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THE BEST OF THE INTERNATIONAL FINANCIAL MEDIA

9 OCTOBER 2009 SOUTH AFRICA EDITION 115

Go Canada

Profit from the land of plenty, page 16

“Always enjoyable and increasingly essential reading.”

Jim Slater

Why you should invest offshore now

America’s most feared director takes on capitalism

Why the slump is far from over

FUNDS

PROFILE

LAST WORD

15

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28

from the editor

Is this a ‘bump’ in the recovery?

9 OCTOBER 2009 ISSUE 115 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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9 October 2009

South Africa’s longterm economic recovery hinges on a turnaround in the developed world. This means you will see the first signs of economic improvement in the US economic indicators. You should focus your attention on the United States’ war against its unemployment juggernaut rather than the disappointing domestic numbers. US payroll data to September 2009 shows an average 482 000 job losses per month over the past year. And the US economy has shed a massive 7.2m jobs since it entered recession in the final months of 2007. As unemployment in the world’s largest economy nears 10% economists are concerned the ‘signs of life’ from developed countries are largely cosmetic.

credit scoring criteria strictly applied.

Economists point to a long drawn out recovery in the sector. Should you concern yourself with jobless numbers and motor vehicle sales statistics?

They warn that improvements in the so-called ‘leading’ indicators are due to ‘false’ activities such as companies correcting inventory levels and increased government spending. Recent developments in the US illustrate how ineffective government intervention is. The wads of cash dished out to struggling banks by the US Federal Reserve weren’t the only attempt to resuscitate the sleeping giant. An innovative “Cash for Clunkers” campaign provided an incentive for US car owners to trade in their old vehicles for new. The measure cost Treasury approximately $2.877bn, but it did little to stop the industry rot. Although the initiative led to 690 115 sales the annualised number remains the lowest on record since December 1981.

The South African Reserve Bank has shrugged off this pessimism. At a Citigroup Global Issues Seminar held in Istanbul recently, bank deputy governor Daniel Mminele said South Africa’s recovery would be underway by year end. “The composite leading indicator of the Reserve Bank has increased during each of the last three periods,” he said. He prefers the latest Bureau for Economic Research purchasing managers’ index assessment (PMI) of South Africa Inc. The index confounded expectations to surge from 39.3 points in August to 48 in September, after spending seven consecutive months below 40! But Standard Bank Economics is not so sure. They say the PMI improvement confirms the country’s manufacturing sector will remain in the doldrums until demand improves.

South African vehicle manufacturers and distributors are in similar territory. The National Association of Automotive Manufacturers of South Africa (NAAMSA) says total vehicle sales (year-on-year to September 2009) are down 20%. And your major obstacle when buying a new car remains securing finance. Credit is scarce and

If you believe the consumer is central to economic recovery the answer is a definite “Yes!” You won’t see a strong recovery in global GDP growth until consumption expenditure returns to pre-crisis levels!

Commentators in the US are already pointing to “bumps” in the road to recovery, with the latest data suggesting the “green shoots” may have sprouted too early. Data from the domestic economy supports this view. The rand is too strong, manufacturing remains at recession levels, credit demand is in decline and there’s no sign of improvement in business or consumer confidence. The economic realities contradict the relentless upward march in equity prices since the second quarter.

You don’t have to sit on the sidelines through South Africa’s slow recovery. In our feature article (on page 16) David Stevenson takes a look at opportunities in Canada – a country that’s enjoying a rather ‘soft’ recession!

Gareth Stokes Editor, South Africa

In this issue 6 News Southern Africa less corrupt than its neighbours; Malema declares war on Nedbank

5 Markets Crunch time approaches for

11 Strategy Why you shouldn’t buy into the current spate of rights issues.

13 Expert view Jody Clarke gets Russell Napier’s views on the markets and the rally.

7 Sector How to profit from the latest vital

14 Matthew Lynn The housing market can’t form the basis of recovery in the West.

metal being hoarded by China.

15 Funds Europe’s looking good for

Latvia; why lead is no longer a cheap metal.

8 Who’s tipping what Profit from oil

income investors.

with this share for the adventurous.

