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

THE BEST OF THE INTERNATIONAL FINANCIAL MEDIA

11 SEPTEMBER 2009 SOUTH AFRICA EDITION 111

Eureka stocks Profit from medical breakthroughs, page 16 “I read MoneyWeek to pick up all the vital things I’ve missed elsewhere.”

Justin Urquhart-Stewart, Seven Asset Management

How to profit from impending recovery

Why the market should stop this merger boom

The mystery man who made $1.4bn from Marvel

WHO’S TIPPING WHAT

OPINION

PROFILE

8

14

22

from the editor 11 SEPTEMBER 2009 ISSUE 111

Is this a 21st Century “Pharma-Con?”

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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Information in MoneyWeek is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decisions. Fleet Street Publications (Pty) Ltd and its staff do not accept liability for any loss suffered by readers as a result of any such decisions. While Fleet Street Publications (Pty) Ltd makes every effort to ensure the accuracy of the contents of its publications, no warranty is made as to such accuracy, and no responsiblity will be borne by the publisher for the consequences of any actions based on information so published.

Opinions expressed are not necessarily shared by Fleet Street Publications (Pty) Ltd.

Bought anything local recently? If you answered “yes”, then you’ve been taken for a ride. There’s price collusion and tender rigging in almost every sector of industrial activity.

You’re paying too much for bread.

Companies are paying too much for steel.

And we’re all paying too much in taxes for a range of public sector projects.

The Competitions Commission’s now launching investigations into this highway robbery. And occasionally it levies penalties against food retailers, steel manufacturers, construction companies, banks and cellular services providers. Yet, companies with significant market share continue to abuse their positions.

The Independent Democrats recently begged for an investigation into pricing practices at the country’s three largest cellular providers.

And just this week, a banking survey conducted by Howarth Forensics for Finweek concluded the country’s “big four” banks hiked fees an average 16% in 2008! These institutions managed to “fleece” you by more than twice the rate of inflation.

Pay-as-you-transact and traditional transaction-based packages were the focus of the report. But, it probably misses some of the staggering increases in other areas. Of course, the banking sector’s response to the survey isn’t surprising. Nedbank reckons the survey “does not use fair standards of comparison”.

Absa suggests the investigation fails to reflect its “average” client. One thing is clear, tough competitions regulation or not, you’re stuck with high prices for basic banking services (and almost everything else)!

While many of us think government’s NHI plan is unsustainable, we’re equally perturbed with recent developments in the private sector.

It seems pharmaceutical companies are ramping up the hype around illnesses to boost the bottom line.

Let’s use the recent “swine flu” pandemic as an example. The H1N1 virus claimed hundreds of lives. It caused panic at healthcare facilities around the globe. But a closer assessment reveals this flu causes fewer annual deaths than a range of other diseases.

In SA, you’d have to evade murder, road accident, malaria, tuberculosis and HIV/Aids before worrying about a few H1N1 sniffles.

The conclusion is the private pharmaceutical sector’s whipping the global population into a frenzy to boost sales of various flu vaccines!

Pharmaceutical firms spend billions of dollars on research and development each year. Every technological advance flashes through the private sector as rival firms battle to squeeze the maximum profit from it. As scientists learn more about human genetics, you can expect the pace of medical innovation to ratchet up exponentially. You’ll know about a range of potentially damaging viral outbreaks before they happen. Endless medical complications will be pre-diagnosed. And while the average Joe struggles to keep his head above water with his medical expenses, pharmaceutical companies will report record profits. In today’s feature article (on page 16), Eoin Gleason looks at some of the international investment opportunities as genetics continues to revolutionise modern medicine!

And there’s more bad news on the horizon. As a taxpayer, you’ll soon have to “chip-in” to

Gareth Stokes Editor, South Africa

In this issue 5 Markets What is the bond market telling investors?

7 Sector

Titanium could be about to soar – don’t be left behind.

11 Strategy Following the crowd is risky. But where is it heading now?

13 Briefing Quangos are costly and wasteful, but politicians just love them.

11 September 2009

extend acceptable levels of medical cover to all of the country’s citizens. Government wants to implement a National Health Insurance (NHI) system similar to that employed in the UK.

19 Blogs Beat the recession blues the Mexican way – set a ridiculous record.

20 Entrepreneurs How Sir Chris Evans turned a love of science into £150m.

23 Travel

Three of Italy’s best luxury hotels,

from Venice to Tuscany.

28 Bill Bonner Gold bulls will be proved right – but maybe not right now.

news Britain

Growth rebound – is the recession over?

After a recession that has wiped almost 6% off Britain’s national output – the steepest slide since the 1930s – growth is rebounding, said the National Institute of Economic and Social Research.

Output expanded by 0.2% in the three months to the end of August, the first quarterly rise since early 2008. Industrial production figures helped – it is up for two months in a row for the first time in three years. Manufacturing output also grew by 0.9% in July, the best result in 19 months, thanks largely to the car scrappage scheme. Recruitment agents have even detected a marginal uptick in permanent and temporary staff appointments. So most economists are pencilling in modest growth in the third quarter.

The key issue is whether the bounce in growth can be sustained. As Sean O’Grady pointed out in The Independent, what we’re seeing now is largely a reversal of the inventory effect.

As the outlook darkens, firms adjust by running down inventories rather than ordering more goods and this has a knock-on effect throughout the economy. A small fall in demand at the retail end of a business results in

a much bigger fall in demand at its suppliers as existing stock is used up. So when this process goes into reverse, as companies re-stock, overall output bounces. But this technical rebound tells us little about the real level of demand in the economy.

A recovery in consumption, which comprises 65% of the economy, is crucial to a sustainable recovery. But as Barry Knight of Smith & Williamson warns, retailers “should be prepared to have another disastrous Christmas”.

Overall real household spending was down by 3.5% year-on-year in the second quarter, noted Capital Economics, while retail sales weakened in August. Pay growth continues to slide and consumers are still grappling with record debt levels.

“The deleveraging process has only just begun.”

Meanwhile, the public sector will have to tackle its record post-war deficit, which will “involve enough spending cuts to add to a jobless total that is yet to reach its peak”, said Alistair Osborne in The Daily Telegraph.

Worse, quantitative easing will have to be withdrawn. Throw in the ongoing credit squeeze and it’s clear why the British Chamber of Commerce has warned that “sustaining the recovery will be very challenging and the risks of a relapse are high”. The NIESR warns that it is likely to take four years for the economy to regain its 2008 size. We are in for a long slog.

SA economy

Put your money under the mattress – at least you won’t be charged “When the banking environment turns hostile, banks turn to their clients,” states financial journalist Bruce Whitfield. But here at MoneyWeek, we believe it’s more like “turn ON their clients” than turn to.

And after FinWeek’s latest annual Bank Charges Report, it seems we’re right.

According to the report: “South Africa’s four largest banks raised banking fees an average 16% – twice the rate of inflation – in the past 12 months.” And that’s in the midst of the first official recession we’ve seen in 17 years.

The findings weren’t pretty… For a consecutive year, Absa cemented “its position as the priciest financial institution” in the country. To date, the country’s largest retail bank has increased its pay as you transact (PAYT) fee an astonishing 69% since FinWeek first published its annual report in 2005.

This year alone, the fee’s shot up 18% and the cost for packaged options jumped a further 39%.

On a PAYT basis, First National stole the top spot having increased its PAYT fee 21% in the past 12 months.

Nedbank, on the other end of the scale,

The bottom line spent on a diamond-encrusted watch for his wife Coleen (right) to celebrate the birth of their first child next month.

R5,000 The amount, according to Independent Online, that Judge Nkola Motata has claimed he can’t pay after being found guilty of drunk driving. This is all a little rich considering he paid R1m for his defence and earned R3.2m, while staying at home, since his suspension began in January 2007.

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11 September 2009

£4.8m What a Tyrannosaurus Rex skeleton is expected to fetch when it is auctioned next month.

£250,000 What Simon Cowell is planning to spend on his 50th birthday party next month.

R2.4m

The cost of the “tools”, SACP leader, Minister Siphiwe Nyanda, needs to help him

“deliver on his mandate”. They happen to be two identical seven series BMW’s.

Cosatu has called for him to down his tools, but he’s told them returning the expensive cars would be “absurd”.

R1 The cost per day for The Unlimited to keep Winston the homing pigeon. He recently delivered a 4GB data stick, from Howick to Durban, in just over two hours.

The Telkom ADSL line he was competing against took far longer.

$600,000 How much a northern Chinese millionaire, mysteriously known only as Wang, paid for her dog, a Tibetan mastiff.

©ITV/REX FEATURES

£50,000 What Wayne Rooney has

news came in cheapest – “only” raising its fee 8%.

that the SMSs were free since his phone never cut out.”

The reason behind the rise? SA’s preposterous fees are making up for earnings shortfalls in the banking sector!

And it’s just one of the reasons “shareholders like to hold SA’s Big Four banks in their investment portfolios”.

That’s an extract from just one of the many stories that’s come out of the woodwork this week about the 15th birthday competition that’s sunk MTN (JSE:MTN) waist high into boiling water.

Meanwhile, SA’s big four are livid.

According to Nedbank’s head of transactional products, Bryan McLachlan: “The survey doesn’t use fair standards of comparison”. And if they – as the cheapest bank in the land – are mad, you can just imagine how the other banks reacted to the news.

Why is everyone so upset? It’s quite simple. To stand a chance of winning the main prize – a brand new Toyota Fortuna – entrants had to send multiple SMSs (each charged at R7.50) to answer a series of questions. And that’s before they were even entered into the race to win!

But what can you do about it?

According to Whitfield, not much.

“Other than negotiating hard with your bank – or opting for a package option and sticking rigidly to its confines – there aren’t too many avenues through which you can voice your displeasure.”

Entrants were also told that “their chances of winning the main prize were dependent on multiple entries,” reports

So what happens now? “Not a lot,” reports the Cape Times. “The competition and misleading adverts are history, and MTN gets to keep the millions it made from its misled subscribers.”

The way we live now

©PHOTOLIBRARY

How a R7.50 SMS turned into a R22 000 debt

Vital numbers

The competition, which MTN withdrew a month early, was lambasted by the media “as a lottostyle service” in early June. On Monday, the ASA ruled that MTN had breached the ASA advertising code by “not adequately informing competition entrants that multiple SMSs charged at R7.50 were needed to enter the competition”.

Most people trapped in a storm drain with a working mobile phone would dial 999. But two girls stuck in exactly that situation appealed for help via Facebook instead. The girls, trapped just outside Adelaide, updated their statuses on Facebook asking for help instead of dialling triple “0” for the Australian emergency services. “These girls could have called the emergency services,” says firefighter Glenn Benham. “We could have come to their rescue much faster than relying on someone else being online, then replying to them, then calling us.” A friend saw their status updates and alerted the authorities.

Companies

“I took out a contract phone for my gardener and put a R200 limit on it…

Imagine our shock when we suddenly received a bill amounting to R22 000 for one month… When we confronted our gardener with the bill he said he thought

the Advertising Standards Authority (ASA). Even worse, entrants believe MTN employees may have rigged the competition.

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$

*5004.30 10312.14 1033.37 2060.39 3707.69 5574.26 22595.00 25086.00 10.99 12.48 7.54

**4.33 0.95 3.00 3.89 4.34 5.15 2.08 1.88 0.85 0.39 -0.99

*03 Sep ** since 09 Sep

Wits Gold (WGR)

54.55%

8500c

Cenmag (CMG)

-17.92%

394c

Pinnacle (PNC)

36.96%

315c

Micromega (MMG)

-16.67%

125c

Lonrho (LAF)

35.00%

135c

SilverB (SVB)

-9.09%

150c

Platmin (PLN)

13.04%

1300c

Cenrand (CRD)

-8.57%

224c

S.Ocean (SOH)

12.58%

170c

IBL Pref (IBLP)

-7.65%

9050c

Compclear (CCL)

12.00%

280c

Comair (COM)

-7.10%

170c

Lonmin (LON)

11.93%

20400c

Afdawn (ADW)

-6.67%

140c

Brimston (BRT)

11.11%

650c

Oando (OAO)

-6.12%

460c

Marshall (MTE)

9.52%

1150c

Grindrod Pref (GNDP)

-5.61%

9250c

Hosp A (HPA)

-4.98%

1165c

Afgri (AFR)

9.25%

579c

Weekly change to JSE stocks as 9 September 2009

4

11 September 2009

the markets

What are bonds saying?

Here’s a question 10-year UK gilt yield v 10-year US treasury bond yield perplexing investors, says Richard Cookson of 4.00% HSBC in the Financial UK 3.90% Times. Why are 3.80% government bond yields 3.70% falling, even as equity 3.60% markets are climbing? By 3.50% rights they should move 3.40% in the same direction. As US 3.30% signs of recovery mount, the improved earnings 15 22 30 08 15 23 31 07 14 24 31 08 Jun Jun Jun Jul Jul Jul Jul Aug Aug Aug Aug Sep outlook should boost 2009 equities. Meanwhile bond prices should fall governments won’t have to borrow as (and yields rise) as the recovery makes much if economies recover – thus higher inflation and interest rates more bolstering the market. likely, making the fixed income available on bonds less appealing.

