. “If the economy is coming out of the bottom of the cycle, as the stockmarket rally would suggest, this fresh capital will act as a buffer to launch opportunities in a growing economy”. But with GDP still negative, mortgage lending tight and unemployment high, “this scenario seems remote”. Boards “do not cut dividends lightly”, so their recent actions suggest they are pessimistic about the outlook. So investors should be cautious. “Diving head-first into shares of companies nervous about their own capital requirements might be as risky as backing England to win back the Ashes.”
The big picture: India’s economy rained off
American car dealers have claimed for 411,624 deals totalling $1.72bn under the government’s car scrapping scheme, more than half of the $3bn budgeted for the programme. Toyota is doing best with 18.9% of sales, while the top ten traded-in vehicles are all made by US firms. But the boost may wane; car-shopping site Edmunds.com reports that users’ plans to buy soon are down 31% from the July peak.
The monsoon rains are crucial Cumulative rainfall to the success of India’s 1000 harvest – and given that 900 Normal 800 agriculture accounts for almost 700 one-fifth of GDP, pretty 600 19% Below normal 500 important to its overall 400 Official economy. So this summer’s 300 deficient 200 rainfall weather is not good news. Actual 100 As the chart shows, cumulative 0 08 22 06 20 03 17 31 14 rainfall is running more than Jun Jun Jul Jul Aug Aug Aug Sep 19% below the long-run Source: India Meteorological Department average, the worst monsoon since a severe drought in 2002-2003. Rains have picked up in recent days, but it’s not yet clear whether this will be enough to prevent large shortfalls in rice, wheat and sugar crops. A poor harvest could take 1%-2% off GDP growth for this year, says Philip Wyatt of UBS.
21 August 2009
millimetres of rainfall
Statistic of the week
the markets
The property slump is a global problem – and the worst is yet to come and prices, but in Spain and Ireland “vacancies are surging, property prices are plummeting and cranes are standing idle”. Rents in Moscow are down 63% and one-fifth of space is empty. In Asia, business centres such as Singapore, Hong Kong, Mumbai and Shanghai have seen rents fall 30%-50% – and with plenty of new space coming on stream in many cities over the next few years, a quick rebound looks unlikely. Investors are feeling the pinch almost everywhere, despite record low interest rates, reports the Royal Institution of Chartered Surveyors. More than three-quarters of the 27 countries in its quarterly survey reported a rise in distressed sales.
After losing heavily in the dotcom crash, many institutional investors moved money into commercial property, believing that it would diversify their portfolios and reduce their risk. For several years, this bet paid off handsomely. The strong global economy and cheap finance pushed up both rents and capital values. But when the global recession hit, commercial property unravelled along with most other assets. Prices have slumped; the landmark John Hancock Tower in Boston, which was valued at $1.3bn in 2006, sold for just $660m. American commercial property indices have declined by 30% already and could fall as much as 50% before the crisis is over, says Ray Torto, chief economist of property services firm CB Richard Ellis on ABC.net.au. The worst of the fallout is yet to come. “The albatross around the neck of the commercial real estate industry is the refinancing debt.” Many deals will need to be refinanced over the next few years,
©PHOTOLIBRARY
“The terrible performance of the Japanese equity market over the past 20 years is well known,” says The Economist’s Buttonwood column. “It is easy to forget that property prices have suffered almost as much.” Japanese land prices are 58.5% below their 1991 peak and commercial property prices are 73% down from their highs. Does the same fate await property investors worldwide in this crash?
John Hancock Tower, Boston: now just $660m yet the value of the property is currently far below the value of the debt outstanding on them, meaning many borrowers may be unable to roll over their loans and will go into default. This will pose a huge problem for the US banking industry, already shattered from enormous losses from the residential property bust; many mid-sized regional banks that largely avoided damage in that bust are exposed to commercial property. But while America is especially hard-hit, the bust is a global problem, says The Economist. France and Germany have seen only modest declines in rents
There are a few positive signs in some markets, such as Hong Kong, where property giant Hysan Development reported better rental income in its latest results. In Britain, “transactions now seem to have found a floor”, says Kelvin Davidson of Capital Economics; after plunging from a peak of around £6bn (R80bn) per month in late 2007, they’ve stabilised, albeit at a historically low £1.4bn (R196bn) per month. Last month, supermarket Tesco and property trust Land Securities both managed to issue commercial mortgage backed securities (bonds secured against the cash flows from properties), the first such deals since 2007 in the US or Europe. But investors should not get too excited yet, says The Economist: as Japan can testify, downturns in this market tend to “last for years rather than months”.
China: leading indicator for world markets? “Stockmarket bulls ought to look at China, which has become a good signalling tool for investors in equities,” says David Prosser in The Independent. The domestic market – which is closed to almost all foreign investors – is down 16% since the end of July and “not far off falling back into bear market territory”.
The CSI300 index 6000 5000 4000
the market ahead of the 60th anniversary of the Communist Party taking power in October, perhaps by ordering the national social security fund to buy shares.
Still, the mood in Shanghai is getting gloomier, shrugging off efforts by the market regulator to talk up improving 2000 fundamentals as justification for the rally. 1000 March 9 ,2009 to current China’s market may fall another 10% as a “Investors are almost convinced that the Jan Jan Jan Jan slowdown in new bank lending continues good days have come to an end,” says 2006 2007 2008 2009 to drain liquidity from stocks, says Andy Wu Kan of Dazhong Insurance in the Xie, formerly of Morgan Stanley, on Bloomberg.com. South China Morning Post. “The regulator can do little to arrest the decline.” Whether an end to China’s bull run will signal the “We’ve seen the peak of this market cycle.” But the bubble is same for the rest of the world remains to be seen. unlikely to burst fully, since the government will try to support 6
21 August 2009
3000
sector of the week
Can solar energy survive a price war? choked off, demand for solar panels from businesses and homes has plunged. Yet “despite PV demand shrinking 17% this year, so much cell manufacturing equipment was ordered and installed over the past year that capacity is still expected to grow 56% this year”, says Charles Annis of research group DisplaySearch. The risk now is that huge over-supply could result in the failure of several cell manufacturers.
by Eoin Gleeson
©PHOTOLIBRARY
Only one statistic really matters in the green energy war: $2 per watt. That’s how cheaply a brand new coal-burning plant can deliver electricity. It’s also the figure that makes scientists working on wind and solar technology wake up in a cold sweat at night. For the last 20 years, they’ve been racing to come up with a technology that matches coal watt for watt. Solar scientists think they’re getting closer. The progress of solar technology is measured against the initial cost of the panels. Siliconbased photovoltaic (PV) panels dominate the industry, selling at around $3 a watt in recent years. But a new generation of thin-film technology has brought the cost of manufacturing down to $1 a watt. That doesn’t mean parity with coal. Taking installation costs into account, industry leader First Solar reckons it has to bring manufacturing costs down to $0.65 per watt to achieve that. But the lower cost of thin-film panels had threatened to make PV cells relics of the green energy war. But not anymore. One thing has held back PV cell manufacturers – the cost of their raw material. As mass production of cheap PV solar cells started, the surge in demand saw the price of silicon soar, and solar manufacturers were forced to scour the earth for new supplies. But after three years of misery, there is now an abundant supply of silicon. On the one hand, high prices caused producers
And there’s another potential problem. It may be getting cheaper, but solar power still has It’s getting cheaper, but can it ever compete with coal? little chance of competing with coal without government subsides. But to ramp up production. On the other, with governments ratcheting up debts to the recession hit demand for the kick-start their economies, the generous material. That’s hammered the tariffs they’ve been offering to install material’s price – the new contract price solar power are under threat as they of silicon for delivery in 2009 is down come under pressure to cut spending. 50% on a year ago. At these levels, Spain, which accounted for more than leading makers of crystalline silicon PV 40% of solar installation last year, has panels can now afford to sell at below cut aid to the sector. Germany will $2 a watt and still make a profit, probably soon scale back its feed-in-tariff according to New Energy Finance. policy, which offers to buy electricity from solar installations at inflated prices. That heralds the start of a price war in But China and America have promised the solar industry. As PV manufacturers huge support for solar in their recent threaten the cost advantage of thin film stimulus packages. cells, the price of panels will be slashed. Thin film producers have already cut Those left standing after the shakeout production. First Solar has taken should profit as demand for solar power aggressive action – sacrificing profit recovers. As thin film pioneers (see box margins by introducing rebates in a bid below) keep innovating, they will have to cling to its cost advantage. the upper hand as the solar industry goes to war. We look at the key stock to watch The price war comes at a bad time for in the sector below. the solar industry. As credit has been
The best bet in the sector – but don’t buy in just yet First Solar (Nasdaq: FSLR) is now producing solar cells at $0.87 per watt. The pioneer in thin cell manufacturing is also the industry’s clear leader on costs. The group recently announced that second-quarter earnings had doubled, beating Wall Street’s estimates. Despite falling prices, its gross profit margin rose to 56.7% from 56.3% last quarter.
350 300 250 200 150 100 50 Jan
Unfortunately, those results were boosted by 2008 accounting jiggery-pokery, reckons Bill Alpert in Barron’s. Earnings were partly lifted by realising $84m in revenue as a result of reclassifying an investment in a German solar farm as debt rather than equity. The real story for now is
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21 August 2009
that First Solar is burning through cash, with cash flow turning negative in March. That raises concerns about how long it can Figures in dollars afford to pay rebates to hold onto clients in Germany – a key market for the firm, accounting for 74% of sales last year. On the upside, the stock has fallen a long way amid the market turmoil (down 50% since we tipped it last year), and aims to move into Jan the US and China to diversify. And as the 2009 leader when it comes to low-cost solar power, we reckon First Solar will be one of the major survivors in the sector when solar bounces back. But if you don’t already hold it, wait for the price war to play out before buying in.
First Solar
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.