24 Toys A Bugatti Veyron for the school run.

news Gold

New highs – and it could double again Gold rose to a new record above $1,042 an ounce this week, finally eclipsing the $1,030 mark reached in March 2008. In inflation-adjusted terms it still has some way to go before matching its 1980 peak of $2,300. The catalyst for gold’s latest jump was a renewed dollar slide. Among the causes was speculation that China and Middle Eastern states had held secret talks about changing the pricing of oil from dollars to

a basket of currencies and gold. The Saudi Arabian authorities denied the story.

What the commentators said Various versions of this rumour have been heard before, and the plan seems absurdly impractical, said Ulrich Leuchtmann of Commerzbank, but it does “match the current zeitgeist” very well. With the dollar on the slide and its long-term prospects unappealing, its eventual demise as a global reserve currency – and what might succeed it – has become a hot topic.

But it’s not just the dollar that looks dodgy, said Chip Hanlon of Delta Global Advisors. Various central banks are doing the same thing: “trying to stimulate and inflate their way back to growth”, with some banks printing money. “It’s not like you can hate the dollar and fall in love with the euro or the yen.” As paper currencies are being debased, investors are rediscovering that gold is “the ultimate currency” as you can’t just print more.

And with monetary policy so loose around the world, which greatly increases “the risk of a blow-up in inflation in the future,” as Adam Farthing of Deutsche Bank pointed out, gold’s role as an inflation hedge is back in the spotlight.

Central banks should also become net buyers of gold now as they diversify their cash reserves. Given all this, Deutsche expects gold to exceed $1,100 next year, while John Brynjolfsson of Armored Wolf predicts $2,000 gold by 2012 – and “it could happen a lot faster”.

African economy

Southern Africa: “Less corrupt than its neighbours” Although we’ve lost our top five spot, South Africa has been awarded a 70% scorecard for its quality of governance in this year’s annual Harvard African Governance Index.

The index, which assesses performance according to five categories including safety and security; rule of law and transparency and corruption, etc. across all 53 African states shows South Africa’s fallen from fifth to ninth position.

Why? Well, according to co-ordinator Professor Robert Rotberg, this is largely thanks to increased corruption and crime.

While we scored very high in most areas, we achieved our lowest mark in terms of safety and security. In terms of personal safety, South Africa had a score of 29.3 out of a potential 100, well below the Southern Africa regional average of 49.6, reports News24. Here, we ranked 47th out of 53 countries. The survey also showed that SA had become the fourth most violent country on the continent.

Although this is concerning, we fared very well in the overall ranking. According to Fin24, South Africa ranks high as one of the best governed countries in Africa. It described these countries as “peaceful and prosperous. They are well led, deliver the

The bottom line Come Dancing (right) are selling for just days after they have appeared on the show. Fans are snapping them up, particularly the ones sported by the fuller-figured celebrities.

£80,000 What PR boss Max Clifford spent on a tiny sculpture of Frank Sinatra in the eye of a needle, which he gave to Simon Cowell for his birthday.

$2m What a man allegedly attempted to blackmail US chat show host David Letterman for over allegations he slept with co-workers.

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9 October 2009

R200 The amount traffic officer Unity Lovely Mahlangu tried to “spot fine” Judge Geraldine Anne Borchers for speeding.

R340,000 The winnings of a gambler who’s now been banned from British

Casinos after using a “no-lose” system.

£150 How much tourists are being invited to pay for a poverty experience in Uttar Pradesh, India. The tourists pay to spend the night sleeping in a cardboard box with beggars.

$85 Are earned in Norway for every dollar earned in Niger.

$85,383

The per capita earnings of Lichtenstein.

$298 The average salary in the Democratic Republic of Congo.

©BBC PICTURES

£2,000 What the dresses from Strictly

news goods to their citizens, hold free and fair elections, and they are less corrupt than their neighbours.”

“disappointed” that the three medals won at August’s Berlin World Athletics Championship were won by blacks.

But the good news for African investors is this: The SADC region is the best performing area in Africa, consisting of five of the ten best governed countries on the continent – Mauritius, Botswana, South Africa, Namibia and Lesotho.

Not even Zimbabwe, which according to the survey is catergorised as the third worst governed country in Africa, after Somalia and Chad,” could drag the group down.