But there are gloomier interpretations.

Perhaps central banks’ injections of Yet over the past month both long- and printed money into the financial system – short-term yields have fallen as bond including direct purchases of government prices have risen. The ten-year yield in bonds in some cases – have led investors the US has edged down from 3.7% to to believe there is “more buying power in 3.4%. In the UK, it’s fallen from 4% to the markets than can be absorbed by a 3.6%. In both countries, two-year bond record new supply of government debt”, yields remain close to the record lows of says Breakingviews.com’s Edward Hadas. late August. So bonds seem to be telling a The longer-term danger of all this new different story to stocks. History shows money is new asset price bubbles and a that if bonds and stocks are sending “bout of uncomfortable inflation”. contradictory messages, bonds tend to be right, says James Ferguson of Pali Or the bond market may be signalling International. But it’s not entirely clear that low interest rates will be with us for what bonds are saying. a long time as the West struggles with deflationary pressure, caused by low There is a benign interpretation of the demand for credit as firms and rise in both bond and equity prices, households work off debt. The recovery says Cookson. One worry hanging is set to falter, hardly good news for over the bond market has been a equities either. The bond market “may be huge jump in supply as governments hard to read”, says Hadas, “but it doesn’t fund record deficits. But signs of look like it is telling a happy story”. recovery may be allaying this concern –

5

European stocks: enjoy the rally while it lasts Equities’ recent rebound is highly unlikely to mark the start of a long-term bull market, as a note on pan-European stocks

by Morgan Stanley points out this week.

The bank’s study of 19 previous major bear markets shows that long periods of ‘range trading’ are typical after the initial slide and rebound as “structural problems in the real economy” prevent a new sustainable bull run from getting going. It’s likely to be a similar story this time.

One problem is that European governments will have to repair their lousy government finances in the next few years.

Across the 15 western European EU members, the budget deficit is expected to hit 7.4% of GDP and government debt 82% of GDP in 2010. By comparison, the Stability and Growth Pact governing the eurozone limits budget deficits to 3%. A combination of tax hikes, spending cuts and more privatisations will be needed. In addition to fiscal tightening, both banks and household sectors will need to cut their debts over the next few years. These three long-term economic headwinds will hamper growth, creating a “stop-go, volatile” economic cycle and causing “range-bound markets for years to come”.

While rebounding growth and earnings look set to underpin stocks for a few more months, the start of fiscal and monetary tightening will cause a correction and the start of a sideways movement of the panEuropean MSCI Europe index in a large range between 600 and 1,200, reckons the bank (the index is now around 1,000). The message is clear, says Neil Hume in the FT: “enjoy the rally while it lasts”.

Statistic of the week

The big picture: the rising price of a cuppa

Britain’s tax code is now the longest in the world. This year, Tolley’s Yellow Tax Handbook contains 11,520 pages and stretches over four volumes, says the tax code’s publisher Lexis Nexis. That’s more than double the 4,998 pages the code contained in 1997, when Labour came to power. And had the page layout not been changed in 1997 to fit in more words, the code would now stretch to over 12,000 pages, a 147% jump on 1997.

The cost of a pack of 80 British Tea prices supermarket own-label teabags has risen by 10% this year to 4.0 an average of £2.20 (R27). And Figures in $ per kilogram prices look set to go higher.

3.5 Global demand for tea has 3.0 been climbing – according to the UN, it rose nearly 5% last 2.5 year – while supply from the 2.0 key producer nations of Kenya, 2005 2006 2007 2008 2009 India and Sri Lanka has fallen Source: FT Source: FT amid droughts. Kenya’s output was down by an annual 11% in July. Wholesale prices for top quality tea have reached a record $4 per kilo, and the extent of the global shortage could drive prices up by another 10% to 15%, says Kamal Beheti of McLeod Russel, India’s top tea leaf producer.

11 September 2009

the markets

Gold’s eight-year bull run is far from over lead to “further steps to debase the currency”.

Gold in pounds 664 Figures in pounds per ounce

Gold is regaining its lustre.

Having trod water for the past few months, it had its best week since April last week, rising by 4.1%. Early in the week it jumped above the $1,000 an ounce mark for the first time since February, not far off its March 2008 high of $1,035. Another slide in the dollar, bullish chart signals and jitters over the strength of the global economy – witness the equities wobble last week – have triggered buying. And the longterm outlook for gold remains compelling.

564 514 464 414 364

264 214

Demand from investors, the key driver of gold prices over the past year, has ebbed over the past few months as risk appetite has revived. But it remains “very strong”, says the World Gold Council; in the second quarter it was up 46% year on year. And there’s plenty of room for it to grow. For one thing, confidence in the dollar’s status as a reserve currency has been undermined by the Federal Reserve’s dollar printing and the consequent threat of inflation. China and Russia have both called for a new global currency system and a Chinese official this week worried that “the dollar will fall hard”. Both central banks have also been buying gold to diversify their reserves.

But gold’s rise isn’t just a dollar story, says John Mauldin on Investorsinsight.com. “The dollar is the worst currency in the world, except for all the others.” Gold is rising in other

+171.59%

314

Investment demand is robust

Gold is the only safe currency

So there is “much to worry about”, says Martin Hutchinson on Breakingviews.com. And it doesn’t take much to move the small gold market: the annual mine supply is worth just $100bn. “A serious increase in investor interest would cause the gold price to soar.”

614

Dec 2004

Jun Nov May Oct Apr Sep Mar Aug Feb 2005 2005 2006 2006 2007 2007 2008 2008 2009

Jul 2009

A massive boost from China

And that’s exactly what now looks to be in the pipeline from China alone. Gold and silver distribution has been strictly controlled in China, but now Chinese television is apparently touting precious metals as an investment opportunity. If 1.3 billion Chinese citizens start buying gold and silver, “even in tiny quantities, imagine what that would do to the market”, says Lawrence Williams on Mineweb.co.za – especially with global gold production “at best flat and probably in decline”.

Source: kitco.com.

currencies too. Ongoing money printing by central banks to stave off deflation is fuelling both fears of a relapse into recession and concerns about inflation.

While major paper currencies are being debased, gold’s relative rarity means that it can’t be created like dollars, euros or sterling. That’s why it has preserved its purchasing power for thousands of years and achieved its reputation as the ultimate safe haven and store of value – it’s the only safe currency out there.

“More and more people are realising the advantages of owning sound money, and that means owning gold.”

If “there is even a hint of worry” that central banks are overstimulating economies, “gold will become everybody’s touchstone”, says Bill O’Neill of Merrill Lynch Global Wealth Management. And if economies appear to be slipping into deflation, central banks are likely to stimulate even more.

As David Einhorn of Greenlight Capital says in reference to the US, deflation will

In the short term, lower jewellery demand thanks to the latest price rise may cause a setback. But with investment demand looking robust even without Chinese citizens buying – which renders worries over lower jewellery demand “irrelevant”, says Robin Bromby in The Australian – the long-term outlook is positive. Both commodities guru Jim Rogers and CLSA’s Christoper Wood see gold hitting $3,500 an ounce; Tim Price of PFP Wealth Management sees scope for gold to “trade at several multiples of its current level in future”. Gold’s eightyear bull run is far from over.

Brazil is recovering – but wait for a dip Brazil is on a roll: the local Bovespa index has gained 90% since last spring. New government plans to capture a greater share of revenue from offshore oil fields have had scant impact on the market. No wonder. “Unlike radical moves in, say, Venezuela”, the changes “merely bring Brazil in line with other oil-rich states”, says Aliza Rosenbaum on Breakingviews.com.

Brazil remains a “relatively safe place to invest”.

Meanwhile, the economic recovery is gathering momentum.

Domestic demand, propped up by lower interest rates, has held up relatively well, compensating for slowing investments and exports. The latter only accounted for 13% of GDP over the past two years, notes Reuters.com. Retail sales were up 5.6%

6

11 September 2009

year-on-year in June; unemployment is falling and industrial production on the up. Rising Chinese growth has also boosted the commodity-heavy index. But investors now look set for a bumpier ride. Emerson Leite of Credit Suisse says there is scant sign of earnings improving rapidly from here, as many expect.

Meanwhile, curbs on lending could dampen growth in China and the market would be unable to escape global jitters if the developed world’s recovery disappoints. And this seems likely – especially since foreign investors now account for a record 38% of the Brazilian market, as Finanz und Wirtschaft points out. Moreover, “valuations are at the top of their historic range”, notes Alexander Kazan of Auerbach Grayson. There should be better opportunities to buy into Brazil.

sector of the week

Aircraft boom will see titanium taking off Metal Miner. Boeing has a backlog of 878 orders.

by Eoin Gleeson

©AFP/GETTY IMAGES

The Chinese town of Yiwu doesn’t Titanium is also the common link show up in the guidebooks. But it’s in a host of industries which will home to a sight every bit as show strong demand over the awesome as the Great Wall – the coming decade. Its corrosionYiwu International Trade City. resistant properties make it ideal Spread over 2.6 million square for water systems and deepwater metres, the world’s largest flea oil drills. And it’s the best choice market is the Wall Street of for condenser tubing in nuclear counterfeit goods, according to and gas-fired power stations.

Eamonn Fingleton in The Jaws of the Dragon. They used to call it But the commercial aerospace Sock Town – more than three industry is the big one, accounting billion pairs of socks leave Yiwu for 50% of titanium demand, with for the US each year. But not a further 34% going towards anymore. An explosion of trade military planes, according to with Africa and the Middle East International Metals. As you over the last ten years has changed Thriving Middle East/Asia trade will boost titanium prices might expect, there has been a the town beyond recognition. slew of cancellations on aircraft orders opportunity lies in the speciality metals English signs in the market have been this year. When Boeing announced plans used to make new aeroplanes, says Chris replaced with Arabic; there are dozens of to delay the launch of its 787 aircraft, the Mayer in his Capital & Crisis Letter.

Arabic restaurants on the main street. industry was left with a titanium Think how lithium has taken off on inventory overhang estimated at as high demand for electric vehicles. Or rare It’s the same story in towns from Dubai as 50 million lbs, says Frank Haflich in earth metals on demand for laptops and to Delhi. Booming trade between Asia American Metal Market. This has kept wind turbines. Speciality metals in short and the Middle East is redrawing the prices depressed for months. The price of supply don’t stay cheap for long once global trade map. In 2000, China’s a standard titanium ingot is down from industrial demand picks up. exports to the Arab world came to just $30 in January 2008 to below $10 now. $6bn. By last year, that figure had risen In air transportation, the key metal is to $48bn. And those new trade routes But the fall in production will be shorttitanium, says Mayer. It’s an integral part have created formidable demand for lived. “We are living amid massive of the new designs for the next generation international flights. Dozens of new flight changes in air transportation,” says in aircraft – making them lighter, quieter connections are opening up each year.

Mayer. Eventually, Boeing will have to and more fuel-efficient. Titanium has the Despite the global slump in trade this scale up production due to Middle highest strength-to-weight ratio of all the year, politicians continue to approve Eastern and Asian demand. Over the next metals. It is exceptionally resistant to plans for vast new airports. Emirates 20 years, an average of 1,200 new planes corrosion. Titanium alloys were even Airline will grow its passenger fleet by a year will be demanded, says Airline used in the controversial swimsuits that 14% this year alone.

Monitor. That’s an order book worth have led to an unprecedented number of nearly $3trn. If even half those planes are broken world records this year. The new There are investment opportunities to made, titanium will soar. We look below BA 787 uses 250,000lbs of titanium in spin out of this – from airlines to aircraft at how you can profit. every plane, according to Lisa Reisman of manufacturers. But the greatest

The best bet in the sector Titanium Metals (NYSE: TIE) is a giant in the That may be a while coming. In July, US Titanium Metals industry, with sales of over $1bn. Its melting demand for big-ticket items, aircraft being 40 operations make up 20% of global capacity. the biggest of those tracked, rose 4.9%. But 30 It is the only titanium producer with major it could easily dip again. And China’s top Figures in dollars plants in the US and Europe – the main three airlines are trying to delay delivery of 20 markets for its products. The group’s planes they ordered for 2010, says Reuters.

10 fortunes are tied to the aerospace order China Eastern may even scrap an earlier book. So it has been hit hard, falling from order for nine Boeing 787s. But the news is 0 $40 a share a few years ago to $8.35 now. in Titanium Metals’ share price. Even in its Jan Jan 2008 2009 With titanium prices at current levels, it is depressed state, it will still generate $80m likely to earn 20 cents per share, compared in free cash flow this year. It finished the to $1.38 in 2007 and $0.89 last year. But the stock is a good longlast quarter with no debt and $106m in cash, so it can withstand term play on a recovery in the titanium market. further cancellations. Buy up to $12 a share, says Mayer.

7

11 September 2009

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

A long-term play poised to recover with the economy – and leave you reaping the benefits Tip of the week: Set to recover with the economy – Finweek Right now, you have the perfect opportunity to start raking the market for shares positioned to recover once the economy kick-starts. So it’s time to cast your net far and wide, and look for shares that appear good over the longterm. And when I say long-term, I mean holding for a minimum of five years.