When a company outdoes itself by 73%, get shares Tip of the week: “Engineering a rewarding return,” says Finweek It’s hardly surprising that most of us are completely unfazed by the deluge of poor results streaming from JSE listed stocks. But, when a company releases an announcement warning that its coming earnings are going to be much more than previously thought – you have to stand up and take notice. And that’s exactly what Howden Africa Holdings Limited (JSE: HWN) has done. When a company determines that its financial results for the reporting period are going to be more than 20% different from the previous reporting period, it
has to inform the market. And Howden surprised on the upside. The company expects earnings to be “73% higher than last year,” as Sikonathi Mantshantsha notes in Finweek. Over the next week, Howden’s will release its much anticipated results. So what does Howden do? This company focuses on the supply of fans, compressors, rotary heat exchangers and gas cleaning equipment. The group supplies vital industries including mining, cement production, petrochemicals and power generation. It boasts over 3,500 employees. Of the various companies the
Gamble of the week: Coronation Fund Managers (JSE: CML) The last week showed us we aren’t out of the woods yet. The JSE bolstered a great performance over the last few months, along with global markets. But, it’s been a volatile week. The JSE’s been bouncing all over the place. So the question remains: What’s in store? Reports from analysts and commentators are mixed. The markets may be pulling back slightly, before getting back on their way northwards. If markets consolidate over the next couple of months, this counter should be right up your alley. It’ll allow you to buy into this asset management company at a discount. Coronation Fund Managers Limited (JSE: CML) offers your
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21 August 2009
group holds, Howden Technology sits at the cutting edge of engineering. Its expertise lies in thermodynamics, acoustics, aerodynamics, rotor dynamics, and stress and vibration analysis.
portfolio an element of diversification. If you’d rather let a portfolio manager pick your stocks for you than have to select them yourself, then Coronation is right up your alley. Coronation is one of the largest asset management companies in South Africa. According to its website, it has assets in excess of R150bn. It offers individual and institutional investors access to both global and local expertise across all asset classes. This includes specialist Global Emerging Markets, Africa and Private Equity units. It has offices in Botswana, Ireland and, of course, South Africa. Its clients include some of the largest retirement fund management, medical schemes and multimanager companies, as well as insurance and major banking groups, amongst many others. It also offers international, personal and institutional funds. Coronation has a long, proven track record. It’s emerged unscathed from economic rumblings by paying out a solid
who’s tipping what In June, Howden reported that it increased its order books since the end of last year. As Mantshantsha comments in Finweek, “it managed to ‘convert’ a number [of orders] linked to Eskom’s capital infrastructure programme”. Howden engineered “solutions” to facilitate Eskom’s drive for a new power generating plan. It supplied boiler fans, industrial fans and heat exchangers. And we all know how much Eskom has to do to get South Africa’s electricity supply back on track after years (or perhaps that should be decades!) of neglect. The deal with Eskom helped Howden out of a sticky spot. There were some delays on “large value environmental tenders it had won”. But now Howden is all guns-a-blazing and the market should reward the company for its fantastic performance in these trying times. Not only is Howden looking good for a place in your portfolio for capital growth, the company pays a generous dividend too. It’s currently sitting on a dividend yield of 3.05%. It’s trading on a PE of nearly 9, which looks slightly undervalued at the moment. Howden looks set to shine as 2009 ticks on and beyond. And, as Mantshantsha remarks in Finweek: “Those who buy the share at the current price might realise they have engineered themselves a cash positive investment.” Buy. Recommendation: BUY at 820c Market capitalisation: R538.979m
Turkey of the week: “All hat and no cattle” – Financial Mail The global financial meltdown hit the banking sector the hardest. But, property has hardly come out the other side unscathed. The residential property market, both here and overseas, is struggling. The commercial property arena hasn’t suffered just as badly, but things are hardly rosy here either. So if you’re in the game of property development and investments, you’re probably wishing you weren’t at the moment! It’s tough out there and it looks like it’ll be 2010 before we see recent interest rate cuts positively affect the property market. One company struck hard by the current economic turmoil is AltX listed Pinnacle Point Group Limited (JSE: PNG). From mid-November 2008, the share has tanked 87%. Not a nice position to be in. As Jamie Carr highlights in his Diamonds & Dogs column in the Financial Mail, Pinpoint’s “had to raise R250m of working capital quick smart just to keep it trading”. Absa, as a major shareholder, has come to the rescue, “underwriting a rights issue and bunging in a bridging facility”. But, as Carr comments, “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”.
dividend for years. And if you’re wondering what constitutes a solid dividend – just look at the dividend yield. It’s a very impressive 6.10%. Along with its stable financials, the company’s a prize winner. It’s won the Raging Bull Award for the “Best Unit Trust Company in South Africa” an astonishing three times. And, on a more socially conscious side, has managed the Nelson Mandela Children’s Trust free of charge since 1997. The great thing about Coronation is the way the share price tracks the international market... Just like an index tracker. So, when the market rises, so does Coronation. And, as an asset management company, its share price is predominately based on the value of its underlying assets. So, if the market retreats slightly – grab your chance to get into this share at a bargain price.
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Pinpoint concentrates on South African property development. It recently added Lagos and the Seychelles to its list. It concentrates on luxury lifestyle, retirement and residential estates. It primes itself as a “major property development company on the African continent”. Pinpoint expects the current value of its existing development, which it values in excess of R35bn, to be realised over the next ten years. On a current share price of a measly 13c, even the most inexperienced investors will sniff out something awry. Especially when you consider that the share was trading up to 100c/share late last year. With the helping hand of Absa, the company’s fortunes could change in the coming months. So, it might be worth sticking Pinnacle Point onto your watch list and keeping an eye on it. Avoid for now. Recommendation: Avoid Market capitalisation: R595.372m
Purchasing the share rather than buying into one of Coronation’s funds makes sense. If you buy into one of its unit trusts, you’re cutting down your potential and you’ll also be paying management fees. If you buy the share, you get capital growth and a fantastic dividend for your trouble. I know which option I’d go for. As markets recover and stabilise over the coming months and years, Coronation will grow and prosper with it. The share has risen nicely since the market lows of March and is worth stocking up on at its current price of 705c for the long-term. If the market corrects, dive in and grab some more. This is one for the bottom drawer. Buy.
Recommendation: BUY at 705c Market capitalisation R2.218bn
best of the financial columnists
Christopher Caldwell Time
Can China really save the world? Larry Elliott The Guardian
Zombies will be killed off in time Edmund Conway The Daily Telegraph
Why we should worry about phones Editorial The Economist
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It’s possible America is emerging from the worst downturn since the Great Depression, says Christopher Caldwell. But it “won’t be the same country” when it does. In spite of clichés about women’s ‘vulnerability’, since the recession began most jobs lost have belonged to men; about half in the “heavily male domains” of construction and manufacturing. Nor will Obama’s $787bn stimulus package redress the balance: it spends relatively little on infrastructure and a lot on female-friendly sectors such as healthcare and education. Then there’s the aid to state and local governments, where three in five employees are women. But women won’t be celebrating. “When women lose jobs, the victims are women. When men lose jobs, the victims are, um, women because they have to make up for that lost male income.” In reality, despite having messed up our economy, men are unlikely to cede control, but we do seem to be leaving the patriarchal model of family economics behind. It remains to be seen what will replace it. It’s comforting to believe that the Chinese government has “calmly produced a blueprint for global recovery”. But the reality is “somewhat different”, says Larry Elliott. Optimists hope that China will do the “heavy lifting for the rest of the world” by pouring trillions of yuan into infrastructure and growing its money supply faster than any other country, thus providing an outlet for exports from the rest of Asia and Europe and giving America time to recover. But “chucking money at the economy” will lead to over-investment, an explosion in bad loans and rising speculation. The regime is pursuing these policies because it’s “petrified” that recession will lead to social unrest. Sure, Chinese policy makers are worried by rising property prices and a doubling in the value of the Shanghai stockmarket, but whether they will do anything about it is another matter. “Tackling China’s economic problems will be tough, unpopular and time-consuming.” Yet the alternative is that China may drive “straight into the buffers”. It is too early to declare an end to the housing crash of the 2000s, says Edmund Conway. Figures from the Council of Mortgage Lenders reveal that the number of properties being repossessed in the second quarter fell by 10%, but this merely reflects the fact that the Bank of England slashed interest rates so low earlier this year that any customer with a standard variable rate mortgage saw a “major fall in their debt servicing costs”. But this is likely to have deferred, rather than avoided, the pain. The moment rates start to rise, hundreds of thousands of ‘zombie households’, currently being propped up by low rates, will struggle to meet their payments. The bank’s decision to cut rates wasn’t a bad one – it gave some households time to sort out their affairs – but it does mean the “recovery will take far longer than in previous recessions”. This is because, slowly but surely, each time the bank raises rates (which it must do to avoid a “nasty inflationary mess”), it will hasten another round of repossessions. Americans are abandoning telephone landlines at a rate of 700,000 a month. If the trend continues, the “last cord will be cut” by 2025, says The Economist. A quarter of households are now thought to rely entirely on mobile phones. Most people, including telecom operators, don’t seem worried, but they should be. Operators such as Verizon and AT&T are still largely run on ‘wireline’, despite diversification. The accelerating loss of landlines will put more pressure on profit margins as the high fixed cost of running the network is carried by fewer customers. Bills for captive customers, such as businesses with switchboards, will rise. And what if telecoms firms go bust? The future pension liabilities of AT&T and Verizon are as big as those of GM pre-bankruptcy. Regulators will have to decide whether to subsidise or bail them out, while also ensuring that emergency and other public services are still provided. The danger is that taxes on wireless and broadband services will be imposed to keep an “obsolete infrastructure alive”. Then the ‘wireline problem’ really will be everyone’s.
Money talk
©SIPA PRESS/REX FEATURES
Is this the end for patriarchy?
“It’s really exciting to be in a film that people want to see. I was having to pay people to watch my movies.” Actress Sienna Miller (above) on Sky News “We must all own up that without Les Paul, generations of flash little punks like us would be in jail or cleaning toilets.” Rolling Stone Keith Richards on the guitar pioneer who died last week, quoted in The Mail on Sunday “There are probably more annoying things than being hectored about African development by a wealthy Irish rock star in a cowboy hat, but I can’t think of one at the moment.” Writer Paul Theroux on U2’s Bono, quoted in The Mail on Sunday “We’ve all met people who feel the need to flaunt their wealth. Some people may be impressed by this, but those are the people you don’t want in your life.” Artist Jack Vettriano in The Sunday Telegraph “It’s being nationalised; you have to live on rations and are treated like s**t.” MP Alan Duncan on life at Westminster, in The Times
investment strategy
Which is the most useful profit measure? restructure all the time just to survive, so there’s nothing ‘exceptional’ about it. As for ‘exceptional’ asset write-downs – how many of us could borrow R1m, spend it on a property that then falls in value, then tell the bank to ignore it as a ‘one-off’ error? So you must use your own judgement as to whether an ‘exceptional’ really is a one-off or not.
by Tim Bennett Profit is the key to share price growth and dividends. But how do you measure it? Take Royal Bank of Scotland’s (RBS) latest results. For the half year to 30 June, ‘statutory’ operating profit (ie, following accounting rules) was £7.8bn. But after ‘impairments’ you get a loss of £244m. Further down the profit and loss account, you find a ‘loss attributable to ordinary shareholders’ of more than £1bn. Most firms report all these different profit figures, plus a few more. So what should you be watching out for?