Speaking to students at Mangosothu Technikon in Durban, Malema called on society to “teach Nedbank a lesson” for withdrawing its sponsorship. Not surprisingly, the ANCYL has followed suit proclaiming that it would “mobilise all patriotic South Africans, corporations, institutions and government departments that bank with Nedbank to withdraw their accounts from the bank and switch to another bank if the sponsorship is not retained”.

Companies

But what Malema has failed to check is that, in terms its senior staff, Nedbank is the most transformed bank in the country.

The bank chief financial officer Raisibe

Malema declares war on Nedbank After four years as the title sponsor of the Nedbank City Marathon and Matha series, Nedbank (JSE:NED) has terminated its R17m a year contract with Athletics South Africa (ASA), reported Independent Online last Thursday.

The way we live now

% change

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

*5108.90 9799.60 1057.58 2110.33 3756.41 5640.75 22674.00 25299.00 10.90 11.85 7.44

**1.21 -1.79 2.69 2.57 0.96 1.55 1.50 1.33 -0.25 -3.68 -3.34

*07 Oct ** since 01 Oct

©IMAGE SOURCE/REX FEATURES

But that’s not what ANC Youth League (ANCYL) leader, Julius Malema believes.

Vital numbers

Best and worst-performing shares Winners

% change Price

9 October 2009

Losers

% change Price

Village (VIL)

33.00%

133c

Afro-C (ACT)

-22.50%

155c

S.Ocean (SOH)

16.22%

215c

ARB (ARH)

-18.37%

200c

Urone (UUU)

15.95%

2097c

CIC (CCI)

-18.00%

123c

Putprop (PPR)

11.70%

525c

Rex True -N- (RTN)

-12.00%

880c

Didata (DDT)

11.61%

865c

Compclear (CCL)

-10.77%

290c

EsorFranki (ESR)

10.47%

475c

Metorex (MTX)

-10.12%

293c

Hulamin (HLM)

10.42%

1250c

AfPrefInv (AFP)

-9.74%

760c

Brimston (BRT)

9.34%

749c

Palcap (PLD)

-9.68%

140c

TWP (TWP)

8.33%

650c

Keaton (KEH)

-8.54%

600c

SovFood (SOV)

7.76%

650c

Platmin (PLN)

-8.00%

920c

Weekly change to JSE stocks as 7 October 2009

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Meanwhile, the group’s share price has fallen 1.57% since the announcement.

Whether this is a result of the “threat” or not remains to be seen. But one thing’s certain, if Nedbank caves in, it’ll open the way for more blackmail by the ANCYL.

The recession is taking its toll on everyone in Ireland – including schoolchildren. A primary school in Cork has sent a letter to the parents of pupils asking for children to bring their own roll of toilet paper with them to help save the school money. The request came as a result of the Irish government cutting grants for books and computers. “I’ve done a quick tour of the classrooms this morning and I’d say at least half the pupils have brought them [toilet rolls] in,” says Catherine O’Neill, principal at St John’s Girls National School. “No doubt there are an enormous number of schools out there that are doing the same thing.”

The reason? Well, according to Nedbank it’s been dissatisfied with the “quality of delivery” by the ASA at some of its sponsored events over the past few years.

He’s accused Nedbank of “using the controversy surrounding Caster Semenya’s sex as an excuse to hide its ‘real agenda’”. Which, according to Malema is the fact that the group is

Morathi maintains that the decision to end the contract early was “unrelated to current events at ASA”.

the markets

The bear’s unfinished business FTSE 100 index 6500 6000 5500 5000 4500 4000 3500 M 2008

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Yet there has “unquestionably been a rise in wobbly data again recently”, says Lex in the FT. The jump in the monthly US jobless figures after months of falls, along with another slide in hourly earnings growth, poured a “big bucket of cold water” over “the idea that the economy was on a self-sustaining and uninterrupted path to recovery”, says Miller Tabak’s Dan Greenhaus.

Things don’t look particularly good on this side of the Atlantic either.

While the services sector is rebounding, August’s sharp drop in industrial production – now at its lowest level since 1987 – is a stark reminder of how fragile the recovery is.

Another worry is that markets are far from cheap. The S&P 500 is now on a cyclically adjusted p/e (this takes the average earnings over the past ten years to smooth out the effects of the cycle on company profits) of 19. The global

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M

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J A S O 2009 Source: Captal Economics

market is on 14 times expected 2010 earnings. Indeed, when this rally began, stocks weren’t even all that cheap: John Authers in the FT points out that at the bottom of major bear markets the cyclical p/e measure falls as low as six, a level not seen on any stockmarket in March.