We all know that when times get tough, we cut back. Long gone are the days of extravagant dinners and lavish shopping sprees. But, there will come a time, and

that time is nearing, when we’ll all be a bit more cash happy – and ready to spend! The recession won’t last forever...

And, Woolworths Holdings Limited (JSE: WHL) is proving to be one of those stocks that’ll benefit when the tide turns.

Woolies has been a household name in South Africa for decades. It’s depended on by many for its wonderful range of food, clothing, furniture and beauty products. And, of course, it also has its own financial services offering. But just because it’s a household brand, doesn’t mean it’s managed to shrug off the recession.

As Shaun Harris highlights in Finweek, the company’s struggled with the current climate. “It must be losing market share to more value driven competitors.” When times get tough, we don’t necessarily stop buying, we just look elsewhere for cheaper alternatives.

Those who used to do their weekly shop at Woolies have

Gamble of the week: Simmer & Jack Mines Limited (JSE: SIM) Now couldn’t be a better time to revisit one of MoneyWeek’s old favourites. This week, gold came crashing through the $1,000 per ounce for only the third time in history. And this small-cap miner is set to revel in the sharp increase in the gold price. We welcome back Simmer and Jack Mines Limited (JSE: SIM).

Simmers roots stem back to the 1880s, but it’s evolved since then into a much more modern operation. Its interests aren’t just in the yellow metal. It also has extensive uranium exposure – great for an age of nuclear energy. Simmers owns 41% of First Uranium, a listed Canadian stock. And, not only is the company a miner, it’s an explorer too.

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11 September 2009

perhaps “downgraded” some of those essential items to a less expensive alternative, such as Shoprite. But Woolies is still a renowned establishment for getting top quality food produce. And, as it stands, Woolies has no competitors in that field. As Harris notes, “food has become a far larger seller at Woolies, accounting (after increasing sales by 9.3%) for R11.13bn of turnover”. It’s definitely a winner for them.

With gold finally in the thousands and, we believe, set to go much higher, this small-cap mining company couldn’t be a better gamble of the week. If the gold price flops, then the negative effects to this company are obvious. But, with gold strongly marching higher, the odds are currently stacked in your favour.

So why Simmers and not one of the “big boy” miners? Well, Simmers has comparably low costs when compared with one of the larger gold miners. This is a result of its mines being shallow, but the gold is of an excellent grade. This gives you a company where the mines are low cost, but they generate high profit levels. And on a broader vein, as the massive US bailouts catch up with the greenback, we should see the dollar depreciate further and the gold price climb higher as a result.

who’s tipping what In its latest financial results, to the end of June 2009, the results weren’t mind blowing. But it did reflect a slight improvement across the board. And with the purse strings kept tight for the past couple of years in SA, thanks to outrageously high interest rates, the pinch was digging in long before we officially hit recession territory.

The hardest hit is Woolworths’ clothing division. Over the latest financial period, it seems they didn’t quite give the consumer what they were looking for.

Poor growth was reflected in the group’s clothing sales. But, with the new season’s stock now in stores, hopefully this is something in the past.

Yet, other aspects of the results reflect a strong, solid company. If you’re looking for a cash rich counter to put your money into, then you need not go any further than Woolworths. Since its last financial results to end June 2008, the company has grown its cash holdings from R826.6m to a staggering R2.391bn! And it hasn't scrimped back on its dividends. It’s currently trading on a dividend yield of just over 2%.

Woolworths should improve going forward as consumers become more cash flush as the recent interest rate cuts begin to have a positive effect on the economy. The company has warned the market that interim earnings will drop in excess of 20%, but the share price has already factored that in. The environment for Woolies to prosper shouldn’t be too far in the future. This is

a share to get into over the next few months and to hold onto for the long haul. Buy. Recommendation: BUY at 1550c Market capitalisation: R12.417bn

Turkey of the week: “Profits have dropped off a cliff,” says the Financial Mail The global recession has hammered industrial commodities of all creeds.

One minute everything was looking hunky dory the world over, the next minute, developments were coming to a standstill as contracts were canned left, right and centre. The best prepared company in this sector would have been hard pushed to predict what was about to unfold on the global economy.

So it wasn't a surprise that companies in this field were going to suffer, but who would have thought they’d suffer this hard? Highveld Steel and Vanadium Corporation Limited (JSE: HVL) was massacred. And that’s why Jamie Carr awards his dog of the week to Highveld in the Financial Mail.

As Carr highlights, global steel production fell sharply “21% year on year”. But Highveld’s “production dropped by 35%”. Of course, this is hardly within the company’s control – you can’t make people use your products.

Its latest results, for the six months ending June 2009, shows the devastating

Simmers has lately been making some big changes to streamline the business. This is great news for the market. At the end of August, the company announced it was taking steps to reorganise its Buffelsfontein Gold Mine.

This is a fully owned subsidiary of Simmer and Jack. Unfortunately this involves job losses, but it means increased savings. Buffelsfontein posted a massive R9m loss in spite of an increase in productivity.

And, just last week, Simmers released an announcement saying that the Competition Commission has approved the merger between Buffelsfontein and the Tau Lekoa Mine (a division of AngloGold). The deal looks

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11 September 2009

effects the global slump for steel had on the company. Revenue plummeted 51%.

Headline earnings per share crashed a mighty 86%. In a weak market, there’s not much recourse for a primary steel producer.

So, should you consider Highveld Steel as a play for your portfolio? Well, the global economy should turn a corner.

And, with massive infrastructure planned in hard hit countries, such as the US, demand should begin to recover. But the big question is when? As Carr mentions, “the focus [for Highveld] must remain on tight control of expenses and working capital”. If the company can get its costs down and all aspects of the business under better control, this could be a fantastic recovery share.

But don’t rush in. Wait for some clarity on the global recovery before adding Highveld to your portfolio. Avoid for now.

Recommendation: Avoid Market capitalisation: R7.491bn

promising, but we won't have clarity until the beginning of 2010. If the deal goes through for the agreed R600m, it’ll assist Buffelsfontein in recovery. According to AngloGold’s production plans, the mine’s expected to produce 130,000 ounces a year.

The company won’t perform as well as it could if the rand remains strong.

But if the gold price continues to increase, the effects will reduce.

Simmers is a great buy at its current price of 230c. A lean, mean, growing gold mining machine is worth a place in anyone’s portfolio.

Recommendation: BUY at 230c Market capitalisation R2.809bn

best of the financial columnists

Dominic Lawson The Sunday Times

Insurers predict inflation Anthony Hilton Evening Standard

Asia signs up to free trade Michael Schuman Time

Women aren’t made for the City Tracy Corrigan The Daily Telegraph

10

The British prime minister was right (“not a phrase you hear much these days”) in refusing to sign up to Angela Merkel and Nicolas Sarkozy’s proposed cap on bankers’ bonuses and for dismissing the Financial Services Authority’s chairman’s suggestion that a special tax be levied on “socially useless” financial transactions, says Dominic Lawson. The credit crunch was caused not by bonuses, but by the failure to impose weighty capital requirements against risky trading activities. And it was governments, not bankers, who encouraged the banks’ move into “socially useful” lending by acting as underwriter of last resort to poor Americans who otherwise couldn’t have got a mortgage. “Will the G20 nations act to clip the bankers’ wings now that taxpayers have had to pick up the tab for this great experiment?” Of course, the reason Alistair Darling doesn’t want to is that “50% of those wicked bonuses” go straight to the Treasury, helping to fund the bloated pay packet of the public sector. “Who said bankers’ bonuses were socially useless?”

Money talk

Interestingly, insurers, who are “more exposed to the real world and its foibles”, fear inflation more than most bankers and economists, says Anthony Hilton. Firstly, they are sceptical that the authorities will be able to reverse the policy of quantitative easing without unpleasant inflationary side-effects. Secondly, they are sceptical that politicians will act, even if they could. Why? Because “if debt is the problem – which it is – then inflation is the solution”. At the end of World War II, UK government debt was well over twice the level of GNP. A few decades later it was below 50%, “not because it had been paid back but because inflation had eroded its value and the economy had grown”.

It will be tempting for any incoming government to repeat this. Savers and those on fixed incomes will suffer, but they tend to be old and “lack the political clout” of the economically active – the ones with the debt. Politicians may deny this possibility, but insurers make their living by establishing what is most likely to happen.

“Mercury poisoning sounds like a rich man’s disease… like something you might get from the leather seats in your Lamborghini.”

Actor Jeremy Piven (pictured above) on his recent illness, quoted on The Late Show with David Letterman

“The Great Recession hasn’t been great for free trade,” says Michael Schuman. Rising job losses and falling demand have led governments to focus on protecting their own industries rather than promoting global commerce. Yet the “part of the world that was hit hardest by the trade crash – Asia – has been actively opening up its regional markets”. The Asian Development Bank says that the number of free-trade agreements (FTAs) signed by Asian countries has grown from just three in 2000 to 56 at the end of August. This could help Asia “become a powerful trading bloc on a par with the one created by the North American Free Trade Agreement”. The rapid growth in deals has been put down to fear of a US spending slump, which has prompted Asian policy makers to look to more local markets. The potential benefits for Asia are huge; so are the downsides for the rest of the world, which could face competitive disadvantages. Some economists say fears are exaggerated, but “pragmatism will prevail”. ‘Fortress Asia’ could become a reality.

I’m not at all shocked to learn that women in finance receive around 80% less than men in bonuses, says Tracy Corrigan. Firstly, very few women work in trading and investment banking, which is where the really big money is made, and secondly, unlike men, they don’t tend to push for big bonuses. Why don’t they choose to work in those areas?

Because the lifestyle sucks and the long hours and foreign business trips are hard to combine with motherhood. Those who take maternity leave are likely to find their careers “permanently on ice” and those with the temerity to sue are likely to be branded troublemakers and struggle to find another job. But “rather than trying to fix the City, or struggling to meet its harrowing demands”, perhaps it would be better for women to pursue a different career. The UK allegedly faces an engineering skills shortage that will threaten the country’s transition to a low carbon economy, and engineers rank well ahead of investment bankers in terms of their contribution to society. Any takers?

11 September 2009

©DAVE ALLOCCA/REX FEATURES

Why Brown was right on bonuses

“I’m 20% cheaper than I was this time three months ago, so I’m a bargain.”

Radio 1 DJ Chris Moyles on BBC pay cuts, quoted on BBC News “For Britain to propose an international tax on financial services is like France proposing an international tax on wine, or Germany luxury cars.”

Anatole Kaletsky, quoted in The Mail on Sunday “Beneath the unpretentious exterior of most middle-class men, with all their talk of being perfectly happy with a Volvo and a Victorian semi, there is a Premier League footballer struggling to get out.”

Author Toby Young, quoted in The Mail on Sunday “News reading is a piece of cake, the easiest job in the media.”

Terry Wogan, quoted in The Sunday Times

investment strategy

How to avoid the madness of crowds

by Tim Bennett “At turning points, the correct view is, by definition, the minority view,” says Anthony Bolton, Britain’s answer to Warren Buffett, in the Financial Times. That’s why he likes sentiment indicators. “If these indicate that investors have voted one way, it normally always pays to bet against them.”

CBOE Vix index 100 80 60 40

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9 Jan 2005

Why sentiment matters There are basically three methods you can use to decide which way share prices will go next. The first is fundamental analysis – using ratios to decide whether shares are cheap or expensive. That’s fine, but right now opinion is divided. If we are emerging from a short, sharp V-shaped recession, then some would say that shares are still cheap.

The FTSE is still more than 10% below the 2008 peak and, at 12.5 times future earnings, valued below an average price/earnings ratio of 15. But if we are about to hit the second dip in a recessionary ‘W’ (as economist Nouriel Roubini has claimed) the bull run will be stopped in its tracks.

Jan 2006

Jan 2007

Jan 2008

Jan 2009

Meanwhile, private investors are worryingly cheerful. Although we all know we should buy low and sell high, too many small investors do the opposite – rushing in as the market peaks and selling just as it bottoms out. For example, at the world’s biggest stock exchange by volume, in South Korea, bullish private investors have been placing some monster-sized bets.

According to the Korean Times, outstanding loans to private investors from securities firms hit 4.54trn won by 3 September – in other words, private investors are borrowing that much money to bet on stocks. That’s a 201% rise since the start of the year and the highest level recorded in 2009.

Analyst Kim Dong-ha warns that the current level of such loans – taken out as investors seek to claw back previous losses on shares by betting big as the market rises – is “excessive” and could soon trigger “huge losses”.

“The current ratio of insider selling to buying is now 30:1” have proved pretty hopeless in the past six months.

Hence, as Bolton notes, the importance of sentiment indicators; in the short-term at least, the best bet may be to set aside p/e ratios and charts and focus on what investors think will happen next. With the FTSE 100 up about 40% since its March low, what do these indicators say now?

The ESI points south Method two is charting – using past share-price patterns to predict the future.

“History repeatedly shows that rallies rarely make extended one-way moves,” says David Schwartz in the FT. Given that “big gains in the run-up to September are typically associated with September price drop”, a “healthy correction” should be on the cards.