4. Ebitda
For most sectors except financial services (which presents accounts slightly differently), this is a vital figure. For a retailer such as Pick ‘n Pay, it’s the difference between sales revenue less direct costs (costs that vary with sales, such as buying in stock). If sales are R300m and ‘cost of goods sold’ are R200m, then gross profit is R100m – giving a 33% gross margin. A sudden drop may mean prices are being slashed or supplier costs have risen sharply – both spell trouble.
2. Operating profit This takes overheads (indirect costs that don’t tend to vary with sales levels, such as salaries, rent and utilities) from gross profit. A decent margin means a business makes good money before funding costs (interest paid to banks and dividend payouts). But how worried should you be if it drops? It depends. Say a watchmaker sells 100 watches for R10,000, each at a margin of 50%, giving operating profit of R0.5m. A clothing retailer might sell 1,000,000 T-shirts for R10 on a margin
©PHOTOLIBRARY
1. Gross profit
Make sure you know what the figures mean of 5% – that’s also R0.5m operating profit. Say the operating margin for both falls by three percentage points. Profits at the watchmaker fall to R470,000. But the clothing retailer’s operating profits fall to R200,000 (1,000,000 x R10 x 0.02). So operating margins are particularly important in high volume, low margin areas such as clothing and food.
3. Beware exceptional items Directors argue that shareholders should not fret about one-off, unusual hits to profit. So accounting rules allow bad news (reorganisation costs, falls in the value of long-term assets, or losses from selling them) to come in below operating profit. Thus operating profit is in effect ‘profit before bad stuff’. But watch out. Many firms (telecoms, for example)
This is earnings before interest, tax, depreciation and amortisation. The last two reflect the wearing out of long-term, or fixed, assets. Analysts like Ebitda – stripping out subjective costs makes for a more reliable profit figure. But Ebitda also flatters directors. Before the credit crunch, telecoms firms, for example, could borrow (meaning high interest charges) to invest in new network capacity (meaning high depreciation charges), knowing that Ebitda, to which executive remuneration was often linked, ignored both. Many grew their companies rapidly using debt, and are now taking big ‘exceptional’ hits as acquisitions turn sour.
5. Retained profits Once a company has knocked all costs off sales, you get ‘retained’ profit – what’s left over as a buffer for future years. This matters because, subject to accounting tweaks, a firm can pay out cumulative past profits as dividends. So always check the payout ratio – what proportion of this year’s profit before dividends has been paid out. Too high and payouts may not be maintained. Next, check total retained earnings at the foot of the balance sheet – the bigger this is, as a multiple of the latest (or last three years’ averaged) dividend, the better.
FTSE ‘dogs’ mauled by the bear
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Investors seeking income, a decent capital gain and an easy life are often tempted by ‘dogs’ strategies. These involve picking shares with high dividend yields (one year’s dividend divided by the current share price) because a high yield points to a low share price. This in turn, say fans, is the way to bag an underrated company that should subsequently do well.
But how times have changed. Had you started using the same strategy in May 2007, your dogs would have turned R10,000 into R4,578 today, compared with R7,255 for the same invested in a FTSE 100 tracker. Worse still, your dividend income would have been battered as companies have slashed payouts to save cash.
So how is the strategy doing now? The Daily Mail’s Midas runs a portfolio of the ten highest-yielding shares in the FTSE 100. Every three months it’s reviewed, with low-yielding stocks replaced by higher yielding ones. It’s a nice strategy, and from 2001-2007, an investment of R10,000 would have more than doubled to R20,000. By comparison, the FTSE 100 rose 17% over the same period.
The lesson is that although high yields can point to cheap shares in a bull market (2001 to 2007), they can also be a bribe for taking the risk of investing as firms struggle with a downturn. With Capita Registrars forecasting that UK firms may slash dividends by a further 15% in 2009 with “little sign of any improvement next year”, the strategy is best avoided for now.
21 August 2009
personal view
3 China plays to inflate your portfolio What I would invest in now South Africa’s at a very difficult point in our mindset right now. Although the market turnaround is impressive, I’m a little hesitant.
This week, David Shapiro, Portfolio Manager at Sasfin Securities tells MoneyWeek where he would put his money.
Can this run continue? Or are we heading for a deeper, more prolonged downturn? Depending on who you listen to, the opinions differ widely on this subject. Personally, the fact that the run up has been so sharp it’s far exceeded the fundamentals behind it, means it’s unlikely the market will be able to sustain these levels for much longer. Many investors will seize the opportunity to take some profits and sit on the sidelines for now. In doing so, they’ll be cash-flush and this could, in the long-term, be the wrong move. The current interest rate environment means that, relative to inflation, you’ll actually earn a negative interest rate on any physical cash you hold. What can you do about this? I, like many others, would rather hang in there and stay in the market. Yes, the volatility will throw us around a bit – but, in the long-term, I’m happy to ride it out. Over time, I believe good companies will pick up again, and I don’t want to miss out on the upturn. But where is the best place to put your money to weather this storm? Personally, I’m sticking with defensive shares. Yes, interest rate sensitive cyclic shares (like Lewis and JD Group) will outperform defensive over time, but it’s still too early for aggressive buys. Yes, GDP is still negative. And yes, consumer spending is still cautious. But there’s no doubt the economy is ticking over. Life goes on – albeit in a cheaper, more spend thrift way.
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Right now, I like companies that benefit from Chinese growth. Unlike most of the world, China’s still expecting to grow by 8% this year. And its voracious need for core products, like iron ore and metallurgical coal, means demand will remain strong. To benefit from this, you can invest in onestop commodity shop, BHP-Billiton (JSE:BIL). The company has 28 high-margin projects in the pipeline. And this represents an expected capital investment of $24.8bn. It also has other medium-term growth options with expected capital commitments in excess of $90bn. No one would want to miss out on this! Now consider the fact that Chinese retail spending still remains robust. To gain access to this, invest in the likes of SAB-Miller (JSE:SAB). This might surprise you, but the world’s biggest beer market is actually China – not Britain or Germany. Following its association with CR Snow, SAB is the number one beer brewer in China. With more than 1.3 billion citizens, beer sales can only go higher. And if beer’s not your thing, profit from luxury goods with Richemont (JSE:CFR). According to the group’s regional manager: “China will be tomorrow's market; our prime importance is therefore to make sure we are established in China today.” Since China already makes up around 25% of Richemont’s revenue, there’s no reason why you shouldn’t get your slice of it.
The shares David likes: BHP-Billiton SAB Miller Richemont
12mth high 12mth low Now R247.44 R119.80 R201.35 R184.72 R130.10 R175.20 R47.23 R12.50 R20.81 * Share prices as at 19 August 2009
investing in property
The first rule of monopoly: Hotels are better than houses by Gary Booysen “Hotels are cutting back rates by up to 50% in a bid to boost flagging occupancies following the sharp downturn in South Africa's tourism trade,” says Joan Muller in Fin24. It’s not just the rooms that are cheap, but the whole hotel. The tourism industry has had the squeeze put on it, but most of us don’t have the dosh required to buy up a couple of hotels while prices are low. But there is another way to cash in.
The timing couldn’t be better... The hospitality sector is prone to volatility and overshooting and that’s what we’re going to take advantage of. According to Muller, the sector was, until recently, propped up by “sporting events such as the Indian Premier League (IPL), the Confederations Cup and Lion's rugby tour.” This lifted May and June occupancies, but as July rolled around sales figures tanked. Hotels are now cutting costs frantically. Staff are being laid off and the industry has thrown itself into reverse. Yet, as always, when markets panic they tend to overshoot themselves. They become overly conservative. And while they’re busy thinking “rather safe than sorry,” it’s time for you to clean up. You have a great buying opportunity here, but only if you’re quick...
So how do I get into the hotel business? Muller says that JSE-listed hotel fund
Hospitality Property Fund recently warned that its earnings will be down 20% to 30% on the back of an “unprecedented downturn” in the travel trading climate. The market has, however, priced in this number and the fund is trading at a historically low level. It’s definitely time to buy. Since its listing in 2006, it comprised two units (A and B). Hospitality Property Fund Unit A (JSE:HPA) is considered the low risk division. Unit A investors have first claim to distributions, which they enjoy at a rate of around 5%. Hospitality Property Fund Unit B (JSE:HPB), on the other hand, has far great earning potential but includes the associated risk. This fund owns 23 hotel properties, which are divided evenly between the corporate and leisure markets. The Holiday Inn Sandton, the Rosebank hotel and the mount Grace Country House Spa in the Magaliesburg are just a few of the prestigious names populating its portfolio. All these top end, premium hotels are going to be packed when 2010 rolls around. And in the hotel industry an uptick can happen in a matter of days.
The Hospitality Property Fund has property assets in excess of R3.1bn and is going to be around for a while. Its fate is intimately tied with that of South Africa. If you think it’s possible that tourism in South Africa will stay as depressed as it is now, then this share probably isn’t for you. But if you’re like the rest of us and know this is a country that’s growing from strength to strength, this could be
Get them while they’re cheap... sell them when they’re not Before you get into this billion rand industry you need to know what’s happening out there. Consumer Assist CEO, Andre Snyman says, “a dip in tourism now is a vital challenge.” Hotel occupancies across South Africa are down 15.1%. But remember the words of Warren Buffett, the world’s greatest contrarian investor: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Nick Wilson explains in the Financial Mail that the hotel industry is “very different” from the traditional commercial property sector. And when you stop to think about it, it makes perfect sense. Income from commercial property is usually locked into longer-term leases that are negotiated on a yearly basis (or even longer.) On the other hand, hotel rooms are seldom booked for longer than two weeks. He says: “There’s usually a lag between economic events and their effects on the commercial property sector, [whereas] the hotel property industry tends to feel these effects almost immediately.” This is a market that can turn up just as fast as it turns down. And all you have to do is wait till you’re flush because this Fund isn’t going anywhere.
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investment briefing
The NHS: a socialist nightmare? The NHS has recently been dragged into America’s increasingly vicious healthcare debate. Why all the fuss? And what will the outcome be? David Stevenson reports. Why are some Americans attacking the NHS?