It was the same story in March 2003, when the four-year bear market rally followed the post-2000 decline.

Then, too, cheap money (Alan Greenspan had slashed rates to 1%) boosted prices “before all speculative excess had been cleaned out of the system”.

This mirrors the way the economic downturn was constantly put off, with the housing bubble replacing the tech bubble and now a government debt bubble replacing the housing bubble.

But we can’t put off the pain forever: there are no more bubbles to blow up.

While the liquidity spree could keep stocks fizzing for now, as we noted last week, the medium-term outlook is bleak as the bear has unfinished business.

US commercial property has further to fall mortgage-backed securities (CMBS), says Halbert. Due to both careless lending and a sliding economy, the delinquency rate for CMBS has shot up sixfold in a year.

And most of the loans making up CMBS that fall due in the next five years – $100bn of $153bn, reckons Deutsche Bank, although others estimate twice as much – will be “difficult or impossible” to refinance as the value of the properties behind them have slid so far. So expect far more commercial property write-downs across the financial system, says Halbert.

We have only seen “a fraction” so far.

Viewpoint

The big picture: crunch time for Latvia and eastern Europe

“My shape is a toilet shape… that’s where 14% of GDP of spending and central bank help will disappear... none of the problems that caused the credit crisis have been resolved… bad debts [have] not been dealt with and we have a new level of profligacy and leverage [in] government.”

No wonder Latvian stocks are falling. The country has Latvia's OMX index 350 endured a brutal recession.

It wants to keep its currency pegged to the euro to prepare 300 for eventual entry. So wages and prices – rather than the currency – must fall to restore 250 competitiveness. IMF loans are propping up both the 200 economy and the peg, but the 30 15 19 29 15 30 15 31 14 31 15 30 Apr May May Apr Jun Jun Jul Jul Aug Aug Sep Sep government’s resolve is weakening. Its latest draft budget, to be finalised this month, falls well short of harsh IMF demands. And if Latvia devalues, it is likely to be followed by Estonia and Lithuania ditching their pegs, leading to regional market “contagion”, says Capital Economics’ Neil Shearing.

David Roche of Independent Strategy on the shape of the recovery.

5

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Banks won’t be boosting lending significantly anytime soon. The International Monetary Fund estimated last week that they have still only written down around half of their likely overall credit-crunch losses. One area where there’s plenty of bad news to come is US commercial property, says Gary D Halbert of Halbert Wealth Management. Prices have fallen by 39% from the peak; rents in New York could slide by 20% in 2010.

Many commercial mortgages, like their residential subprime counterparts, were packaged up and sold on as commercial

©BLOOMBERG

“There’s a very big risk” that markets are being “irrationally exuberant”, as Nobel Prize-winning economist Joseph Stiglitz put it this week. The overall tone remains bullish, with the FTSE 100 notching up a gain of 21% between June and September, the best quarterly performance since its inception in 1984. And most markets made a solid start to this week too.

Commercial property losses will hit US banks

9 October 2009

the markets

Brazil has every reason to celebrate – but that doesn’t make its stocks a buy is upside risk to its forecast of 26% profit growth (in dollar terms) in 2010.

… but stocks are vulnerable

©AFP/GETTY IMAGES

Most stockmarkets dipped last Friday due to disappointing American data. But Brazil’s benchmark index, the Bovespa, received another shot of adrenaline: Rio de Janeiro has been selected to host the 2016 Olympics. The index is now 106% up from its October low.

Winning the Olympics is cause for celebration because it’s a “mark of recognition” of how much Brazil’s economy has changed over the past few years, says Economist.com. Once a byword for economic chaos, Brazil has now got its act together.

Brazil is in good shape…

In 2002, Brazil almost went broke, but under left-wing president Lula, it has stuck to a cautious fiscal policy. This has helped reduced external debt as a percentage of GDP from 40% to around 10%; all three big debt-rating agencies have now upgraded Brazil’s debt to investment grade. Keeping interest rates relatively high over the past few years has squeezed out inflation, which has fallen from 17% in 2003 (and 5,000% in 1994) to a record low of 4.4%. As well as improved fundamentals, Brazil’s longterm outlook is compelling. There is plenty of scope for consumption to grow: the household debt to GDP ratio, for instance, is a mere 14% – compared to 54% in the euro area – while mortgages are only 4% of GDP. It also boasts a huge range of soft and hard commodities.