Trouble is, “there are always exceptions to the rule” and predicting when a dip may come is tricky. For example, Morgan Stanley data show that, during the last 19 recessions, stocks fell by more than 20% after rebound rallies. But these rallies lasted an average of 17 months each and lifted stocks by around 70% at a time. So far the rise since March has been a more modest 40%, so there could be more upside to come before the next dip.

Another problem for chartists is central banks. A global monetary stimulus (rock-bottom interest rates and money printing) of this size has never been tried before, which may be why established techniques for predicting share prices

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The Dow Jones Economic Sentiment Indicator (ESI) aims to predict the health of the US economy by looking at the coverage of 15 major daily newspapers.

The balance of sentiment between bulls and bears is given a number between 0 and 100. Last November the index hit 22.2. That lack of confidence was a clear buy signal for a contrarian investor. But the papers have grown steadily more bullish since then. In August, the ESI hit 35.5, having risen for six months in a row. Although sentiment can’t be said to be outright bullish until the indicator hits 50 or above, the speed of the recent rise points to a pull-back for shares.

Insiders are nervous – outsiders are bold “The huge gap between buying and selling volume by corporate insiders is eye-popping,” notes Schwartz. According to research by TrimTabs, the current ratio of insider selling to buying is now 30:1.

This suggests “an absence of hope” among company directors about their firms’ prospects. That’s hardly positive for share prices.

Fear is rising The Chicago Board Option Exchange (CBOE) Vix index – which reflects the amount investors are willing to pay to protect themselves against falls in stock prices – “tends to move up when stocks move down and vice versa”, says Tennille Tracy in The Wall Street Journal. Just last Tuesday the index hopped up 12% to 29.2, its highest level since 9 July. That’s some way off its recent peak of 81, seen just after Lehman Brothers collapsed. But given that “investors expect the Vix to pop higher in coming weeks”, you should be cautious. For example, says Matt Shapiro, a market maker with Stutland Equities, futures contracts on the Vix for October are trading at around 32.

So what should you do?

“Investors who missed the huge rally of the last six months will now probably strive to catch the next leg up,” says Schwartz. That, plus a flurry of mergers and acquisitions activity (see page 14 for more), could keep shares moving up a little longer. But with recent corporate profits growth underpinned by costcutting and one-off stunts such as the US ‘cash for clunkers’ programme (to boost sales of new cars), or the temporary cut in UK VAT, the many indicators pointing to a drop in share prices are likely to win the day soon.

personal view

2 stellar shares to buck the next downtrend What I would invest in now

This week, Gary Booysen, the editor of Stockmarket Sleuth tells MoneyWeek where he would put his money.

Since hitting its low in March, the JSE has rallied an incredible 38.2%. That’s an impressive turnaround and it’s a trend we’re seeing across the board – with many leading global markets up 35% and more in the same period. At these levels and considering the fact that the fundamentals haven’t changed much, the market is looking slightly overbought.

And it’s why I believe a short-term pullback is inevitable.

We’ve seen the subtle nuances of this fear quietly permeate the markets in recent weeks.

Traders, racked with indecision, are returning to a more risk-averse stance. And when investors begin to worry, they start to funnel money into traditionally safe havens. That’s why we saw gold finally break through the psychological $1,000 barrier on Tuesday.

But that doesn’t mean gold shares are a good sector to get into right now. They’ve run up hard since the darkest hours of last year’s market crunch. The JSE Gold Index is up 63.29% since its mid-November lows. That said, it’s come down around 14.73% since hitting its 2009 high in March. Have they run their course? That remains to be seen. But what we do know is, there’s better value elsewhere.

The solution is to stay in equities, but a different kind of equity. On every exchange, there are those shares that rocket while others collapse. That’s why I’m looking at defensive shares.

If we look back over the last year, defensive shares have held up far better than growth shares – which collapsed, on average, some 40% to 60% between October 2008 and

March this year. Defensive shares, on the other hand, ran up or stayed flat. And this, during the worst market we’ve seen since the 1920s.

Don’t believe me? Well, my first defensive pick, Shoprite (JSE:SHP), didn’t stumble when markets were brought to their knees a little less than a year ago. It’s up 31.48% from last October and it’s been trending steadily upwards since the beginning of the year. Not a bad performance at all. At R58.51, it’s presenting a great opportunity to profit from any further market hiccups. Remember, when money’s tight, it all comes down to “bread and butter issues”. And as we can see in the superb set of results the group recently released, consumers are flocking to its stores. Trading profit is up 28.1% to R2.941bn and turnover rose 24.5% for the year ended 30 June.

My other pick is a little more contrarian, but it’s every bit as defensive as Shoprite. Over the next few years, life insurance group Discovery (JSE: DSY) is set to be a great growth share.

The reason I’m so bullish about it is because of its market share. Take its medical scheme, for example. It’s the country’s largest open medical scheme and the only one to enjoy an AA rating for its claim paying ability, the highest possible credit rating from international rating agency, Global Credit Ratings. This, plus its massive market footprint, sets the group apart from its peers.

The share’s also run up 35.98% since the market fell to its knees and, at just R27.70, it’s a great way to boost the vitality of your portfolio.

The shares Gary likes: Shoprite

12mth high R60.99

12mth low R40.50

Now R58.51

Discovery

R29.49

R19.50

R27.70

*Price as at 9 September 2009

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investment briefing

The bonfire of the quangos Despite decades of rhetoric, politicians have been slow to get rid of Britain’s unelected and often wasteful bodies. Why? David Stevenson reports. government departments. “The government’s attitude towards quangos is similar to a medieval doctor’s to leeches – whatever the problem, whether it’s obesity, teenage pregnancy or regional disparity, it creates a quango, and the problem gets worse,” says Ed West in The Daily Telegraph. “But the main problem with quangos is not that they waste money but that they suppress democracy.” For example, in 2007 regional assemblies of local councillors – themselves created despite being rejected by North East voters – stood up to Labour’s housebuilding programme. Labour simply abolished the assemblies and handed their power to the regional development authorities, some of the biggest quangos of all.

The next British government – whoever leads it – must find ways to reduce public spending to deal with Britain’s hefty debts.

Conservative leader David Cameron has spelled out some cuts he plans to make.

Among his targets are unnecessary ‘quangos’, or ‘quasi-autonomous nongovernmental organisations’, also known as ‘non-departmental public bodies’, or NDPBs. Over time, successive British governments have established a wide range of quangos to take on responsibility for specific areas of public life. Many date back to the 1980s, although the first – Trinity House, the lighthouse service – was established in 1514. Although their employees aren’t civil servants, most quangos are directly funded by taxes.

What do they do?

© IMAGES.COM/CORBIS

Why are quangos in the news?

Why not scrap them?

There are several types. Some, such as the regional development agencies or the regulator Ofcom, have executive powers (as in they actually do things). Others give independent advice to ministers, for instance the Boundary Commission, which reviews parliamentary constituencies. And there are watchdogs, which monitor the likes of prisons and immigration removal centres. The Cabinet Office lists 790 NDPBs in the UK, but that doesn’t include some devolved Scottish and Welsh quangos. The Taxpayers’ Alliance reckons there are in fact 1,162.

How much do they cost?

Precise, neutral figures are nigh on impossible to find. But the Cabinet Office puts their total cost at £34bn (R425bn) a year, while the Taxpayers’ Alliance reckons it’s closer to £60bn (R751bn) – that’s £2,550 (R32,000) per British household. And “despite government claims that the number of quangos is falling, at least 40 new bodies have been created since Gordon Brown took over as prime minister in June 2007”, says The Times, whose latest survey “shows that more than 100 board members or executives were paid at least £100,000 (R1.2m) last year, with five earning more than £300,000 (R3.7m)”. The UK Treasury admits that quangos’ spending rises have far outstripped those of Whitehall departments.

Will Yorkshire show

Are they worth it?

Far from it. Several quangos are no more than lobbying organisations for regions or industries, while Dan Lewis’s Essential Guide to British Quangos estimated in 2005 that there were 529 “useless” quangos that either did very little or duplicated the work of other quangos or existing 13

11 September 2009

Politicians have been promising drastic action against quangos since the 1970s.

Margaret Thatcher called for a cull; Gordon Brown, when in opposition, promised a “bonfire of quangos”; and Tony Blair vowed to “dismantle the quango state”. But despite the rhetoric, no politician has made a dent in their numbers. On the one hand, dismantling such bodies is always easier than setting them up – once in place, they tend to create work for themselves. As The Daily Telegraph’s Tom Burkard puts it: “The 11 school quangos in England serve little purpose beyond ensuring their own survival.” But it’s also because quangos can be very useful for politicians – they offer an illusion of neutrality and the opportunity to pass the buck when things go wrong. As the BBC’s Nick Robinson puts it, “politicians like to set up bodies that give them independent expertise, but sometimes distance them from responsibility”.

The National Institute of Clinical Excellence, which has to decide which drugs to fund on the NHS, is a classic example.

Quangos: easier to unleash than abolish

So what’s the answer?

A proper quango bonfire. Cameron has put together a threepart test for quangos to pass or be scrapped, reports Benedict Brogan in The Daily Telegraph: “Does it undertake a precise technical operation? Is it necessary for impartial decisions to be made the way on quangos? about the distribution of Tory council leaders are planning a radical overhaul of taxpayers’ money? Does it Yorkshire’s £300m-a-year (R3.7bn) development agency if fulfil a need for facts to be Cameron wins, says Jonathan Reed in the Yorkshire Post: “Plans transparently determined, to strip Yorkshire Forward [which is tasked with promoting the independent of political local economy] of a string of powers for housing, transport and interference?” planning, and to slash its budget, have already been discussed in advance of a promised shake-up of quangos.” All regional development agencies could soon see “significant and radical change”, says Andrew Carter, joint leader of Leeds City Council.

“We want a clearout of the quango appointees, and much more representation from democratically elected people”.

The trouble is, we’ve heard most of this before. But perhaps there’s more chance of reform at local level (see the box, left).

opinion

The market should shun the merger boom – but can it resist the fattening treats? get a short-term boost to their profits.

But only at the cost of hollowing out the base of companies they can invest in.

Again, take Cadbury. The UK has precious few globally successful consumer goods groups. A hundred years of work has gone into creating some of the world’s most recognisable confectionery brands. If they are subsumed into a Kraft conglomerate, they will probably slowly be forgotten about and eventually die off.

Fund managers will make a quick extra 30% profit on the shares, which will flatter the next quarterly report to their investors. But there will be one less highquality British company to invest in.

Cadbury could have given them steady profits and dividends for years – precisely the kind of blue-chip stock that pension funds need to hold in their portfolio.

The bulls are rampant again.

Bonuses are back. £1m houses in London are being snapped up. And, if we needed any more evidence that the market regained Matthew Lynn has much of its swagger, it looks like a merger boom is cranking up into action.

US food giant Kraft began the week with a £10.2bn (R127bn) bid for British confectioner Cadbury. The weekend papers were full of stories of a bidding war for Deutsche Telecom’s British mobile unit, T-Mobile, before a jointventure with Orange was sewn up. It’s not long since mining giant Xstrata lodged a £41bn merger proposal for its rival Anglo American. At this rate, we’ll soon be in the middle of a full-scale merger boom, much like the telecoms and media takeover craze that powered the bull market of the late 1990s.

You can understand why some big deals are back on the agenda. After the savaging equity markets took in the past year, assets are cheap by historical standards. Regardless of what you think will happen to the global economy, there probably won’t be a better time to expand an industrial empire. British assets are particularly cheap. The FTSE hasn’t recovered as fast as other markets, and the pound has devalued significantly against the dollar and the euro.

And it’s not just about opportunistic timing. Chances are, the next decade will be a lot tougher economically than the one we’ve just been through. Global demand will be sluggish as debt mountains, both public and private, get paid down. Making money won’t be easy.

Taking over a rival, cutting costs, and raising prices as competition is reduced, is one of the few guaranteed ways of raising profits when times are hard.

The market, if the past is any guide, will pile in enthusiastically, doing everything it can to stoke another merger boom.

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11 September 2009

©BLOOMBERG

Global view

Mergers fatten profits, but only in the short term Bankers will lick their lips at the fat fees to be earned from M&A deals. Funds will look forward to locking in the profits of the past six months, and pocketing healthy takeover premia too. Take Cadbury: the share price dived to 445p at the depth of the crunch, but soared past 800p when the Kraft bid was launched.

But, in truth, the last thing that City bankers and fund managers should be doing is slipping straight back into their bad old ways. One of the main problems the market must tackle is the way it rewards short-term profits at the expense of long-term prosperity. That’s true of bonuses, clearly. But it’s true of the M&A market too. The overwhelming evidence is that mega-mergers destroy value on an epic scale. Vodafone chewed up billions making itself the world’s biggest mobile company, while losing market share at home. Glaxo devoured Wellcome, then SmithKline Beecham, yet didn’t end up any bigger than when it started.

Conglomerates put together through wheeler-dealing, such as Hanson, fell apart even faster than they were created.

Bankers make fat fees. But only at the cost of destroying long-term relationships with companies that could have provided work for decades ahead. Fund managers

Likewise Anglo American. True, plenty of fund managers have questions about the way the mining firm is being managed.