The rising cost of US medical care
President Obama is proposing the The ‘real’, ie, inflation adjusted, cost of US biggest-ever reform to America’s 16.0% medical care ( Jan 2000 = 100 ) (RHS) medical care system. Some observers 15.5% even suggest that he’s planning to 15.0% introduce the US equivalent of the British National Health Service 14.5% (NHS). That’s got reform opponents 14.0% US medical care spending as hot under the collar. “When it % of personal consumer 13.5% seemed that the US healthcare debate expenditure (LHS) was in danger of hyperventilating, ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 and a few deep, calming breaths were in order, it’s just got more hysterical still,” says The Guardian. “Not content with claims that Barack Obama’s wish for reform represents Meanwhile, “the incentive structures in socialism, and that state apparatchiks the US lead to costly oversupply of would decide which doctor treats whom, services without consideration to the those who oppose reform are now value they provide. Experts suggest up to likening the hapless president to Hitler.” 30% of US healthcare spending could be saved by changing this,” notes The Spectator’s Henry Featherstone. As things Why is Obama pushing for reform? stand, premiums are rising fast and Of the total population of 300 million, deductibles (similar to the ‘excess’ on a 47 million Americans have no medical UK insurance policy) are also climbing. insurance cover, so have to stump up They now exceed $1,000 for almost 20% hard cash for healthcare as needs dictate, of those with insurance. assuming they can afford it. Medical costs accounted for 60% of American bankruptcies in 2007, and this includes How much is US healthcare costing? many who were insured. Further, since In 2007 the US spent $2.2trn (R15.4trn at medical insurance is often provided by then prevailing exchange rates) on employers, it can be another big cost of healthcare, more per head than any other losing a job. That’s proving ever more of major country. The proportion of a worry as the dole queues lengthen. personal consumer spending on healthcare
120 115 110 105 100
has been climbing steadily for years, as the chart shows, as costs have fast outstripped average increases in inflation. Judged on quality, access, efficiency, fairness and healthy lives, America’s healthcare provision lags behind Britain, Australia, Canada, Germany and New Zealand, says the Commonwealth Fund, a private foundation aiming to promote a better healthcare system for the country.
So what is the Obama plan? Part of the problem is “he doesn’t really have one”, says Nigel Hawkes in The Independent, “but is leaving Congress to bring forward proposals that meet three objectives”. These are “reducing costs, guaranteeing that every American has the freedom to choose their own health plan (including a public plan to compete with private insurers) and ensuring that all Americans have quality and affordable healthcare”.
Isn’t that what Americans want? It seems not. Fewer than 20% of Americans believe their healthcare system is in crisis, says Hawkes – a proportion that hasn’t changed in 15 years. That’s because, at its best, US medicine is outstanding, says Hawkes. “Based on health insurance, supplemented by Medicare for the over-65s, and Medicaid
Has any country got healthcare right? France – which offers universal healthcare, along with Germany – topped the 2000 World Health Organisation list of best national healthcare services (see main body for more on this). But US healthcare reformers should be looking across the Pacific. The Singaporean government spent just 1.3% of GDP on healthcare in 2002, while the combined public and private healthcare expenditure was just 4.3% of GDP. Yet infant mortality and healthy life expectancy rates are better in Singapore than in America (see map on following page). How come? Singapore’s secret is to mix market pricing with incentives to minimise costs and waste. So the government pays for basic healthcare, but recovers between 20% and 100% of its outlay from patients. A government hospital patient who chooses an open ward is 80% subsidised by the state, but patients may choose more comfortable wards with lower, or no, government subsidies. Meanwhile, private individuals must save up for
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potential medical expenses through mandatory pay deductions, which are supplemented by employer contributions, into ring-fenced personal healthcare accounts – the ‘Medisave’ scheme. But only approved medical expenses can be funded this way, while consultations with private practitioners for minor ailments must be paid for. So the private healthcare system, which has to publish price lists to encourage comparison-shopping, competes with public healthcare, which helps curb the prices of both. Further, to protect patients, a regulator monitors service levels and costs. In a nutshell, patients can choose what to spend their money on, while the government ensures they can afford healthcare. Singapore’s policies “show that the ‘free lunch’ offered by greater government control is meagre compared to the ‘free lunch’ offered by old-fashioned individual incentives”, says Bryan Caplan of Liberate Healthcare.
investment briefing
The cost and state of healthcare worldwide Canada 10% (18) 81 5
UK 8.4% (37) 79 5
USA 15.3% (2) 78 7
France 11.1% (10) 81 4
Mexico 6.2% (90) 74 29
Spain 8.1% (42) 81 4
Cuba 7.1% (63) 78 5
Argentina 10.1% (16) 75 14
Key
Russian Federation 5.3% (120) 66 10
Turkey 5.6% (107) 73 24
China 4.5% (144) 73 20
Country Spending on health as percentage of GDP (rank out of 193 countries)
Singapore 3.4% (174) 80 3
Life expectancy at birth Infant mortality rate (per 1,000 live births)
Source: World Health Organisation (all figures from 2006)
for the poor, the system at its best provides good care”. The US scores well on rapid access to elective treatment (second only to Germany) and preventive care, where it’s the best of all – largely due to managed care plans trying to save costs by keeping people out of hospital.
So which system is best?
How has the NHS been dragged into this?
Furthermore, although the defenders of the NHS claim it’s free, of course it isn’t – the 2007/2008 NHS budget added up to R20,000 for every man, woman and child in Britain. As David Rawcliffe on Adamsmith.org points out, although we know that the NHS is paid for by taxation, with a mix of national insurance contributions, stealth taxes, PAYE and government borrowing, it’s all too easy for us to forget how much we actually pay. What’s more, much of the money goes on administration. Despite a total payroll of over 1.5 million – worldwide, only the Chinese People’s Liberation Army, the Wal-Mart supermarket chain and Indian Railways directly employ more people – less than 50% are clinically qualified. That makes the NHS “a bureaucratic monstrosity”, says Tim Worstall, also on Adamsmith.org.
Americans have recently been served up many rumours about the NHS, says health economist Zack Cooper on The Huffington Post, “of long waits for care and patients being denied coverage because care is too expensive”. These, he says, “range from the benign to the outright asinine”, as waiting times are no longer a huge problem, and very little care is denied on the basis of cost. But much of the latest furore has been stirred up by Tory MEP Daniel Hannan – for “daring to criticise the National Health Service on American television”, says Nile Gardiner in The Daily Telegraph. Yet Hannan “deserves praise, not condemnation” for his comments, says Gardiner. He “has done his country a huge service by raising the issue of the inadequacies of the NHS”. 15
21 August 2009
Neither, says Featherstone. While total spending on health is very different – 9% of GDP in Britain and 17% in America – the extent to which both healthcare systems save lives “shows the US as the worst in the developed world and the UK not far behind”.
How does the NHS compare internationally? It only scored 18th place in the most recent World Health Organisation survey of national healthcare systems in 2000. But only 37.5% of its index was based on measuring healthcare itself. The rest gauged how that care was distributed and how it was financed. “When 62.5% of the weightings are given to the things the NHS is supposed to be good at” – such as financial fairness and equal care for all – says Worstall, “and still it only comes 18th, it must be pretty bad at providing the healthcare level and responsiveness... This might be a clue to why no one has ever bothered to copy the British healthcare system, for all we’ve been told for decades that it’s the wonder of the world.”
So is the US versus UK debate valid? Despite the furore, “insurance would still be the basis of the US plan, not tax as in the UK”. So much of the recent frenetic talk is well wide of the mark. More to the point, “instead of arguing about which flawed healthcare system should be adopted, the question should be: how do we deliver better outcomes for less money”? says Featherstone. That means looking elsewhere (see box).
MoneyWeek’s Roundtable
11 stocks to ride the second wave of recovery When global equities hit a blip earlier this week, we asked our investment experts which locally-listed shares afforded the perfect balance of growth and downside protection from the sluggish economy. Gareth Stokes: We’ve witnessed quite a correction in price levels on the JSE All Share Index – and most global equity markets – over the last couple of trading days. Have investors cottoned on to the fact that equity markets have outrun the real economy? And should we be concerned? Chris Gilmour: This is probably a fair interpretation of recent events. Worldwide we’ve seen markets running ahead of the real economy for some months now. While the real economy is turning around – and things are looking positive – any equity downturn is probably going to be relatively shallow. I expect the current pullback is nothing to get overly excited about. David Shapiro: I agree with Chris. We outran the real economy a long time ago. But that’s how markets operate – they run ahead for a while and then they pull back – shares trade at a premium to fair value and then at a discount. The point to note is that investors finally believe there’s going to be a recovery. I take exception to the commentators who say “it’s one thing to get out of a recession, but another thing to start growing again”. Once you’re out of recession you want to grow! When you’re out of intensive care you start doing things to aid your recovery. Perhaps I’m less of a cynic than most of these commentators because I believe investors will adopt the appropriate risk profile and start doing what it takes to rekindle economic growth.
clearly nervous about the September to October period. There’s been quite a run of “better than expected” data from the United States; but this isn’t enough to offset concerns over remaining systemic risks. Banks remain the weakest link with bad debts and foreclosures on the rise. And we can’t totally discount the chance of a second round of write-offs, bail-outs, etc. as the developed countries reassess their positions coming out of recession. Gareth: A number of international commentators have mentioned the massive piles of cash tucked away in money market funds, waiting on the sidelines to be put to better use. Do you think there’s enough cash to ward off a big market pullback, especially if fund
international cash returns. One of the warning signs is that money has been moving to equities out of fear of low cash returns. The stock market has become like a giant lightning conductor attracting every morsel of available liquidity. We could end up with an equity bubble way beyond fundamental support. If it’s just a normal pullback then I expect it to be shallower and shorter-lived than usual. Chris: This pullback is more of a consolidation than a sell-off. I don’t think that we’re going to plumb the depths that we saw back in November 2007 for example. And I’d be very surprised if we went back to the lower levels [on international markets] we saw in March 2009. We can look forward to a fair bit of weakness without worrying about total disaster. The reason – there’s a lot of liquidity around the world right now – investors will be selective about where this cash goes.
“The stock market has become like a giant lightning conductor attracting every morsel of available liquidity.”