Brazil is celebrating its Olympics win Having kept rates high during the boom, Brazil avoided an asset bubble and had room to cut when growth slipped, says Martin Hutchinson on Breakingviews.

There was also plenty of scope for a stimulus package worth 1%-1.5% of GDP. Exports only comprise 13% of GDP, which helped shield Brazil from the global downturn. The upshot is that, after a mild recession, the economy expanded in the second quarter. Retail sales are now up by 5.9% year-on-year, and industrial production has risen for eight successive months, although it is still 7.2% down on last year.

Unemployment is edging down too.

Brazil’s finance minister is pencilling in GDP growth of 4% next year. Bank of America Merrill Lynch even thinks there

Given all this, you can see why investors are bullish. Yet the rally is starting to look overdone.

“If we continue at this pace, it could turn into a bubble again,” says former central banker Arminio Fraga. Valuations look high: according to Bloomberg, the Bovespa is on a trailing p/e of 21.

What’s more, says Capital Economics, Brazil is essentially a commodities play. While commodity exports comprise just 10% of GDP, raw materials stocks make up over half of the Bovespa.

And the biggest worry is that Western demand “is not going to pick up enough to replace the end of the restocking cycle in China”, says Brock Salier of Ambrian Partners in London.

A sustainable rebound in the West looks unlikely, given the broken banking system and deleveraging consumers, notably in the US, the world’s biggest economy. As markets factor in weaker medium-term demand growth, commodities will slide, while an accompanying drop in global risk appetite also bodes ill for emerging markets, says Capital Economics. Capital Economics believes that while the Bovespa may well keep climbing for now, it is likely to slide back to just under its current level by the end of 2010.

The days of cheap lead are over Lead has been the best performer in the dangerous industry shunned by other Lead metals complex this year, gaining 130% countries”. As it “inevitably” gradually 2400 to a 16-month high in September. A key tightens environmental standards, higher 2200 Figures in $ per tonne driver has been supply disruptions production costs are likely to filter into 2000 1800 culminating in China’s suspension of higher lead prices. Meanwhile, the 1600 some of its lead-smelting capacity after pipeline of mine production set to come 1400 allegations of lead poisoning. But onstream after 2010 is thin, and lead-acid 1200 1000 concern over supply looks overdone for battery demand from the automobile 800 now, given that demand has slid and sector – 70% of total demand – is set to N D J F M A M J J A S O stocks in warehouses are at a six-year rocket as emerging markets’ consumption 2008 2009 high. Despite that, the long-term outlook of cars and lorries grows to Western for lead is positive, says BNP Paribas Fortis. China is now levels. “The days of lead being a cheap metal” look over. “pivotal” to the global supply of refined lead; its share of RBS expects the annual average lead price to hit a new record production has risen to 40%. “China has taken on this dirty and high of $2,750 a tonne in 2013.

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9 October 2009

sector of the week

Ride moly’s skirt tails to profit pipeline, which delivers 775,000 barrels of oil a day to the US, couldn’t hope to maintain the 99% integrity it keeps along 1,287km of tundra.

by Eoin Gleeson China seems determined to own all the world’s metals. There is one critical metal it has missed out on so far: molybdenum. But not for much longer.

©BLOOMBERG

A burst in steel production in the last few months has also boosted moly demand. The more steel Molybdenum has been vital to going into cars, buildings and just about every infrastructure appliances, the more moly you project the Chinese have need. That can’t last for ever. Steel undertaken. ‘Moly’ makes steel makers are heavily indebted to resistant to corrosion and extreme stimulus packages and are being a heat. So it is a vital ingredient in bit too enthusiastic about firing the high-strength steel China uses up dormant mills. Hot-rolled to build everything from cars to steel, a benchmark grade that is the skeleton structure of its processed into cars, buildings and skyscrapers. China was one of the primary producers of the metal in Molybdenum is a vital ingredient in China’s building programmes appliances, cost about $600 to $630 a metric ton in August. But 2008, with exports of 25 million it can now be had for about $550 to In the first half of this year, 40% of pounds. But this year it became a net $570 a ton, according to World Steel Chilean moly exports were shipped to importer for the first time, according to Dynamics. Steel makers appear to have China – there were no Chilean exports consultancy firm MolyEx. Why? stocked up for now on the necessary at all in the first half of 2008. And the alloying metals for the quarter ahead.