Perhaps it is not extracting all the value that can be squeezed out of its assets. But a huge merger is unlikely to fix that. If the shareholders aren’t happy, they can sack the management. But if they sell the group, they won’t get to share in its longterm growth. And the FTSE and the JSE will lose another big, quality company – if platinum, gold and diamond mining isn’t a good long-term business, it’s hard to know what is.

The market, including the fund managers, the hedge funds and the bankers, could send a simple message. Over Cadbury or Anglo American, they could say: “This is a quality business and if there are any problems, we’ll ask the management to fix them. If they aren’t up to it, we’ll appoint new ones. But we don’t see any point in a mega-merger: it will just distract management, and destroy value in the long-term.”

There’s about as much chance of that happening as there is of a packet of chocolate buttons surviving break-time in a school playground. But if it did, it would send a powerful message that the market had changed. And before the fund managers pocket the profits and the bankers start trying to rustle up rival bids, they should at least pause to ponder whether another merger boom is really what they need right now.

investing in property

Sectional title property: Low stress, high reward

by Gary Booysen contingency budget for emergencies.

Currently a wide variety of buyers are looking to sectional title units to meet their accommodation needs, says Carol Reynolds, Pam Golding Properties manager for the Durban area.

Ascertain if there’s any talk of special levies – you’ll find this in the recent body corporate minutes. If there are, find out what these special levies are for.

Banks are slowly beginning to open up lending facilities, but they’re nowhere near the pre-crisis levels. And let’s face it, the credit act is still in place.

The world also learnt a lesson (hopefully) from the subprime mortgage crisis.

We can expect lending to remain more subdued than the wild party of pre2007. This has opened sectional title properties up to a much wider audience.

Reynolds explains: “Sectional title units appeal to a broad range of home buyers including both owner-occupiers and investors. At present we see a demand from a mix of first time buyers, pensioners, retirees, young couples and families, single parent families and of course, investors as a buy-to-let investment. We also find parents standing surety for their children – young people investing jointly in sectional title apartments and professionals pooling their incomes to buy in more than one person's name.”

Just about everyone is buying into sectional title schemes. From high end game reserve golf estates to miles upon miles of Duplex housing, squeezed in like putty into the gap between Johannesburg and Pretoria. They’re also great if you’re planning to flog it in a couple of years for a healthy capital gain.

“The sectional title sector of the market presents good buying opportunities right now. Interest rates are low, and from a

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11 September 2009

And look at the outstanding levies noted in the financials – at any given time, there shouldn't be more than 5% to 10% outstanding; any more than this is a concern.

Finally, take note of the general exterior of the building – a good body corporate maintains its blocks well and this is usually a good indication of a healthy bank balance. buy to let perspective the tenant pool has grown – as many would-be purchasers are compelled to rent due to the banks' stricter lending criteria.

Sectional title units are very suitable for letting and in fact are usually easier to let than freestanding homes.”

They’re popular, whether you’re planning on renting out or living in, for a number of reasons. They offer good security, which is high on the priority list of most home purchasers. The body corporate takes care of all external maintenance keeping pools and gardens in good condition all year round. And they’re also usually a lot cheaper than their freestanding counter parts. So, what do you need to know before buying up?

Make sure the body corporate is liquid Reynolds suggests you ask to see the audited financial report. Is the body corporate liquid? The body corporate should also have funds in reserve – if not, be concerned. There’ll be no

Know thy neighbor Reynolds says first time buyers who have no experience of a body corporate need to familiarise themselves with the body corporate rules. This doesn’t just mean finding out if the block is pet friendly. Learn as much about the block as you can She says: “It's a good idea to investigate the profile of the other owners, for example, senior citizens may prefer not to move into a block that is predominantly owned by young families with children. It's always important to establish what percentage of the units is owner-occupied and what percentage tenanted. From an investment perspective, always ask your estate agent what rental return you can expect in a block and what the monthly levies are, to see whether the purchase makes financial sense. And in the current lending climate it's critical to ask your agent whether the banks are finding value in the block, and whether they are financing property in the building.”

cover story

How to profit from medical breakthroughs Genetics is continuing to revolutionise medicine, and is throwing up some exciting investment opportunities, says Eoin Gleeson.

America’s poor are spitting blood.

For the past month they’ve been herding into town halls to howl their disapproval at Barack Obama’s plans to reform healthcare. What are they so angry about? To many, particularly outside the US, it looks as though Obama’s plan to extend medical insurance to 47 million uninsured poor Americans has their best interests at heart. So is this a case of the turkeys voting for Christmas? Not at all. Most of the Americans who fought for seats at these healthcare debates are fiercely proud of their healthcare system.

They don’t want it to change. And that’s not because they are a band of blind jingoists, paralysed by fear of Communists in Washington.

Consider this. In 2006, the US accounted for 82% of world research spending in biotechnology, according to the British Medical Journal. A recent report by technology consultants Cels places the top five institutes for stem cell research in America. Between them, the top five US hospitals carry out more clinical trials

in the stimulus bill. Much of that will go to 15,000 additional grants submitted by scientists at universities across the US. Here’s how you can benefit from this and from the global surge in medical research.

each year than all the hospitals in any other country combined. It may be hugely wasteful in many ways, yet no other country contributes more to pushing back the frontiers of medicine than America.

And that’s important. We are living in an era of remarkable medical breakthroughs, but breakthroughs are exactly what we need to combat the diseases that will kill more of us as life expectancy increases.

The easy cures and low-hanging fruit in terms of treating disease have been picked off by the pharmaceutical industry over the past 60 years. The good news is that having decoded the human genome – which stores our biological programme across 23 pairs of chromosomes – we are starting to learn the secrets of even the most complex diseases. Stem cell labs from Newcastle to Jerusalem break news of stunning new developments by the week. Today’s medical industry is one where machines can sequence our genomes, blood from an umbilical cord is used to regenerate the brain, and robots perform remarkable feats of surgery.

Decoding our genes A cousin of mine was born with cystic fibrosis (CF) – a hereditary condition that exposes the sufferer to chronic respiratory infections due to an imbalance of salt and water in the lungs.

In the early 1980s, doctors struggled to control the effects of CF. My cousin was exposed to a blunderbuss of respiratory drugs and was never far from a mechanical respirator. At that time the average life expectancy for someone with CF was 29.

Today, CF sufferers have a much better chance of making it past their 29th birthday. Scientists have been able to pinpoint the gene that causes CF and are even attempting to replace the faulty versions in patients. When they are successful – so far patients’ immune

In America alone, some $39bn was allocated to healthcare spending

Best plays in the sector

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Genetix (Aim: GTX) made its name selling the machinery used in the 1990s for sequencing the human genome. But once the job was done, sales fell sharply. So the firm changed tack. Now it’s a world leader in image screening and diagnostics. It makes lab equipment that allows scientists and clinicians to screen cells in early-stage research and design of biologics, which, as we pointed out, will account for 44% of the world’s top 100 treatments by 2012.

Genetix is also a leading provider of technologies for genetic analysis for prenatal and postnatal screening. It sells imaging and diagnostic equipment to big pharma, biotech and more than 1,000 diagnostic labs worldwide.

for biological drugs will require a huge amount of data crunching and analysis; Genetix has the tools for the job. It trades of a forward p/e of 11.5.

Earnings per share (EPS) has been growing at 29% a year.

Increasing consolidation in the pharma industry will make it hard to maintain that pace, warns MoneyWeek’s Paul Hill. But the search

In late July, we selected Reneuron (Aim: RENE) as a canny play on stem cells. Reneuron focuses on producing adult stem cell Continued overleaf

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150 Figures in pence

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cover story do the job for just $50,000. “I spent ten years searching for just one gene,” Dr Venter told The Economist. “Today anyone can do it in 15 seconds.”

Scientists have a single target in mind: $1,000 to sequence a genome. “At that price, we enter the era of consumer genetics,” says Professor Steven Pinker in The New York Times. We will pay to learn how likely we are to develop hereditary diseases, such as Alzheimer’s or Parkinson’s, and adjust our lifestyles accordingly. This shift towards preventative medicine heralds a radical evolution for healthcare. A recent study by the American Cancer Society concludes that prevention and early detection decreased cancer death rates between 1990 and 2005 by 19% for men and 11% for women.

The cost of sequencing a genome is plummeting. Scientists hope to get it down to $1,000 per genome Continued from previous page

defences have blocked treatments – it will add years to the lives of young CF sufferers.

Ever since upstart biologist Craig Venter stunned the science community by sequencing a human genome seven years ago, the prospect of a leap in our understanding of human disease has seemed tantalisingly close. By deconstructing the human body cell by cell, scientists believe they will uncover the genetic roots of complex diseases.

Many thought the Human Genome Project, sequencing a single genome at the cost of $4bn, would herald cures for

everything from cancer to diabetes. What they have actually learned is that these diseases are far more complex than they had imagined.

“We’re entering the era of consumer genetics” But scientists are close to a remarkable medical milestone. Dr Venter’s big achievement was to sequence a single genome under his own steam for a fraction of the cost of the official Human Genome Project – his project cost $100m.

Yet now radical improvements in sequencing technology allow scientists to

Continued from previous page therapies. And two could prove themselves very quickly. Since July, Reneuron received regulatory approval to start clinical trials on its treatment for stroke patients. But its promising diabetes therapy is even closer to a breakthrough. So we still like Reneuron.

But an even cannier play on stem cells is in storing them. CryoSave (Aim: CRYO) is the largest stem cell bank in Europe, commanding half the market. These bio-banks will be invaluable to researchers. Cryo-Save has already committed 100,000 samples to storage and last year saw a 21% jump in demand. The group turned a profit of €3.5m on turnover of €29.5m, and just reported an 11% jump in storage in the last quarter. Tom Bulford of Red Hot Penny Shares UK maintains a 12-month target of 140p. It trades at 58p today.

One of the most impressive medical device innovations of recent years is the Cyber Knife, from Accuray (Nasdaq: ARAY). This robotic radio-surgery gets around one of the main risks in surgical tumour removal: the risk of damaging organs due to movement

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At $1,000 to sequence a genome, it will also be cheap enough for widespread medical use. Newborns could be sequenced at birth for medical records; cancer patients will have tumours sequenced as they are developing.

That then raises the prospect of personalised medicine, says JP Morgan analyst Tycho Peterson – bringing the right drug to the right patient with the right dose, instead of the horrible trial and error that CF patients, for example, have had to cope with in the past.

That’s why Obama has included $10.4bn to invest in new life-science research over the next two years in his stimulus plans.

But let’s not get carried away. It could be up to a decade before the $1,000 target is reached, reckons The Economist.

Continued overleaf

during surgery. The Cyber Knife does this by moving to the rhythm of the lungs and prostate, tracking and removing tumours as the body moves. The machine has a 100% success at treating prostate cancer in studies, notes Paul Hill, and has a huge potential market.

Another medical devices group that looks set to revolutionise cancer treatment is Electro-Optical Sciences (Nasdaq: MELA).

Melanoma is the deadliest skin cancer, accounting for 80% of all skin cancer deaths. There are 150,000 cases reported a year in the US alone. But doctors still must rely on their own vision to decide whether a spot or wart merits a biopsy. So Electro-Optical has developed the MelaFind, a hand-held imaging ‘gun’ that emits ten different light wavelengths to capture images of suspect pigmented skin lesions. The device is under expedited review by the Food and Drug Administration, but in clinical studies, MelaFind’s accuracy in ruling out disease proved to be 2.5 times greater than that of dermatologists. Roth Capital Partners analyst Matt Dolan thinks sales of the device could hit $10m the first year, then climb to $40m.

cover story Continued from previous page

The medical-industrial complex

Until then, the primary use of gene data will be in discovering new drugs.

The key to this research is machinery, says Tom Bulford in Red Hot Penny Shares UK. “Gone are the days when teams of white-coated researchers stood at laboratory tables, squinting at cells through the lens of a microscope.” Today, they use machines that can identify cells at high resolution, count them at high speed and analyse their characteristics in seconds. Decoding the genomes at $1,000 may be a while off, but the companies aiding this colossal data crunch have a very strong market to attend to in the meantime. We look at the best play in the sector in the box on page 16.

The monstrous potential of stem cells No one can doubt the staggering potential of stem cell research. In the last month alone, German scientists took a big step towards producing replacement body tissue using stem cells. And scientists in Newcastle have used them to develop sperm in a test tube – threatening to make the male of the species redundant.

The trouble is that it’s a long way from experiment to commercial treatment.

And while the regulatory authorities have given a green light to the first-ever human trials using embryonic stem cells this year, we can’t suddenly expect a string of medical miracles. You can blame our biology for that.

The human body consists of more than 200 mature cell types, each with its own specific function – from brain to blood to muscle. Stem cells are immature cells with the chameleon-like ability to take on the characteristics of any of those 200 cell 18

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Biologics are drugs made from living sources, such as antibodies, rather than from chemical substances. The benefit of using antibodies, for example, is that once they are activated by a disease, they can build up resistance against it. In that sense they are used in disease prevention, not just treatment. With cheap gene sequencing, demand for drugs that stave off hereditary disease could really take off, especially as governments seek to vaccinate children to that end. Oncology vaccines are already generating huge interest, with cervical cancer recently added to many immunisation programmes. AstraZeneca has predicted that biologics will grow on average by 11% a year up to 2012, at which point they will account for 44% of the world’s top 100 treatments.