Chris Hart: We’ve witnessed a huge runup in local equities and investors are 16
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managers take advantage of cheaper prices to channel these funds back into equities? David: Yes, that’s my view. There is a lot of speculation in the market – and speculators don’t like to lose money. Once the speculators have taken their short-term profit, the long-term investors will flood back. Hart: It depends whether there are systemic forces behind the current correction. If investors get a sniff of systemic risk then this money will stay on the sidelines – even at record low
Gareth: Tito Mboweni’s decision to cut rates by 50 basis points on 14 August took the market by surprise. Perhaps the governor was expecting second quarter GDP to come in slightly worse than -3%! Are there more interest rate cuts to come? Chris: The way I perceive it – this -3% for the second quarter had been bandied about for quite some time (for months rather than weeks). That is the figure that most people became comfortable with. And yet the governor chose to reduce rates by 50 basis points when at the previous MPC meeting he was Continued overleaf
MoneyWeek’s Roundtable Continued from previous page
absolutely adamant that would be the end of the interest rate cutting cycle. Call me naïve, but in my opinion this suggests that the Reserve Bank is more concerned by the state of the economy than previously. It also suggests that the bank might have expected the GDP figure to come in slightly worse than estimated. Gareth: Do you think the bank was forewarned by Statistics SA? Chris: You know it’s funny the way that governments all around the world claim they don’t see these numbers before they actually come out. In my opinion, the bank would want to know in advance so that their monetary policy decisions are appropriately taken. I’m sure the central bank had an idea about the likely GDP number when they met. Gareth: Does the Q2 2009 GDP number mean we’ll see further rate cuts? Chris: Without a shadow of a doubt. Especially after finance minister Pravin Gordhan’s recent comment that South Africa is in for a slower than expected recovery. Ironically, one of the reasons for this is we’ve had no form of fiscal intervention as yet. It’s been instructive to see what’s happened in the rest of the
world. The developed economies tried interest rates first of all and it didn’t have the desired effect. All we’ve had here is interest rate cuts – and we’ve still got relatively high interest rates compared to the rest of the world. I think that there’s ammunition left for further cuts. David: I think so. What surprised me was why they hadn’t cut rates before. You don’t have to be an economics professor to know the economy is growing slower. We just have to look at the manufacturing numbers, motor vehicle sales and other raw data. You didn’t have to read company results to know that things are not that great out there and that nobody is really sitting out there worrying about inflation. In fact, the word doesn’t even appear in recent corporate results. I would expect another half a percent cut even as early as next month. The bank can always reverse their decision if it proves premature. Gareth: Chris Hart – were you surprised the number came in bang on consensus? Hart: Not really. On a year-on-year basis we might see some further deterioration compared to the first quarter, but the worst is probably behind us. We’re facing a sluggish recovery. The one concern is we’re coming out of the
Our panel Christopher Gilmour Absa Capital
Chris Hart Investment Solutions
David Shapiro Sasfin
recession with very limited additional stimulus. This will mean the recovery will get off to a sluggish start. The good news is we haven’t borrowed too much from the future as is the case in the US and Europe. Gareth: My concern, with interest rates at their best level in quite some time, is we haven’t yet seen any indication of a turn in consumer confidence. What’s going on? David: This is one of the issues that people are asking about in the US too. I like a quote that Kevin Lings used earlier this morning – to “re-engage”. We’re trying to get consumers to “reengage” with the economy. It’s not that they haven’t got the money or the appetite to spend, but rather they’re feeling a little shell-shocked. And the bankers still expect bad debts to worsen slightly. Even so, people get bored with doing nothing with their money. Sooner or later they’ll start to take advantage of what’s out there! I think, at the moment, people are still feeling a bit battered and bashed – psychologically
© PHOTOLIBRARY
Chris: We’re not seeing a return in confidence in the official Statistics SA retail sales figures – far from it! But we Recent graduate? No job guarantees as employment declines!
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Continued overleaf
MoneyWeek’s Roundtable are seeing it in the retail furniture numbers. So the cuts are having some impact. I’m also struggling to get my mind around the apparent dichotomy of what we’re seeing in the official retail sales figures compared with the reports from the individual companies out there. It’s incongruous. Gareth: Recent corporate earnings confirm the stresses in the real economy. What can you say about numbers from Standard Bank, BHP Billiton and perhaps a company like Bell Equipment? Chris: Look, we knew some months ago that the earnings part of the PE equation would be the difficult part to get right. In the past few weeks we’ve started to see the actual earnings figures – and they’ve been in line with expectations. Hart: Banks have been particularly hard hit – but going forward their provisions for bad debt will have to increase. I think the banking industry lost about a third of profits in the latest round of reporting, and we’ll see another 20% to 30% decline next time around. David: Let’s begin with Standard Bank. A lot of the “bad” in the latest interims can be ascribed to Liberty. But this problem is being managed. I like Bruce Hemphill and I think he’s going to do a great job at the group. As for the rest – a number of the banks are getting rid of the excesses of the past. Some of the attitudes weren’t quite correct – because there’s a big difference between an actuary and an accountant! A financial report shouldn’t espouse “airy fairy” nonsense about smoothing out this or that. Today’s banking sector results are adjusting to changed circumstances. This is a very good sign and puts banks on a sounder foundation going forward.
when the economy turns – and especially next year when we get the benefit of the World Cup – I think the banks might have it quite nice. David: As far as BHP Billiton is concerned, they had a great set of results. It’s a very well managed company with the balance sheet certainly not under stress. We could highlight the disappointments at certain divisional operations, but iron ore, metallurgical coal and oil performed brilliantly. Great results! Chris: BHP Billiton is by far the best capitalised of all the big diversified miners. The group is seeing some nice movements in India, where industrialisation is growing apace, with the added benefit that India isn’t heavily dependant on export trade (as is the case with China). Locally, we knew that Bell Equipment was struggling and its latest report was an absolute shocker. Their poor performance is tied to the slowdown in mining and private infrastructure activity. They simply geared up through the boom times and are struggling to right-size through recession. David: Bell Equipment was caught out. I don’t think anybody expected the downturn to be a severe as it was. They expected commodity prices to continue and that China would save the world from recession. The results are reflecting that shock, but I think the stronger local companies will come out of it running.
quite expensive, although we had foreigners who were buying them last Friday after Mboweni cut rates. So I think there’s some scope there if we get further rate reductions. Cash is looking the least attractive of all. Anyone who’s holding cash must be thinking it’s time to get back into the market. Now is the time to start thinking seriously about sinking cash into equity. David: Interest rates are going to stay low. The core rate is sitting at around 6.5% to 7.0%. To earn 3.5% after tax is hardly challenging! I could just put all my money into British American Tobacco and beat that off the dividend. I’m setting my hurdle rate a lot lower this year than in the past. My starting expectations are a lot lower – and measured against that I won’t have trouble achieving returns in the market. Gareth: Are you pro gold under current conditions? David: No. You know what happens – I’m pro commodity – so if you want to throw gold in there then sure. But some of the gold miners are looking a bit expensive now. I’m still pro iron ore, Billiton, Sasol, the Chinese consumed commodities, etc. Chris: We’ve never been pro gold – it’s a barbarous relic – and we haven’t changed our view. Hart: My answer is a definite yes! Having said that, I hope I’m wrong. One has to be careful what one wishes for – because if gold remains strong it suggests a host of concerns about the global economy.
“A financial report shouldn’t espouse ‘airy fairy’ nonsense about smoothing out this or that.”
Chris: We must get the bank figures in perspective. Our banking system is probably – and I speak under correction here – one of the most robust systems in the world at this time. For the simple reason we didn’t get involved in subprime and the balance sheets remains relatively good. And the earnings by and large are still very good. From a PE perspective our banks are cheap. And 18
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Gareth: Despite unprecedented levels of market volatility, most fund managers believe the best performing asset class through 2009 and 2010 will be equities. Do you agree with this? Chris: I would certainly go along with that. We’d certainly be looking at equities. Bonds ran quite heavily in the early part of this year and were looking
Gareth: At one of the investment presentations we attended recently, the fund managers suggested that stock picking would give way to being in the right sector over the next couple of years. What sectors would you focus on? Chris: We’ve mentioned banks – I think that sector is looking good. The banks will be among the first to benefit when Continued overleaf
MoneyWeek’s Roundtable
© GETTY IMAGES
8700c. I also like MTN Group (JSE: MTN) which remains a top growth stock.
Naspers is well placed to cash in on the growing numbers watching pay TV Continued from previous page
consumers regain their confidence. Some of the credit retailers (like Lewis and Abil) are also looking good. A sector that has neglected in this market is the construction sector. People were nervous after news of contracts being lost in the Middle East. And yet Group Five posted strong results last week. I remember Brian Rees saying a couple of years ago that you’ve got to have your forward book at about 90% of current turnover. Below that you start running yourself into an untenable situation. And most of the locally-listed heavy construction plays are well above that. We expect public sector infrastructure spending to remain high for some time. Worldwide the so-called Marshall Plan (massive infrastructure spending) will be what pulls us out of the recession. Hart: In South Africa, cash at 7% it’s not completely out of the ballpark. It still gives you roughly 50 basis points per month. With equities, I’m not so sure. What I think is that one has to be careful going forward in terms of what price earnings are attractive. I think the financials have run too far at the moment. I would look at your consumer cyclical sector that will benefit as consumers and households come out of their foxholes. These will run on 19
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further interest rate stimulus – and I believe there’s another cut or two to come. David: I like to choose the stocks. You know what happens – for example, if you go into retailers, you’ve got JD Group versus Mr Price. So you’re going to say you’ll go for cash retailers. Even though JD Group can turnaround quickly, as can Ellerines and Abil, I’m still more comfortable with a well-run Truworths or Mr Price. Even if I like the sector, I want to be selective within that sector. Plus you can find good companies across all sectors. Gareth: Could you name your three favourite shares – perhaps something that balances growth prospects with a hint of defensiveness to ride out any future market downturn? David: I’m consistent in this. If I had to I would still stay with companies like BHP Billiton (JSE: BIL). That will be my main play. I like British American Tobacco (JSE: BTI). These are both Chinese plays. Naspers Limited (JSE: NPN) is another company I’ve been following for a long time. They’re looking a bit expensive now, but still worth a look. And you could consider something like Tongaat Hulett (JSE: TON) – I could see that counter a lot higher than the current
Chris: I think we’d go for BHP Billiton (JSE: BIL). The company is wellmanaged and offers impressive diversification in the resources sector. We’d go for Pick ‘n Pay (JSE: PIK) – we like the company and think there’s still a lot of potential in it. Management has rewarded investors with consistent earnings and dividend growth over a number of years. And I think we’d probably go with Murray & Roberts Holdings (JSE: MUR) in the construction space for all the reasons mentioned earlier. Government has committed to R787bn in infrastructure upgrades – and although some of these projects are already accounted for – the country needs similar expenditure to maintain growth prospects going forward. Hart: I’d include Foschini Limited (JSE: FOS) or Truworths International (JSE: TRU) to take advantage of the inevitable consumer-led recovery. They will certainly perform if we see further cuts in the interest rate. Despite my ‘concerns’ over a gold sector recovery I would add Harmony Gold (JSE: HAR). And I think if we do see any form of sustained recovery it will be led by the resources sector. Therefore I would pad my portfolio with something like Palamin (JSE: PAM). I have a feeling that copper will lead the base metal recovery worldwide.