Chinese recognise that they can stockpile Lately it has just been too expensive to Nonetheless, a slew of big projects to the metal while it’s cheap, knowing that mine the stuff, says Chris Mayer in the develop primary moly mines have it is critical to the energy industry.

Daily Wealth newsletter. China is one of foundered for lack of finance this year the few countries with deposits big (see box). So supply will remain tight.

Nuclear power utilities, for example, enough to warrant extensive moly mining rely on super-resistant moly alloys to – there are also substantial deposits in the Once demand for molybdenum picks up replace the world’s ageing reactor US and Chile. But it costs nearly $13 to as oil pipelines are laid, nuclear plants condenser tubes. Each new reactor will produce a pound of moly from Chinese are built and China continues its steelneed at least 400,000 pounds of the mines, and moly trades at only $8 today intensive bid for industrialisation, it stuff. Around 100 new reactors are – down from its peak of $30/lb. won’t stay at $8 per pound for long. scheduled for construction in China over The huge environmental cost of Chinese demand alone has been growing the next few years. America, meanwhile, developing moly mines is shifting at 27% a year, making up a quarter of is hoping to build twice that many. production from China to America. global demand. And true to form, Beijing has started banning exports and Then there are the oil pipelines. The But that has done nothing to kill off hoarding the stuff. We have a look at Alaskan pipeline consists of a moly alloy China’s demand for the metal. They may how you can stake a claim to moly in that can handle temperatures of –21˚C. not be able to mine it, but the Chinese the box below.

Without moly, the 48-inch thick are importing huge quantities instead.

The best bet in the sector Thompson Creek Metals (NYSE:TC) is one of the world’s largest publicly traded producers of molybdenum. The group has four sites – two in British Columbia, one in Idaho and one in Pennsylvania. Total mineral reserves exceed one billion pounds of moly – excluding the potentially massive Mt Emmons deposit in Colorado.

Thompson Creek Metals

30

Figures in dollars

25 20 15 10 5 0 Jan

2008 Thompson Creek Metals recently announced deal financing of C$217m to develop the Endako expansion in British Columbia. As of 30 June, the company had C$262m of cash and a debt load of C$16m. The firm suffered last year as the price of the metal

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9 October 2009

dipped. But it is profitable and will rebound strongly as demand for moly in nuclear, steel and energy infrastructure projects picks up.

Meanwhile, major rival projects have been delayed this year. The New Big Hope project, owned by junior miner General Moly, is at least 20 months away, even Jan 2009 once it gets financing, says Chris Mayer in the Daily Wealth newsletter. And other big projects by Freeport and Moly Mines have been pushed back to 2011. Thompson Creek Metals trades on an attractive forward p/e of 11.3.

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.

Profit from the inevitable soar in the oil price with this share for the adventurous Tip of the week: “Best in the West” says Finweek I’m sure you, with the rest of South Africa, welcomed the generous cut in petrol prices this week. But after last year, we’re all too familiar with the fact that the oil price is more than capable of blowing the lights out. Before the markets well and truly crashed last year, we saw Brent crude trading well above $140 a barrel.

And the fundamentals which saw the oil price soaring haven’t changed.

With the market crash came a crash in economic growth. But now it appears that the global economy is getting itself back on track, which means it’s inevitable that the oil price

is also going to get back on track.

So where does that leave you?

With the Brent crude price currently stable, trading under $70 a barrel, it’s time to get into oil companies before the oil price gains momentum.

You could run out and buy some of South Africa’s oil giant Sasol’s shares. But with massive blue chips, the price is going to move sedately compared with a smaller counter. And that’s exactly why Oando Plc (JSE: OAO) may be exactly what your portfolio is looking for.

Oando labels itself as “Nigeria’s energy giant”. The company is Nigeria’s leading local oil firm, with a finger in every pie of the energy chain. Oando’s primary listing is in Nigeria, with a secondary listing on the JSE.