President Lyndon Johnson was the Silvio Berlusconi of his day: fond of grand but ill-judged displays of manhood in front of reporters. At one press conference, Johnson reassured the assembled reporters that he had made a full recovery from routine gall bladder surgery by baring his chest. “Here ya go,” bellowed Johnson, lifting his shirt to reveal a horrific scar from his navel all the way up to his chest.

Cartoonists had a field day depicting the scar in the shape of Vietnam.

His scars wouldn’t be so impressive today

“Follow the money and buy medical devices” types. Embryonic stem cells hold the most potential. But it’s hard to predict how these cells will behave when administered to patients. They have a nasty tendency to form malignant tumours called teratomas – literally ‘monster tumours’ – which can contain random bodily structures, such as eyes and teeth.

There has been more success with adult stem cells, but their range of uses is restricted because of their maturity.

The third and best source of stem cells is the umbilical cord. Here the cells are young and easy to secure. Stem cell scientists have already used them to make 20 human-organ-based tissues, including liver, blood vessels and pancreas tissue.

But again, there is no guarantee how these cells will develop.

Ironing out all these ‘programming’ problems with stem cells will involve scientists conducting a vast range of tests before they get anywhere near a potential commercial treatment.

But as you may have gathered from the above, the sheer logistics of sourcing enough cells to do so isn’t easy. For example, adult stem cells typically come from bone marrow. To extract them is an invasive and painful procedure. So for now, the best way to profit from stem cell research is to buy into firms that specialise in stem cell storage – we look at a global leader in the field on page 16.

Medical surgery has come a long way since then. If Johnson went in for gall bladder surgery today, the surgeon would make two or three small cuts of about five to 10mm through his abdomen and then pass a long, thin telescope through to view the region on a monitor. The scar would be a lot smaller, and Johnson could have been back to work within a week.

But what hasn’t changed since Johnson’s administration is the way the medical industry is run. Some call it the medicalindustrial complex – an industry that thrives on the profit-hungry collusion of companies working in pharmaceuticals, hospitals, medical supplies and insurance.

This industry has little interest in costeffective treatment, or serving a public interest. “The ugly truth about the business of medicine is that sickness is profitable,” says Andy Kessler, author of The End of Medicine. “The greater the number of treatments, procedures and hospital stays, the larger the profit.”

The Congressional Budget Office has pointed out that $700bn of roughly $2.3trn spent on healthcare in 2008 was wasted on treatments that did not improve health outcomes.

This flood of money to create new products, that the industry can charge ever higher fees for using, is shockingly wasteful. But it can also produce impressive new medical devices alongside the less effective treatments. As Kessler puts it, “it’s like throwing spaghetti at a wall – some of it sticks”. What’s more, medical device firms benefit from lighter regulation and lower product development times than drug developers, making them less prone to big disappointments far down the development track. Spending on new health technology already makes up as much as two-thirds of the 6% annual increase in healthcare costs, which for this year is $2.5trn. So for now, investors should follow the money and invest in medical devices. We look at two of the most promising on page 16.

the best blogs What the bloggers are saying 80 70 60 50 40 30

Source: Defra

Prospectmagazine.co.uk There hasn’t been rationing in Britain since the banana ban was lifted in 1954. But could it make a comeback?

‘Economists’ are paid apologists for the Fed

Risk to British food supplies % of total imports per commodity

The return of rationing in Britain?

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Soya – Liverpool Cane sugar – London Tea – Felixstowe Cocoa beans – Hull

Bananas – Portsmouth Coffee – London Grapes – Felixstowe

The good news, from Britain’s first food security assessment, is that with domestic production and European imports supplying over three-quarters of consumption, their food supply is “very resilient to supply interruptions”. But not everything is safe.

The Department for Environment, Food and Rural Affairs has flagged seven vulnerable commodities. Top of the list are soya, cane sugar and tea. Brits get through more than £100m worth of each of these every year in the UK. But in each case, at least 75% of the amount they consume comes from outside the EU. Worse, the majority arrives through a single port – Liverpool for soya, London for sugar cane and Felixstowe for tea. In the event of a terrorist attack or an outbreak of war in a producing nation, Britain could see rationing return. “Time for a national soya bunker?”

Socially useless jobs are individually useful Stumblingandmumbling.typepad.com/ Lord Turner has dismissed the City’s activities as “socially useless”. But who cares if they are, asks Chris Dillow. “I’ve spent almost 24 million minutes on this earth, and in not a single one of them have I given a parrot’s clunge about whether my work [investment banking and journalism] is socially useful.”

Besides, the real reason Lord Turner is so concerned is he grew up in the 1960s.

Studies show that economic conditions in our formative years shape our attitudes to the economy. And the 1960s was a time of full employment – when you could pick a career path at whim.

Not so if, like me, says Dillow, you grew up in the 1970s and 1980s – a time of mass unemployment and industrial decline. “My only concern has been to find any job and to keep it.” In that context almost any job will do just fine.

It’ll be the same for those young people entering the workforce today, who are likely to have their beliefs shaped by this recession. They won’t care about doing socially useful work and will be grateful for what they can get. Only earlier generations, cosseted with full employment in their early years, can afford to fret about the social benefits.

Huffingtonpost.com The US Federal Reserve failed to see the Great Depression coming. Yet it has escaped criticism from the economics profession. How? asks Ryan Grim.

The answer lies in the Fed’s reliance on a vast and formidable network of consultants, visiting scholars, alumni and staff economists. These in turn dominate the economics industry to such an extent that offering any criticism amounts to career suicide. And it’s a game that’s been played out for three decades. Back in the 1970s, the Fed didn’t hold much sway amongst economists. But since then a culture of consultancy has been fostered. Over a three-year period ending October 1994, for example, the Fed awarded 305 contracts to 209 professors worth a total of $3m. This year the Fed plans to hand out $433m to the economics profession.

And the influence is obvious. A hugely disproportionate number of big economists cite monetary policy as their main field. And many sit on the boards of the top economics journals. So dissenting from the Fed’s paralysing belief in efficient markets and light regulation can mean non-publication.

The Fed has become the oxygen of an economist’s career, which is why so many ‘missed’ the housing and debt bubble – they were toeing the party line.

Hard realities, but great tacos It has been a rough year for Mexico: one that has included the swine flu outbreak, an economic crisis and continuing drugrelated violence. But Mexicans have found a way to deal with these traumas – smashing Guinness World Records. On 1 August, Mexico won the record for the longest catwalk.

Promoters in San Luis Potosi set up a fashion show involving 81 models, each of whom had to strut 4,332ft. Two days later, Mexico produced the largest meatball in the world, weighing 109lbs, while earlier in the year 40,000 people locked lips on Valentine’s Day for a kissing record. Then, as August came to an end, 12,937 crowded into the Monument of Revolution to reenact Michael Jackson’s Thriller (pictured). “It’s a way for us not to think about all the difficulties, the conflicts, the killings,

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the economic crisis,” said receptionist Rocio Valdez. “Yes, we’re in bad shape, but if we can make the biggest taco in the world…” Which, in fact, they have – Mexico holds the record, thanks to a 1,654lb flour taco made in 2003.

entrepreneurs

How I turned a love of science into £150m babies. With no time for formal testing, Evans and his team did much of the toxicity testing on themselves (“we just ate the stuff and stuck it into one another”). The breakthrough is credited with saving the lives of hundreds of premature babies. He also discovered a natural micro-organism on river banks that turned the colour of fish-farm salmon pink (at the time, chemical dye was used), which he sold to US company Abbott for £4m.

Sir Christopher Evans, 52, sounds like a parent’s worst nightmare. At seven, he was feeding Lucozade to tadpoles in tinfoil covered tubes. By the age of ten, he was experimenting with explosives. But far from curbing his scientific tendencies, the biotech entrepreneur’s parents encouraged him. “I can still remember the night my father came home drunk on Mackeson’s with scoopfuls of sodium chloride he’d taken from work, which I used to make those explosives,” he says. “Science was my thing and fortunately, my parents recognised it.”

The son of a steel worker, Evans grew up in Port Talbot, south Wales, where he attended St Christopher’s College along with the rest of the “rough and tumble kids” on his council estate. After studying microbiology at Imperial College London, he gained a PhD in biochemistry at Hull University, then headed to the US to work in academia and the pharmaceutical sector. In 1987, he returned home to set up his own business. At the time, there were almost no biotech companies in the UK or Europe. With £1.3m raised from British Sugar, he started Enzymatix from a prefab hut outside Cambridge “that had been full of sheep and had no sinks”.

Evans started developing enzymes, the natural biological catalysts found in cells. He’d sell them to pharmaceuticals

©DAVID LEVENSON/GETTY IMAGES

by Jody Clarke

MY FIRST MILLION Sir Christopher Evans, Excalibur firms at £750 a box. The first two sold in the toilets at a conference in Reading, where Evans bumped into the man from SmithKline Beecham. It sounds ludicrous, but it was the start of a series of innovations that would catapult him into the big leagues.

Using enzymes from cabbages among other things, Enzymatix found a way to mass-produce phospholipids, a biomolecule that can be used to improve the lung functioning of premature

Thankfully, there were no long-term side effects from his time as a human guinea pig. He split Enzymatix in 1992 to form Celsis and Chiros (later Chiroscience).

The firms floated in 1993 and 1994 for £60m and £100m respectively.

Of the original 64 Enzymatix employees, at least 14 have become multimillionaires. Evans himself is worth around £150m after going on to set up a series of other companies. They include Excalibur, a venture capital fund that aims to invest in start-up biotech companies and sell them.

It’s not bad going for a man who admits he must have been “some kind of genetic, mutant freak” as a child – one minute playing rugby with friends, the next scurrying off to the shed to make fuses for fireworks. But neither his eccentricities nor his riches have changed him too much. “I still meet up with those same guys, 52-year-olds now, to head to the rugby,” he says.

The MoneyWeek audit: Gary Lineker

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• What has he earned?

Gary Lineker began his football career in 1977 with Leicester City.

In 1985, his excellent goalscoring record led Everton to pay £800,000 for him – a record for the club at the time. Lineker stayed for just one season before a £2.75m transfer deal took him to Barcelona, where he reportedly earned £4,000 a week.

In 1989, still playing for Barcelona, Lineker’s annual football earnings were put at £250,000 by The Sunday Times, with twice as much again coming from endorsement deals and appearance fees. That year he signed a £1.5m transfer deal with Tottenham Hotspur, sparking £100,000 worth of season-ticket sales at the London club in just two days. His weekly earnings

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were £10,000 while at the club. He ended his football career at Japan’s Grampus Eight club after a transfer in 1992, earning £3m there, despite injuries.

• What about non-football earnings?

In 1994, Lineker struck an advertising deal with Walkers crisps. In his first year, this netted him £75,000; this had risen to £300,000 by 1996. In 2000 he signed a £1.5m five-year deal. He also earns large sums for after-dinner talks. In 2005 he was reported to charge £25,000 per engagement. He is also a respected sports TV presenter, earning £2.5m in 2005.

• What did his recent nuptials cost?

The press was full of news last week of Lineker’s budget wedding to model Danielle Bux; the couple wed in a £400 ceremony in Italy. But this thriftiness was eclipsed by a £250,000 reception held the next day. That figure includes a £9,000 second wedding gown worn by the bride.

personal finance

5 tips for living below your means

by Karin Iten

question: If getting rich makes us happy, then do countries get happier as they grow wealthier? It’s a fair question and the answer will surprise you. Here’s what the study found. “As a country gets wealthier, there’s no overall increase in happiness. Why? Because they continually compare their wealth against that of others.” In fact, economies that encourage people to continually strive for more generally have a higher suicide rate than others. Fascinating!

Lately, I’ve been thinking a lot about what it means to be wealthy. Everywhere I look the consensus is clear: The way to true wealth is to live below your means.

How do you go about this? Well, the trick is to live a comfortable, but not a wasteful, life. As Benjamin Franklin put it: “A penny saved, is a penny earned.”

It’s as simple as that. Or is it?

The truth is, living below your means is easier said than done – especially since it, like any habit worth acquiring, requires a mental shift. That’s why, this week I’m revealing my top five tips to living below your means.

So let’s get into it…

Tip #1: Avoid prepared food It’s no secret that we’re all pressed for time. As contributing members of society (and parents), there simply aren’t enough hours in the day to get it all done. Yes, takeaways and ready-made lasagne can be tempting, but buying prepared foods each night will end up putting a serious dent in your pocket. And not only do you pay for the extra convenience, but you also get a meal full of chemicals and preservatives too.

The trick: Once you learn to plan ahead, you’ll be surprised by how much time (and money) you can save. So why not buy a slow cooker and prepare tomorrow’s meal the night before? Just before you leave for work, switch it on.

By the time you get home, dinner will be ready and waiting.