Our Roundtable tips Investment Palamin BHP Billiton British American Tobacco Harmony Gold MTN Group Naspers Limited Tongaat Hulett Pick ‘n Pay Murray & Roberts Foschini Limited Truworths International
Code PAM BIL
Price 7300c 19935c
BTI HAR MTN NPN TON PIK MUR FOS
24825c 7414c 12860c 23151c 8740c 3550c 4771c 5480c
TRU 3735c Prices at 18-August-2009
entrepreneurs
A punter who revolutionised gambling coffins saying “death of the bookmaker”. That got Black onto the front of the Times Business Section. But it was fending off competition, rather than generating publicity, that proved the bigger obstacle. Six weeks before launch, a rival website, Flutter, popped up. It tried to copy the auction site Ebay. So someone offering odds on a bet of, say, £10, would simply be matched up with someone else who wanted to accept a bet of £10. But this limited bet sizes and the odds on offer. Betfair, on the other hand, could handle say a £1,000 bet from one punter by matching it with ten counterbets from other punters all prepared to wager £100 each. A year after launch, Betfair took out its rival by buying it.
by Jody Clarke Sitting in the garden of his 330-acre Surrey farm, Andrew Black, 46, is understandably proud of his achievements. In just nine years, the tousle-haired maths boffin has revolutionised the gambling industry with Betfair, the £300m-a-year online betting site. But if his grandfather – the antibooze, sex and gambling campaigner Sir Cyril Black MP – were still around, he probably wouldn’t think much of it. “A Baptist and leading man in the temperance movement… betting was completely off the agenda.” Top of the class in maths at Kings College, Wimbledon, Black went “a bit crazy” once let off the leash at Exeter University, spending most of his time at the bookies. Kicked out in his second year, he was forced to take a succession of “rubbish” jobs to makes ends meet. These included stacking shelves in B&Q, and working as a golf caddy, before a spell at GCHQ in Cheltenham led to the inspiration for Betfair in 1998. Locked out of the office at five on the dot every day, “I sat in my cottage with just too much time on my hands to do nothing.” A keen gambler, Black dreamed of an online betting exchange that would allow two punters to bet directly against one another. One would offer a wager, and the other would accept it. That way, gamblers could set their own odds and
MY FIRST MILLION Andrew Black, Betfair cut out any middleman, such as a highstreet bookie. After knocking the “bare bones” of it together on a computer, Ed Wray, a City banker and fellow bridge player, agreed to go 50-50 with him on the business. In June 2000, it launched from a “poky little office in Russell Square”. The £1m needed was cobbled together from family and friends after venture capitalists refused to back them. Some nifty marketing followed, including a procession through the City with
Betfair soon grabbed over 90% of the market, despite having limited money to spend on marketing, as word spread of its more flexible model. Taking 5% of the profits on every winning bet, the company turned over £1m after year one, and by 2005 was making profits of £12m on a turnover of £66m. With an 11% share of the business, Black – now worth £185m – will never worry about money again. However, he accepts that some may disappear on his new stud farm venture for flat racing. “I never did Betfair for the money or to get rich. I did it to do it. My grandfather always told me to go forth and conquer and do something amazing with my life.” Black’s assault on the gambling industry shows it was pretty sound advice.
©STEVE BISGROVE/REX FEATURES
The MoneyWeek audit: Tom Hanks
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• How did he make his money? Hanks made his big screen debut in 1979 in He Knows You’re Alone. The low-budget horror film earned 23-year-old Hanks £377. Five years later, Splash propelled him into the Hollywood A-list. By 1988, he was a big enough box-office draw to earn £1.1m for Big. In 1994 Hanks won his first Oscar for Philadelphia. By now he had discovered the path to serious Hollywood money – taking a cut of box office takings. He’s believed to have earned over £46m from that year’s Forrest Gump. His fortune swelled further in 1998 when he waived a fixed fee for Saving Private Ryan, opting instead to just take a cut of the profits. That decision is reckoned to have earned him over £24m.
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• What is he worth now? “Hanks Banks”, says Forbes. His films have taken $5.8bn at the global box office making him one of the world’s biggestgrossing actors of all time. Forbes also estimates that he earned $35m last year despite not starring in a film in 2008. This year he scored his biggest pay cheque to date – a rumoured £29m to reprise his role as Robert Langdon in Angels and Demons. • What does he spend it on? Hanks is a careful shopper – after a day’s shopping in London in 2005 he returned to every shop the following day because he had forgotten to collect his VAT refund forms. But he’s less careful when it comes to politics. A prominent Democrat, he once donated £6,000 to Bill Clinton’s legal defence fund at the start of the Monica Lewinsky scandal. That’s a cheque he later came to regret writing as the more lurid details emerged.
personal finance
Should you be considering debt counselling? by Karin Iten Are you or a loved one snowed under by debt? With the way the financial crisis is going and the rate unemployment figures have escalated, no one would blame you. But even if you’re not in trouble, the thought of rising debt may be keeping you up at night. • Is there an easy way out? Some may say that there is: Debt counselling. But is it really as easy as it sounds? Let’s investigate… • The aim of debt counselling is to restructure your debt in such a way that you pay off the minimum amount every month (via a long-term repayment plan) until you’re no longer in debt. Just like debt consolidation, this means you only pay one amount and you pay the debt back over a longer period. But, that’s where the similarities end. When you consolidate your debt, you don’t learn how to avoid these traps next time. BIG mistake! Unless you’re blindsided by an unexpected, unavoidable catastrophe (like your house burning to the ground), ten-to-one, you didn’t end up in debt from just one cheque. And here’s where debt counselling can help. When you choose this strategy, your counsellor analyses your spending habits and teaches you to avoid these situations next time round. As the saying goes: “When you know better, you do better.” Remember, the main aim of debt counselling is not only to get out of debt, but to figure out your financial weak points so you can fix them and stay out of debt in future. While attending these sessions, you’ll also get advice on a number of issues, including your budget. Thereafter, they’ll chat to your credit providers on your behalf. And, together, they’ll help you restructure your debt to achieve a manageable level based on your income and expenditure that suits your creditor too. Sounds great, doesn’t it? But is it really? Like any other form of financial healthcare, debt counselling has
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consultation. After that, your counsellor will charge you in the region of 5% of your monthly instalment (or up to R300 – depending on which is the smaller amount) for his/her services. That’s expensive. Let’s face it, you got into debt by spending more money than you had, right? Credit bureaus will be made aware of the fact that you’re in debt counselling. This may count against you later on if you apply for a large loan like a bond. Until you pay all your debt, you can’t get any additional credit.
Debt counselling is not “the easy way out”. Remember that. If you find yourself snowed under by rising debt, always approach your credit provider first. Explain the situation to them. And try to negotiate a plan of action if you’re unable to pay back your debt on time. disadvantages. So, before you grab onto this lifeline, consider the following:
If you’re not successful, only then seek the advice of a debt counsellor.
•
Warning: National Credit Regulator (NCR) doesn’t accredit all counsellors. So contact them (at info@ncr.org.za or 0860 627 627) for names of an accredited counsellor.
•
Your creditors won't write your debt off. Unlike insolvency where your assets are used to pay off your debt, with debt counselling you won’t lose anything, but will have to pay back every cent… with interest! Your counsellor will charge you an application fee of about R50 (excl. VAT) and a monthly service fee. Initially, you’ll pay R3,000 for your
And remember, you aren’t restricted to someone in your area – if you have email and access to a fax machine, you can find a registered counsellor online.
Tax tip of the week SARS is ready for Monday 31 August 2009? Are you? The provisional tax deadline for the first period of 2010 is on Monday 31 August. Are you ready? Remember: Don't base your calculation on an estimated taxable income that's less than the basic amount unless you motivate for the lesser amount first. The IRP6 return for the first period now includes a space where you must motivate your request. If SARS isn’t satisfied, you can request a revised estimate.
Avoid penalties and interest: Submit your IRP6 return well before the due date This’ll ensure SARS receives and processes your request in time. SARS will only evaluate your estimate if there’s a material difference between its tax payable and yours. If your reason for the lower estimate is acceptable, SARS will issue an IRP6A notice “Approval of Lower Estimate” and you’ll be in the clear! Matsika Vengesa, TaxConsulting, matsika@taxconsulting.co.za
profile This week: Andrew Hall
The trader whose ‘stratospheric’ bonus has landed Citigroup with a hot political potato
The “added wrinkle”, says The New York Times, is that Hall works in a corner of the trading world that appears “headed for its own infamy” following probes by regulators. One of Phibro’s strategies was to store oil in chartered supertankers until the price went up. That may be a legitimate tactic, says TheBigMoney.com, but given the anger at the pumps when gas hit $4 last summer, “it doesn’t look good”. You can imagine the headlines: “Citi’s $100m man bought oil and kept it off the market.” Oxford-educated Hall, 58, is an intriguing figure, says The Guardian. Tall, athletic
and bearded, he reportedly leaves his office most afternoons to go rowing “or engage in callisthenics with a ballet teacher”. Most on Wall Street are unstinting in their admiration of a legendary trader renowned for his gimlet eye and the steely nerve with which he carries through huge bets. Hall’s discipline is extraordinary, observes The New Yorker: He has the “fanatical dedication of an oarsman” – and it shows. Profits from Phibro, which operates out of a converted dairy farm in Connecticut, account for an uncomfortably large chunk of Citi’s revenues. So how did the son of a British Airways pilot trainer come to scale such heights? Hall’s first piece of luck, after graduating in chemistry, was to be taken on by BP to trade in its US operations. There, he caught the eye of Phibro, a century-old commodities house that had been incorporated into Salomon Brothers. By 1987, he was running the operation. He made his fair share of mistakes, says The Guardian: He lost $100m in the first Gulf War when he was wrong-footed by a plunging oil price. But, more often than not, his long-term gambles pay off spectacularly, most notably when he bought every single oil future he could find in 2003 and rode the wave as prices rose to top $150/barrel. When Phibro came under the Citigroup umbrella, the
©PATRICK MCMULLAN
British-born commodities trader Andrew Hall – a man who professes to hate publicity – now finds himself in the eye of the US bonus storm over a $100m payout and looks set to be the next “marquee villain” of the financial collapse. There is little doubt that Hall – who heads operations at the trading boutique Phibro – is owed his money under contract. The problem is that his contract is with Citigroup, which was saved from collapse by nearly $45bn of taxpayers’ money. To make good on the deal, Citigroup needs the blessing of the Obama administration’s pay czar, Kenneth Feinberg, says Slate.com. He has powers “to claw back” excessive compensation and is currently mulling over Hall’s case.
bank was happy to honour bonus contracts of “stratospheric proportions”, even by Wall Street’s standards. Now Hall is determined to fight for his pay-out – on grounds of legal principle alone, he says – even if that entails a “divorce” from Citigroup, says The New York Times. That puts everyone in an awkward spot. “It is hard to say which is worse: The inevitable outcry if Hall is paid $100m, or the risk that he might take his talents to a firm in which the public has no stake.” Bail-out politics is proving a remarkably tricky game.
The other traders making waves The resignation last month of Roger ‘the Dodger’ Jenkins – the Barclays rainmaker reportedly on a £40m pay packet – was considered a timely PR move. Maybe, says Tracy Corrigan in The Daily Telegraph – but news that the bank’s investment chief, Bob Diamond, has been dangling bonuses topping £30m to lure four commodity traders from JPMorgan shows an astonishing lack of restraint. Besides politicians and the public, JPMorgan has launched a complaint with the Financial Services Authority, arguing the package could “distort the market”. Is the gang of four’s lead trader, Todd Edgar, worth the fuss? On past form, he is, says Trader Monthly, which awarded him its Commodities Trade of the Year in 2007. That was for a “Fort Knox-sized heist” on the gold market, yielding JPMorgan
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$250m. To have the guts “to stick with a trade like that in a year when everyone is selling is unbelievable,” remarked a fellow trader. No wonder Diamond is prepared to pay big for the “golden surfer”, who gets his kicks wrestling the “gnarly” surf in Sumatra, Indonesia. “Todd... got the perfect storm. And he rode it out perfectly. Sometimes a year-round surfing habit can sure come in handy.” Another big player causing waves is star bond dealer Antonio Polverino, who has been lured from Merrill Lynch to statecontrolled RBS on a £7m “guaranteed bonus”, notes The Times. If Polverino pulls in the deals, he may turn out to be worth his salt. RBS chief Stephen Hester is certainly banking on Polverino: His own £9.6m bonus depends upon him delivering.
Spending it Travel
Three remote hideaways A spring break somewhere far away from our depressed economy is very tempting. Here are three of the best – and most remote – lodges and villas in the world.
1. Vil Uyana, Sri Lanka This resort “blurs the boundary between hotel and nature reserve”, says The Times. There are 25 vaulted wooden villas sitting over reclaimed paddyfields and guests can stay among paddyfields, over marshlands, above water or in the forest. The forest villas are the largest and most private, but all come with a plunge pool and sundeck. And even though you feel far from home, the onsite chefs whip up “fantastic food”. There’s plenty to see at Vil Ulyana too. The nature reserve attracts birds, lizards, crocodiles and even the occassional wild elephant. Rates start from $200 (R1,600) per night for a double room on a B&B basis. Visit www.jetwing.com.
2. The Fuselage Suite, Costa Rica For a unforgettable holiday, book into this former aeroplane, which has been transformed into a luxury lodge. The
1965 Boeing 727 offers “spectacular views” of the Manuel Antonio National Park’s rain forest from the balconies built onto its wings, says Julian Gavaghan in the Daily Mail. Inside, the cabins have been decked out with teak paneling and divided into two bedrooms, a kitchenette, dining Top right, Vil Uyana, Sri Lanka. Main picture: The Fuselage Suite, Costa Rica room, living area and two bathrooms. In the evening you can will help you spot the zebras, elephants watch the sloths, toucans and monkeys and giraffes that live in this part as settling into the trees for the night from well as big cats including leopards and your balcony. lions. © VINCENT COSTELLO
By Ruth Jackson
A stay in the Fuselage Suite of the Costa Verde resort costs from $400 (R3,200) per night. For more information visit www.costaverde.com.
3. 360, Shompole, Kenya Head to Shompole for the ultimate safari retreat. The “dramatically situated” 360 is named after the panoramic views this lodge offers over the Great Rift Valley, says Condé Nast Traveller. A telescope
The lodge has a dining area suspended over a swimming pool and two 5,000 sq ft bedrooms. It also has its own helipad so you can zoom off to the Maasai Mara or to Ol Doinyo Lengai, an active volcano across the border in Tanzania. A stay at 360 costs from $785 (R6,400) per person per night. Visit www.shompole.com.
Wine of the week: a really rare, red blend Bouchard Finalyson Hannibal 2006 R195 at exclusive wine retailers Usually people associate the Bouchard Finalyson estate with its excellent Pinot Noirs – the Galpin Peak, Tête de Cuveé Galpin Peak and the Unfiltered Limited Edition, which are all rated four and a half and five stars. Then there are its fabulous Chardonnays by Marilyn Cooper – the Kaaimansgat and Missionvale – but, today I want you to experience something different. It’s unusual to find single cultivar wines from Italian varieties Sangiovese, Nebbiolo and Barbera, and even more rare to
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combine these with Pinot Noir and Shiraz. But experienced winemaker, Peter Finalyson, has done just that. And he’s produced a beautifully textured wine with all the varieties blending in perfect harmony. I paired it with an interesting ostrich bobotie, while the others at the dinner table tried it with fish and medium rare steak. It turned out to be an ideal food wine for all. The unobtrusive oak ensured it went with the fish, yet it’s powerful enough to match a T-bone. What a delight!
Marilyn Cooper is a Cape Wine Master and Managing Director of the Cape Wine Academy.
cars
An exclusive and beautiful Alfa Romeo Alfa Romeo has produced many seminal cars over the past 99 years, and its 8C Spider lives up to an illustrious heritage, says Andrew English in The Daily Telegraph. Inspired by the 1930s original, the remake first made an appearance at a motor show six years ago, and there were no plans to put it into production. But, beseiged by pleas from the public, Alfa finally agreed to turn out 500 of them. There were three customers for every car. So now here’s the drop-top version. There will still only be 500 models, and all those that are destined for Britain have been sold already, but it’s a “fabulous, beautiful” car, and “pretty hard core” to drive. If you were lucky enough to get your order in, your wallet
will soon be £174,000 (R2.3m) lighter. The engine in particular is a “masterpiece”, says Ben Oliver in Car. It is “ludicrously loud, powerful and responsive with a slick, sharp shift” and it powers the car from rest to 100km/h in just over four seconds and on to a top speed of 305km/h. On the downside, although the Spider “changes direction with remarkable agility for a frontengined car”, the steering is “heavy and disappointingly lifeless” and the brakes “offer little feel”.
less, and Ferrari will still take your order”. True, but the Alfa has “beauty and sound and soul to match anything”, says Paul Horrell in Top Gear. The design is “sheer oozing palpitating glamour”; the engine is “epic” and “furiously responsive” and sounds so great “you can play tunes on the thing”. It is “exclusivity, beauty and performance in one glorious package”.
In all, you shouldn’t be too “gutted at having missed out on the Spider”. The looks, noise and price “make promises the chassis can’t keep”, and the Ferrari California “has it licked dynamically for £35,000 (R463,000)
The world’s favourite drop-top The Mazda MX-5 is the world’s favourite drop-top, says James Martin in The Mail on Sunday. And it’s easy to see why. The original 1989 model was inspired by classic British two-seaters such as the Lotus Elan and Triumph Spitfire, and it was a “light, cheap, simple sports car wrapped around a 1.6-litre engine”. And we loved it. Now the car is in its third generation. The latest models offer bigger engines, flappy paddle gear changes and even a folding hardtop roof in the Roadster Coupé version. They remain “pretty basic” inside, and six-footers are going to feel cramped, but the MX-5 is still “the
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only true sports car” you can buy for the price (from R300,000). “Drive it like a nutter, and it’s also one of the most fun roadsters out there.” At normal speeds, however, it’s beginning to show its age. “I’d go for a 1989 original.” Both new and used MX-5s topped a Which magazine drivers’ survey for reliable cars. “Owners absolutely love them”, used or new, as “few cars can offer so many smiles at sane speeds”. They have excellent handling, lively performance and a comfortable driving position. Buy it new and you’ll get tweaked engines and styling, which just make “a great package even better”.
blowing it
Visiting family in the UK? Don’t be whisked away! faces, from sporting heroes to style icons, music legends to opinion-formers”. Apparently Jensen Button is available for drinks if need be. To me, that sounds an awful lot like Harrods is offering a rent-a-friend service. Is it really that lonely at the top? Maybe it says something about the kind of person you are to have Harrods book your holidays. But what kind of an animal do you have to be that you can’t rustle up a few friends or family to join you on holiday?
© PHOTO LIBRARY
Did you opt for a British holiday instead of the usual spot? Then you probably had an experience similar to The Guardian’s Rachel Cooke. Rachel chose the seaside haven of Broadstairs for her “British vacation” this year – “dreaming of immaculate beaches, secret coves and a delicious supper of lemon sole which came out of the North Sea that very morning”. She was in for a bit of a disappointment. No delicious lemon sole was pulled ashore in Broadstairs that morning. And as she brooded over the choice of full English or a microwaved scampi on the laminated lunch menu that her boarding house had provided, Rachel began to get rather irate at herself for buying into the myth of the quaint British seaside town. She’s not the only one to make that mistake. British holiday bookings are up 16% this year, according to Lastminute.com. And creeping around in heavy traffic in dishevelled seaside towns, many disgruntled families will be cursing those international jetsetters.
The quaint British seaside town: Full of familiar faces and manic laughter. It’s Harrods’ new travel service. Yes, “what was Harrods by Appointment has now morphed into Harrods by Appointment Beyond”. For a minimum opening spend of £2,500 (R33,000), Harrods will sort out the kind of trip that money can’t buy – “from impressionist workshops with an artist on his houseboat to private chocolaterie cooking courses at the Ritz Escoffier School”.
But are they having any better a holiday?
But here’s the real deal.
Well yes, they are. But Matt Rudd in The Sunday Times has discovered something that suggests holidays for the uber rich might not be all champagne
“We all know that there’s no party without interesting characters,” explains Harrods. “So we look to complement your list with a handful of recognisable
Just picture that huddled group of celebrities. Each of them laughing half-heartedly at your stories. Then staring at the ground when you’ve finished. And grimacing as they swill back the free champagne. Terrible. So the next time you’re ordering an inedible lunch in a desolate British seaside town, count yourself lucky that you have people with you who actually enjoy your company from time to time. At least you haven’t paid £2,500 (R33,000) to spend a night being stared at by a half-cut Phil Collins, while Jensen Button schmoozes the date you’ve hired for the evening.