Tip #2: Never pay retail prices You can easily save hundreds of rands a year on clothes by waiting for sales or shopping at discount retailers. But what if you need something now? The way to go is factory shops and yes it means you won’t have to skip the labels either.

The trick: Visit www.factoryshops. gomommy.co.za. Here you’ll find the addresses and contact information of more than 280 factory shops in the country, including clothing stores Addidas, Billabong and Hip Hop, as well as shoe shops, cosmetics retailers, food

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outlets and so much more. Who ever said you can’t be fashionable without breaking the bank?

Tip #3: Cut up your card “Credit cards make money unreal,” says dumblittleman.com. Why? Because they take the thought process and discipline out of your buying. Debit cards are no better. All you do is swipe, sign and “hey presto” you’re done. You may know what you’ve spent, but do you know how much you have left? Unless you’re a conscientious mathematician, the answer is probably no.

The trick: When you pay cash and watch just how fast those bills disappear, you’re likely to be much more careful about how much (and on what) you spend. It’s like being a kid and relearning the value of money all over again. You’ll begin to question every purchase and that’s when you’ll become really smart about your spending habits.

So put away the plastic this month and see just how much you save.

Tip #4: Stop competing with the Jones’ A recent study posed the following

The trick: Keeping up with the Jones’ is hard work. You need to redefine your definition of rich and make it work for you. And it’s why I’ve left my top tip for last…

Tip #5: Redefine your definition of rich My final tip comes from personal finance site, www.frugaldad.com and it’s a real eye opener. “I remember sitting in a cubicle at my first professional job staring at a picture of a SUV I wanted to buy (and eventually did). Now, I sit in my office and look at the pictures of my kids. Just outside my window, I can see the beater I drive sitting in the company parking lot… What a difference a decade makes! To sum things up, my definition of being rich is having enough to meet my family’s basic needs, a few of our wants, and to be able to give some away to others.”

That’s the crux right there. Don’t live life trying to fool yourself into thinking wealth is measured by the material objects you own. If you don’t manage your money, it’ll manage you – and you’ll be stuck in debt forever.

Tax tip of the week Don’t ignore Vat on fringe benefits One of the most common mistakes picked up by the SARS auditors is that employers fail to declare Vat on company fringe benefits. Don’t be the one caught out!

Vat on fringe benefits is often overlooked and rakes in thousands of rands of revenue in additional Vat, fines and penalties for SARS audit teams every year.

Don’t become part of the statistic! Make sure your payroll administrator is aware of the Vat provisions that relate to fringe benefits. Declare your employees’ Vat correctly. They won’t be the ones paying the penalties. Just remember, you don’t have to collect this Vat from your employees.

Peter Franck, Editor in Chief, Practical Vat Handbook

profile This week: Isaac Perlmutter

The mild-mannered man in the specs and fake ’tache is really a business superhero Isaac ‘Ike’ Perlmutter, Manhattan’s newest billionaire, kept a low profile in the wake of Walt Disney’s $4bn deal to buy the Marvel comic-book empire, of which he is head. Few were surprised, says The Sunday Times. The “mysterious stranger pulling the strings behind Marvel’s stable of superheroes” is so shy of publicity that he tends to turn up to movie premieres in disguise. The fake moustache and glasses ensemble he donned for the premier of Iron Man (pictured) was so effective that not even close friends recognised him.

It was in 1996 that Perlman, 66, and his partner, fellow Israeli Avi Arad, swooped in to rescue Marvel from oblivion. In doing so, they managed to outmanoeuvre two of Wall Street’s most feared deal-makers: Ron Perelman and Carl Icahn. That David and Goliath battle led to an extraordinary turnaround that saw Marvel transformed from a worn-out publisher to the entertainment goldmine behind blockbusters such as Spiderman and X-Men. Quite a feat for an unknown businessman, with no interest in comics or movies, who arrived in America with just $250 in his pocket.

What little we know of Perlmutter’s early years comes from the more extrovert Arad, a motorbike-loving movie buff – by far the more approachable half of this “classic good-cop, bad-cop pairing”, says

BusinessWeek. The duo didn’t meet until both were established in the US, but they share a similar background. Born into families of meagre means, they both fought in the 1967 Six Year War before taking their chances in America. There, however, the similarities end. “Ike is all elbows and Avi all charm.” Perlmutter shuns the trappings of wealth – his only known indulgence is playing tennis. “His mind is always in gear and going on to the next thing,” a colleague told the FT. “He likes to observe and absorb what is happening around him without necessarily standing out.

He’s the kind of guy you wouldn’t notice in a room.”

Perlmutter’s entrepreneurial streak was evident from his early days in New York. He would stand outside Jewish cemeteries in Brooklyn, touting for work leading services in Hebrew.

Later progressing to selling toys and beauty products on the street, he taught himself how to read a balance sheet and made his first fortune selling surplus goods in “dollar store” outlets. Sniffing out

distressed businesses was a speciality: he once owned a controlling interest in Victor Kiam’s electric razor manufacturer Remington Products. But he was always most at home in the toy market.

He first encountered Arad – a toy designer – during a scrap over royalty payments. In 1990, they teamed up to run Toy Biz and struck a deal with Marvel’s then owner Perelman to sell action figures based on Marvel characters. When bad financial bets and hubristic expansion schemes got Marvel into trouble, they pounced.

Some say Perlmutter’s shyness is partly explained by his thick Israeli accent. But he’ll have to get used to more scrutiny now that he’s running Marvel for Disney. Still, there are compensations, says The Sunday Times. The sale lands him with a $1.4bn payday: enough to “cover the cost of disguises for the rest of his life”.

Disney takeover of Marvel could yield heroic profits Twitter was ablaze with anger after Mickey Mouse swooped on Marvel and made off with its muscle-bound heroes, notes Dominic Rushe in The Sunday Times. Aficionados don’t want to see Donald Duck getting mixed in with The Hulk, or baby versions of Marvel’s characters. But, outside the fanboy community, Disney’s $4bn bid for the Marvel empire looks like “a smart, if very expensive bet on the new Age of Heroes”.

Disney already has a tight hold of the tweenage girl market with hits such as Hannah Montana and High School Musical. The gaping hole, which Marvel fills, is access to “hard-to-reach young males”. The deal could yield billions for Disney if it can turn Marvel’s 5,000-strong library of comic characters into movies, internet properties, video games and merchandise.

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11 September 2009

Maybe, says Matthew Garrahan in the FT, but Hollywood’s history of trying to combine rival studios “is littered with clashes and failures”. What’s more, many of Marvel’s most lucrative characters – including Spiderman and X-Men – are already tied up in deals, yielding billions for rival studios Sony and Fox. Still, analysts draw comfort from the fact that Spiderman’s “guardian angels”, Perlmutter and Arad, are being retained at Disney. As the success of Iron Man shows, they have a knack of breathing new life into vintage characters. And the studio has landed quite a street-fighter in Perlmutter, who has always majored on “his own brand of frugal deal making to Hollywood”. In straitened times, it’s handy to have a hardliner who refuses to pay vast salaries to actors. Perlmutter may now be a mogul of enormous wealth, notes one colleague. “But he knows the value of a buck.”

Spending it Travel

Three of Italy’s best luxury hotels

By Daria Afanasieva

Whether you’re looking for a cultural city break or a relaxing country holiday, Italy’s wealth of luxury hotels means there is something for everyone. Here we look at three of the best.

Value for money in Venice For a “good-value five-star that’s right on the Grand Canal”, head to the Westin Europa & Regina. If you were inclined to, you could dangle your feet straight into the Grand Canal from the hotel’s terrace. St Mark’s Square, Venice’s sightseeing Mecca, is just ten minutes’ walk away. But for all the square’s attractions, don’t forget to explore the hotel itself – the Westin is made up of five historic buildings dating from the 17th to 19th centuries.

After the rigours of a day’s sightseeing, retire to your room for an in-room spa experience. The hotel’s service is “sleek and professional”, says Nick Trend in The Daily Telegraph, and it was named on Condé Nast Traveler’s 2008 Gold List and 2009 Gold List Reserve. Be aware that Venice is best avoided in summer when the canals can start to smell. Go in autumn when the pong recedes and the Westin’s terrace provides a great view of the Venice Historical Regatta, which takes place on the first Sunday of September.

Double rooms cost from €310 (R3,380), including breakfast. Guests are given a 10% discount for stays longer than three nights in mid- and low season. For more, see www.starwoodhotels.com/westin.

Venice’s Westin Europa & Regina offers excellent views across the Grand Canal

Learn to be a gladiator in Rome If you want to visit Rome, but would like to be able to escape the mania of the city when the tourist crush gets too much, book into the Rome Cavalieri (below, left). It’s just ten minutes outside the city, but boasts 15 acres of Mediterranean parklands. With three swimming pools, a spa, its own art collection and stunning views of the Vatican, it’s the answer for “families wanting to combine poolside pleasures with sightseeing”, says Genevieve Fox in The Times.

For a guaranteed unforgettable experience, sign up for the hotel’s gladiator training. You’ll be given your own gladiator kit with tunic, Roman sandals, belt, protective gloves and sword – a wooden training sword that is.

Anyone aged over seven can take part.

Double rooms start at €270 (R2,950) per room per night, inclusive of breakfast buffet and VAT. For more, go to www.romecavalieri.com.

Eat, drink and relax in Tuscany “High in the hills of beautiful Valle Serena, Borgo Santo Pietro is a perfect base for cultural exploration,” says Madeleine Lim in The Independent.

Siena is just 30 minutes away, Florence an hour and Pisa two hours.

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11 September 2009

This villa hotel opened last summer after being converted from a “rustic, historic” property into “chic tourist accommodation” by its Dutch owners.

The renovation has been a complete success: Borgo Santo Pietro is “a temple of comfort for rather more indulgent travellers” (pictured, below).

The luxurious retreat boasts a spa, a freshwater infinity pool and acres of Tuscan gardens. And you’ll need to do plenty of laps to work off the hotel’s wonderful food. The in-house restaurant has a menu in which “classic Italian cookery meets superlative comfort food”.

Doubles start at €335 (R3,650) a night, including breakfast, or for €43,000 (R470,000) a week you can rent the whole seven-bedroom villa. For more, see www.borgosantopietro.com/en.

cars

Bentley’s lean, mean, green machine This Bentley, the Continental Supersports, is “the latest and meanest of the phenomenally successful Continental series”, says Andrew English in The Daily Telegraph. And as you watch the fuel gauge swing to empty at alarming speeds, you can console your conscience with the fact that this Bentley can run on bioethanol.

Bentley believes that, although the hype has died down, biofuels still have a future, and that, although not cost-free in environmental terms, do have benefits over oil. But whatever the case may be, this Bentley does not mean compromise, either in terms of luxury or performance. Its 5,998cc, W12

engine still delivers 621bhp and does 0100km/h in 3.7sec and a top speed of 330km/h.

And as for the luxurious interior, the “vibe is modern, edgy, purposeful – and yet there’s the usual Conti comfort and build quality”, says Tim Pollard in Car. It’s “very focused for a Bentley”: the front seats are “carbon clamshells that grip hard but still offer the support a Bentley owner would expect” and “composites and Alcantara trim swathe most visible surfaces”. And to drive?

“Our brief test ride took in some pretty brutal acceleration, sideways action and tested the brakes to the full … As far as

we could tell from the passenger seat, it’s a well resolved car. It’s Continental, magnified, with a harder, purer sporting focus. My abiding impression of the Supersports is that it’s a full-bore sports car for our times.”

To drive it is a “revelation”, says Andrew Frankel in The Sunday Times.

It’s “so much more nimble than a standard Continental”, and it has a “new-found level of poise and grip”.

Because it’s been 78 years since Bentley last built a proper sports car, many thought it never would again. “They were wrong: the Supersports is here to prove it.”

Wine of the week: The greatest white grape variety Wine: Groote Post Weisser Riesling 2008 R95 at exclusive wine retailers What a treat it was to visit the wineries up the west coast recently. Only an hour’s drive out of Cape Town you find four hospital wineries where you can taste wines that benefit from the cool sea breezes and gentle slopes.

by Marilyn Cooper For a while, Groote Post estate has bottled its Riesling, Chardonnay and Pinot Noir with the new Vino-lok seal (a glass stopper to replace the traditional cork). It’s decided to discontinue using this in future, mainly because it’s so much more expensive. If you see one of these wines, try them and don’t forget to check out the stopper.

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Weisser Riesling is the one cultivar you can put away and enjoy eight to ten years later, which is exactly what I’ve done with this wine.

While it’s perfumed with floral and honeysuckle aromas that make it fresh and lively on the palate, now, with time, this will become honeyed, rich, layered and full of complex flavours.

Enjoy it with ultra rich cuisine from Alsace.

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

blowing it

The Lipstick Index flashes red again Instead of stars, studios are turning to relative newcomers.

“In the past, studios believed that if they wanted a box office hit, they needed a big star,” says Peter Guber, chairman of Mandalay Pictures. “But this year, we’ve had a summer filled with sequels, remakes and franchises that don’t come with big names.”

Chemists must be pleased.

Britons, we learn, are sacrificing foreign holidays, expensive nights out and new cars because of the recession. But they’re still buying plenty of make-up – good news for lipstick manufacturers.