Tabloid money… leave me my high heels, says Judy ■ It’s time the Trade Union Congress (TUC) stopped being sexist about high heels, says Judy Finnegan in the Daily Express. “I have never, ever understood the view that a women in high heels is a woman in thrall to sexism.” Women wear high heels because they love them, not because they’re forced to do so. “Many men are compelled to wear a tie to work. Quite a lot of women find a man in a suit and tie rather sexy. Does that turn men into hapless sex objects?” ■ Given the state of the economy, was it smart for a group of the “Premier League’s squillionaires” to spend £120,000 (R160,000) on champagne in a London nightclub, asks Mark Austin in the Sunday Mirror. If they are really looking for ways to get rid of their money, “I can put them in touch with a very good charity helping lads of their own age who’ve been seriously injured fighting in Afghanistan”.
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■ Jerry Hall is still “admirably gung-ho” says Jane Moore in the Sun. The former model and ex-wife of Mick Jagger famously said that a woman should be “a maid in the living room, a cook in the kitchen and a whore in the bedroom.” She’s now amended this to say she would hire the first two and just do the last bit herself. “Plenty of women of her age would be happier doing the middle bit themselves and hire the other two,” says Moore. ■ Reports of our laziness are greatly exaggerated, says Anne Widdecombe in the Daily Express. A new survey claims some people would sit through a TV show they didn’t like rather than get up to change it. Many are too lazy to walk the dog after work. But “I’m not sure”: Maybe people are just tired out after a hard day. “Of course if all you do all day is organise survey results into boxes and add up the results then you probably have the energy to take Fido for his walk at the end of it.”
shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news
PUNTS Company
Media
Reason
British American Tobacco (BTI) Tobacco
Financial Mail
Jamie Carr elevates BAT to diamond status this week in his column Diamonds & Dogs. “BAT is thriving, demonstrating that the human capacity for self destruction remains unimpaired.” He also does a quick calculation of the scale of the business in 2008. “The company flogged 349bn smokes last year, generating 349bn butts that a quick calculation suggests could carpet the Great Wall of China to the depth of a camel’s armpit.” It’s also a winner according to Andrew McNulty in the Financial Mail. Favourable exchange rates, price increases and acquisitions have allowed earnings to grow well during the downturn. It’s gaining market share and has a great dividend yield of 5.03. It’s cheap on its current PE of 8.88. Buy. 24750c
Foschini (Fos) Investment Companies
Summit TV Nesagan Chetty, RMB Asset Management
Nesagan Chetty at RMB Asset Management likes Foschini. “It’s probably lagged the likes of Mr Price and Truworths – but it’s one where the bad debts as a percentage of the book is much lower at about 8.9%.” It’s trading on a PE of 9.73 and has a dividend yield of 5.29. Chetty thinks, “it should grow earning slightly higher than inflation, at maybe about 10%”. It’s currently trading at around two-and-a-half to three times its book value, which is slightly cheaper than Truworths. Buy. 5440c
Simeka Business Group Financial Mail (SBG) Alt X
Tongaat Hulett (Ton) Food Processors
Financial Mail
Current price
“A pipeline of secure contracts provided cash flow while the group rationalised operations in its technology and outsourcing divisions,” says Sasha Planting in the Financial Mail. Simeka has consolidated its position and will now be focusing its operations in South Africa and Nigeria. Buy.
28c
This week, Sasha Planting is all about sugar in the Financial Mail. She says, “Tongaat’s low-cost Zim operations have been included in the financial results, giving rise to a balance sheet take-on-gain of R1.9bn. This gain is excluded form operating profit and headline earnings.” This comes hot on the heels of Jamie Carr’s belief that, with the unbundling of Hulamin, the sugar business’ never looked sweeter. With Zimbabwe’s move to a rand-dollar based currency, Tongaat believes many distortions will be restored to our northern neighbour’s economy. As a result, the group’s seen a vast improvement in its operations in our neighbouring country. Buy.
8800c
Data Vendor Company
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This comprehensive data content, coupled with our home-bred applications, makes I-Net Bridge an invaluable partner in facilitating your investment decisions.
shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news
DOGS Company
Media
ArcelorMittal (ACL) Industrial Metals
Financial Mail
Reason
Current price
Jamie Carr explains this week’s dog by saying: “A year ago the steel bashers were bathing in dollar bills, now the market has spun around and bitten them in the posterior with the vim and vigour of an ill-tempered mamba.” The figures speak for themselves. ArcMittal turned profits of R4.5bn in the first half into an R844m loss. It “must be reeling from the abruptness of the collapse.” The company has made large scale cuts to contain the haemorrhaging, but these production losses will only bounce back when the economy as a whole “recovers from the pounding” it’s taken. Carr goes on to say that lowering rates has ended “the steroid-crazed rampage of the rand” but has only served to improve the mood in the sector from “suicidal to merely gloomy.” Avoid.
11700c
Reason
Current price
WATCHLIST Company
Media
AngloGold (ANG) Mining
Financial Mail
Larry Claarsen of the Financial Mail sees potential in AngloGold. He says: “The mining house reported a good set of numbers despite the strong rand and slowing global economy.” Over at Imara SP Reid Percy Takunda believes we’re beginning to feel the cost cutting measures put in place during the downturn. Hold. 28950c
Anglo American (AGL) Mining
Finweek
Shaun Harris of Finweek says: “If we believe economist that South Africa will lag global recovery, then Anglo American, with its major markets overseas should be one of the first large JSE-listed mining groups to turn around.” The problem comes in that Anglo still has high levels of debt and is still facing the looming Xstrata deal. On top of all this, it’s been unbundling none core businesses. Businesses that could have seen it though the downturn. “The rationale for getting back to core mining a few years ago made sense but the timing was terrible.” We’re going to have to wait and see what happens. Hold.
Sabvest Ltd (SBV) Investment
Financial Mail
24259c
“The investment group’s underlying assets have performed well in a softening economy,” says Larry Claasen in the Financial Mail. Despite the potential turmoil, in the near future it has seen fit to declare a dividend. This is either courageous or foolish. But, regardless, their long-term prospects remain solid. Hold. 599c **Closing prices as at 19 August 2009
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last word
No recovery, not now – not ever The past cannot be revived... That we live in an age of miracles has become common knowledge. A man can sit on a beach near Sydney and carry on a casual conversation with an eskimo. Using an internet-based phone service, he may do so at little cost. If this were not miracle enough, he may now grow a new nose, if he needs one, on his own arm.
Bill Bonner
In the US, entire industries now operate as wards of the state. They may have too little capital. Or their operations may be too costly. Or their products may simply be out-of-date and unattractive. Still, government keeps them alive – at the expense of rivals. The spectacle is magnificent and sordid at the same time – like a great, stately oak teeming with pests, lobbyists and mossy hangers on. Many of the branches are decayed and rotten. But what politician would cut off a dead limb with so many voters on it?
Now the old formula no longer works – neither for Americans nor the Chinese. Despite the urging of their government, Americans can’t be expected to take on more debt so as to keep consuming stuff from China. As savings rates rise toward 10%, US demand alone will fall by an estimated $1trn a year. With the China trade now accounting for 83% of America’s non-oil trade deficit, you’d think the Chinese would get out the chainsaws. They may already have as much as twice the output capacity needed to meet real demand. They should be trimming as much as half their manufacturing sector, not expanding it.
©REX FEATURES
That preface on the State out of the way, we turn to the state of the economy. In this age, people seem ready to believe We draw out that relationship anything is possible – apparently, only to show how hopeless it even reviving the dead. After the would be to draw it out further. It fever of the Late Bubble Epoque, is obvious that Americans have the world economy finally enjoyed too much credit, which succumbed in 2007. By December led to excess consumption. that year, the US economy was Borrowing to consume is just shrinking. The feds now propose another way of saying that to return to the glory years of the consumption was taken from the pre-crash era. Most economists future and dragged forward. This polled by The Wall Street Journal inevitably leads to a time when believe it can happen. The the future arrives and demands its economy is already recovering, pound of flesh. The future arrived they say, thanks to government in 2007. Thenceforth, the intervention. But we are spending that would have suspicious. Both of the miracle occurred “in the future” had and the miracle worker. What is already occurred in the past. As a government really up to? Few We can’t turn back time, and the future is here now with a bill result, the factories that would people take the time to think about have produced the consumer items for The consumer credit expansion of the it. Yet the question leads to a hypothesis: 2009 found they had already produced 1945-2007 period ended with a bang. The feds aren’t as blockheaded as they more than enough in 2006 and 2007. While there were many actors involved in appear. As a result, the whole thing exploded in a the show, with many supporting roles and fiery ball of asset-price destruction. plot twists, the key to understanding the In its naked form, government is not evil; final phase was to capture the symbiotic it is merely a self-interested parasite. It would be better to invite the future in, relationship between China and the US. Its main value – to the extent it has one – let her collect her debts and get on with is in its ability to fend off other parasites. things. Yet government officials on both It seemed to serve both parties well. Each The citizen, generally, would rather be sides of the Pacific continue their numbenabled the other’s excess. China added governed by someone speaking his own skull efforts to revive the bubble mightily to the world’s supply – far more language. Someone he elected. Or at least economy. In the US, the feds are trying than was needed. America did heroic someone whom local connivance put in to stimulate demand for more stuff. work on the demand side. US growth was place. He does not usually resent the Chinese stimulation is going into led by consumer spending; in China, by homegrown parasite – though it routinely producing more stuff. As if the world capital investment. Factories grew. Output costs him a large part of his output. didn’t have too much stuff already. But was revved up. But there was a flaw. On the contrary, he grows so fond of it the role of government is neither Americans ran out of money. After the he even dons his helmet from time to prosperity nor plausibility, but 1970s, they could only increase their time to protect it – to keep other protection of parasites. They’ll keep buying by going into debt. This they did parasites at bay. Beyond that, the role of propping them up and paying them off with insouciance bordering on insanity. government is to keep order, protect until the whole thing falls in a heap. Total debt rose to 370% of GDP and campaign contributors and lure blew up in 2007, with major lenders supporters with other peoples’ money – To read Bill’s thoughts, sign up to forced into bankruptcy or mergers, while doling out a concession to one, locking Money Morning’s free email at GDP walked backwards at its fastest pace up another, and giving a subsidy or a www.moneymorning.co.za. since the end of World War II. protective tariff to a third. 28
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