Ringing the changes

©MORGAN DAVID DE LOSSY/CORBIS

Indeed, L’Oréal has reported higher-than-expected profits for the first half of the year (R15bn) and Boots, a popular high street chemist, has seen a healthy increase in beauty product sales.

The link between make-up and recession is not new, as The Guardian points out. Sales of expensive lipstick soared in the wake of the September 11th attacks, too, leading an executive at Estée Lauder to dub it the Lipstick Index – make-up sales rise when times are bad.

The reason, I suppose, is that in difficult times women look for inexpensive treats to help them feel good – and look good.

“A recession doesn’t change people’s insecurities about the way they look,” says a researcher at Nitel, the beauty analyst. “They may have given up their long-haul holiday this year, but the reality is make-up is a small indulgence in the scheme of things.”

Big stars lose their lustre Bad news for Hollywood stars.

Young men, according to The Sunday

Lipstick sales boom as economies turn down Telegraph, are losing interest in big-name movies “as they find entertainment elsewhere – the internet, video games and iPhone applications – usually without having to leave their sofas”.

The stars are already feeling the effects, with the days of $20m (R150m) pay cheques seemingly over. Disney ditched Julia Roberts when she wouldn’t cut her $15m (R115m) salary to star in the recent comedy, The Proposal. Scarlett Johansson and Mickey Rourke are said to have accepted a mere $400,000 (R3m) each (this is Hollywood, remember), plus a cut of profits, to appear in Iron Man 2.

And Jim Carey took nothing upfront for his movie Yes Man, settling instead for 30% of the profits.

Luxury retailers in New York are resorting to stealth to boost sales. The likes of Tiffany and Bergdorf Goodman can hardly start slashing prices publicly – not without devaluing their brands. So what are they doing?

Cutting quietly – letting buyers know with a discreet word that the item they would like but can’t quite afford can be had for less. Tiffany, for example, has reduced engagement rings from around $10,000 (R76,000) to $9,000 (R68,500), but made no fuss about it.

Perish the thought. “We wouldn’t do an announcement saying ‘attention shoppers, prices have just been reduced on diamond rings’,” says a Tiffany executive.

Does it work? The Times says engagement ring sales have fallen by “slightly less” than the the sale of other items. Slightly less. It’s hardly a resounding yes.

Tabloid money… grumbling GPs must earn those fat salaries ■ Every time I write about British GPs and the six-figure salaries many of them earn for working a five-day week I get the usual insults from those bleating that I have no idea how hard they work, says Carole Malone in the News of the World. “One wrote to me recently: ‘It’s 6pm and I’m still here working’ – not realising that most people on huge salaries work till 6pm and beyond. Even, oddly enough, at weekends.” Anyway, we now learn that because of GPs’ refusal to work after hours, primary care trusts are being forced to fly in foreign GPs at R11,500 an hour. Many of them can barely speak English. “This lunacy has to stop. The UK government must tell GPs either to work overtime to justify their massive salaries – or forfeit them.”

■ Research reveals that girls get 10% less pocket money than boys, says Sue Carroll in the Daily Mirror. “Is this meant to

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raise my feminist hackles? Since when were children entitled to wages or payment of any kind unless it’s earned? ‘Parents are unwittingly contributing to the gender pay gap,’ says the study.

Easily resolved, I’d have thought. Stop giving the spoilt little brats handouts.”

■ The Advertising Standards Authority (ASA) has a bone to pick with MTN. According to Independent Online, the network was “deliberately misleading its subscribers into spending vast sums on expensive SMSes in a bid to win big prizes.” The mobile giant eventually pulled its competition but will we see justice? Not likely. Independent Online says: “The competition and adverts are history, but MTN gets to keep the millions it made from its misled subscribers.”

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

PUNTS Company

Media

Reason

Current price

Shoprite (SHP) Food & drug

Financial Mail

“Pulling off a scorching set of results in a droopy economy is a huge achievement and Shoprite has demonstrated once again quite what a classy operator it is,” says Jamie Carr in the Financial Mail. He attributes its success to its “spooky” ability to control every aspect of its business. It’s benefiting from consumers’ shopping down and will no doubt manage to hang onto many of them when better times return. It’s on a solid growth path and is set to add 11,000 new employees. This company is a star and it’s no wonder Jamie Carr picked it as his Diamond this week. Buy.

5851c

Marc Hasenfuss of Finweek says with his tongue firmly in cheek that, “shares in private education specialist Advtech (and haven’t we said that 10 times before) are probably one of the best options if contemplating putting your kids through school and university”. Trinity House was recently added to the increasing list of private schools, which include Rosebank College, Varsity College, Crawford and Abbots. It’s a well managed brand and cash generative business. On a PE of 11.90 this share is cheap and at 485c a share, it’s a no brainer. Buy.

485c

Advtech (ADH) General retail

Finweek

Transpaco (TPC) General industries

Financial Mail

Transpaco earns itself an accolade this week. Larry Claasen of the Financial Mail has named it his “ugly duckling”. It has plenty of cash. Its turnover rose 11.5% to R803m and it’s even seen fit to raise its dividend 71.4%. This is a profitable company, cheap on a PE of 4.88. Buy. 815c

Reinet (REI) Equities & investment

Summit TV Charl Bester, Kruger International

Reinet gives you a cheaper option on Brait Securities, but Charl Bester at Kruger International believes you’ll also get what some people call the “Rupert magic”. Its interim dividend and diluted earnings are both up 26%. Buy. 1040c

Bidvest (BVT) Support services

Financial Mail

Bidvest has a presence across the globe. But instead of this saving the share from the recession, it simply exposed it further.

With the world beginning to right itself, Bidvest’s earnings are sure to grow. Buy. 11700c

Data Vendor Company

Contacts

Dealings

Services

Profile

Address: 7 Sturdee Ave, Rosebank Johannesburg

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• Live equities, indices, FOREX, Fixed Income, futures • International equities and indices • International and local news wires • High level graphing applications • Forecast reports • Company financial analysis systems • In-depth company data including shareholding • News and data deliverable to Websites, Intranets and Extranets.

I-Net Bridge is the leading South African provider of economic data, financial market data and corporate market intelligence.

3rd Floor, Wembley Square Mc Kenzie Street Gardens, Cape Town Tel: (011) 280-0600, (021) 488-1856 E-mail: info@inet.co.za Website: www.inet.co.za

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11 September 2009

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

Company

Media

Blue Label Telecoms (BLU) Fixed-line telecoms

Financial Mail

Reason

Current price

The Financial Mail’s Larry Claasen says, Blue’s “turned the corner”. It didn’t start well as listed companies go, but that’s all about to change. It signed a deal with Microsoft that’ll make it easier to access the internet on a cheap cell phone. This one’s going to rocket. Buy.

541c

DOGS Company

Media

Reason

Current price

Central Rand Gold (CRD) Mining

Finweek

Brendan Ryan in Finweek explains how in the 80s many wouldbe mining moguls tried to open old mines in the Witwatersrand.

Almost without fail, these ventures ended in tears. There was a brief contender, Loucas Pouroulis, but even after a windfall at his Consolidated Modderfontein operation, he eventually closed it. Central Rand Gold is the latest of these foolhardy projects.

According to Ryan: “The harsh facts of life discovered by those mining entrepreneurs in the 80s were that the ‘old timers’ did a pretty thorough mining job the first time around. If they left anything behind there was a good reason for it – usually because the ground was very difficult to mine.” Avoid.

224c

Metair (MTA) Auto parts

Financial Mail

“You know things are bad when a company can’t even make a gross profit,” says Claasen in the Financial Mail. Everything related to the auto industry stinks at the moment, but with a 38% decline in exports, Metair “faces some difficult decisions”.

Avoid.

465c

Reason

Current price

WATCHLIST Company

Media Financial Mail

Afrox (AFX) Chemicals

MTN (MTN) Telecommunications

Woolworths (WHL) General retail

Financial Mail

Finweek

Razina Munshi at the Financial Mail believes Afrox has contained costs and reduced borrowing. It’s tackling problem areas, while viewing the future with caution. Its results have been pushed lower on the back of reduced demand. Hold.

2071c

“Even in a down period, MTN’s results are impressive,” says Larry Claasen. But, there’s more to this burgeoning telecom giant than meets the eye. Its subscriber numbers are down and it’s yet to conclude the Bharti Airtel deal. Hold.

12700c

Shaun Harris of Finweek says, “Woolworths looks like a broad retailer caught in the right place at the wrong time”. In an uptick Woolies would do particularly well, but with the recessionary conditions that we’re experiencing, it’s losing market share to the likes of Mr Price. Its clothing brand is doing particularly badly this year and this is adding to its misfortune. While market share is difficult to reclaim, Woolworths is still a great share. It’s trading on a PE of 14.18 and is a very well established brand. Hold.

1550c **Closing prices as at 9 September 2009

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last word

Gold rising The jobless… spending-less… clueless recovery

Bill Bonner

only three of five working-age residents have a job. Those who are still working are putting in the shortest work weeks ever recorded. How could the economy be growing with fewer people earning money? The New York Times tried to explain the enigma by calling it a “jobless recovery”. But a recovery without jobs seems unsatisfying, like a loveless marriage or a fat-free burger.

Gold crossed the $1,000 threshold again this week.

For the right reasons… and perhaps the wrong ones. Separating the good from the bad and the ugly is the challenge of today’s back page.

Another key indicator is personal spending. Not surprisingly, that is

As for Tim Geithner, he took no chances; he sang his own praises.

Speaking to a gathering of the G20, he congratulated them all: “… facing the greatest challenge to the world economy in generations, the G20 gathered here in London and committed to an unprecedented programme of policies to restore growth and reform the international financial system. Those actions have pulled the global economy back from the edge of the abyss. The financial system is showing signs of repair. Growth is now underway.”

Stocks are still up. Commodities too. Oil is over $70. Most encouraging of all: the ten-year Treasury note yields only 3.47%.

So what evil sends investors running to the protection of gold? None, say the papers; investors buy gold in anticipation of a recovery, which will bring with it tightened supplies and rising demand.

Every economist, investor and hair stylist knows what this means – inflation.

But if growth is underway, investors should be glad there’s not more of it.

The key indicators of real economic progress are negative. Employment is not rising; it is falling. Nearly seven million Americans have lost their jobs since the recession began. In California, 28

11 September 2009

©PHOTOLIBRARY

The press attributed gold’s rise to benign causes. The end of the world seems to have been postponed – indefinitely.

Bloomberg reported that a clear majority of those polled thought the world economy was recovering. With no more fear of the deflation devil, investors felt they were in the arms of angels. Surely Ben Bernanke watched over them even when they slept. Most people – including the president of the United States – attributed the recovery to the archangel Ben. “Investors give Bernanke high marks,” said the headline.

Gold bulls will be proved right… eventually down. Maybe it is a spending-less recovery too. The level of consumer spending is down 33% from a year ago.

Discretionary spending in the US is now down to a level not seen in 50 years.

Consumers aren’t spending partly because they have no money, and partly because they apply what money they have left to relieving the headache from their previous spending spree. In July, they reduced their personal debt hangover by more than $21bn – four times what economists had forecast.

These are, of course, the same economists who pimp for the angels at Bernanke & Co. If they’re right, we have a spendingless, jobless recovery pushing up the price of gold. Or, they are all clueless. Readers may come to their own conclusions.

We offer an alternate interpretation. We begin with a doubt about the one now on the table. In the popular version, the more the recovery seems real, the more investors fear real inflation. This drives them to buy gold. As inflation rises, so will the price of gold. If this were correct, we could also expect remedial measures from the US central bank. The Fed should withdraw its monetary stimulus, returning the economy to a kind of normalcy it hasn’t seen in years. The risk, not insignificant, is that Fed economists will err. It may loosen monetary policy too slowly or too quickly. Asked about the risk, Janet Yellen, president of the Fed’s San Francisco branch, replied: “I’m more concerned that we will be tempted to tighten policy too soon, aborting recovery. That’s just what happened in 1936… the Fed tightened policy because it was worried about large quantities of excess reserves in the banking system… let this not be another 1937.”

Gold bulls are counting on it. And the Chinese – with the most to lose – are buyers too. “Gold is definitely an alternative [to the dollar],” said Cheng Siwei of the Peoples’ Republic, “but when we buy, the price goes up. We have to do it carefully so as not stimulate the market.” The gold bulls may be right.

But we’d add a nuance. We’re not surprised by Fed errors. What surprises us is the rare accidental success. It would take a miracle for central bankers to find exactly the rate the market needs precisely when it needs it most. The ’37 error might have been an accidental success. It pushed the market in the direction it may have wanted to go – towards further liquidation. At least the decks were clear when the post-war boom came. Maybe we’ll get lucky and the Fed will make the same error again.

Not likely. Today’s recovery, based on hot money from the feds, is a fake. It won’t cause inflation, not soon. When this becomes clear, commodities will sink – along with stocks… and gold. Central banks, ignoring the futility of their hot money programme so far, will add more hot money. Eventually, the gold bulls will be proven more right than they imagine.

But they may be proven wrong first.

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