Gamble of the week: Cadiz Holdings Limited (JSE: CDZ) With the chaos that struck world markets stemming primarily from financial and banking stocks, it’s no wonder that many investors are cautious about risking any cash into them. But with an economic recovery now underway, you have the perfect opportunity to get into these undervalued shares and ride them higher.

And a stock that’s looking too good to ignore at the moment is Cadiz Holdings Limited (JSE: CDZ). Since March, the company has recovered significantly, but there’s still plenty of room for improvement.

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9 October 2009

Oando is responsible, through sales or distribution, for one in every five litres of oil in Nigeria and West Africa. And it certainly looks like this is set to increase as the company gets itself ready to pounce as it prepares itself for an acquisition frenzy.

As Shaun Harris in Finweek notes, the company called “an extraordinary general meeting in Lagos last week”.

Why? To seek approval from its shareholders for an increase in authorised share capital. There “could be a big rights issue on its way”.

You need to bear in mind that Oando is a risky endeavour in comparison with “big and boring Sasol”. But with that risk comes the chance to get into this

Cadiz is a highly specialised financial services company. It deals in equity derivatives, specialised asset management, stock broking, securitisation and structured solutions for the large corporate market. And Cadiz is a company where the “big money” turns to when it needs to protect its wealth. It operates under three divisions, namely Cadiz Securities, Cadiz Asset Management and Cadiz Corporate Solutions.

The company stormed onto the JSE back in 1999. The shares were 130 times oversubscribed at listing! A record still to be beaten! And, to its credit, Cadiz has earned The Financial Mail’s top derivatives research and dealing house award for the past 12 years.

Cadiz currently controls R45bn, with an additional R7bn managed under its Wealth Management division. Of course,

who’s tipping what little oil firm with enormous potential.

And who can forget that with greater risk comes greater reward.

continued to fall and has stabilised over the past few months at 5c a share.

Oando’s interim results are due for release any day now, but it seems the market may already know something we don’t. The share price has been rallying nicely over the past couple of weeks. But that doesn’t mean it’s too late to get into the company. Oando still has a long way to go to return to its highs of last year.

Faritec is an IT services and solutions company. It aims to provide tailor made IT solutions to assist customers in managing their businesses more effectively and economically. From looking at what’s happened to this company’s share price, perhaps it should have applied some of its services to its own business.

Once the oil price gets moving again, Oando is sure to also gain momentum.

In return for your investment, you’ll receive dividend payments. The company is currently sitting on a dividend yield of nearly 3%. The PE is a modest 6.19.

Buy at current levels of around 520c. As Harris states: “The true value is buying a play on energy in West Africa." And Oando offers you this exposure perfectly on a plate. Buy. Recommendation: BUY at 520c Market capitalisation: R4.705bn

Turkey of the week: “This has not been the best of years for Faritec” – Financial Mail When the rest of the market is picking itself up and dusting itself down, it must be depressing to note that your share price hasn’t improved at all. And that’s exactly what’s happening with Faritec Holdings Limited (JSE: FRT).

Over the past year, Faritec’s share price has been on a slippery slope south. At the beginning of 2008, the company was trading above 100c a share. But since then, it’s been grim. The share price has

But what went wrong? How can it be possible that a share price can fall that far? As Jamie Carr notes in his Diamonds & Dogs column in the Financial Mail, “sales dried up at speed as a result of the economic situation”.

The problems all stem from management’s inability to keep costs under control. This was further aggravated with a drop in operational income that just compounded the company’s problems.

The result? Company earnings plummeted. Now the company’s shares are completely illiquid, which means you’ll struggle to get in or out of the share.

But it may not be all doom and gloom for Faritec. There could be some improvements on the cards in the near future. As Carr highlights, “it is something of a triumph that Faritec has any future at all” when you consider the massacre of the company’s share price over the past few months. But “much of the credit must be given to its new equity partner, Shoden”.

like any financial share, the company felt the pinch last year.

This resulted in earnings and profits taking a bit of a knock. But that didn’t stop the company paying out a healthy dividend, especially when you consider that many large firms decided to give them a miss.

The company is currently sitting on a very generous dividend yield of 3.65%. So not only should you profit from capital growth over the coming years, but you’ll also receive a tidy sum in dividends. And, by Cadiz investing in the

9

9 October 2009

With Shoden with them all the way, cost cutting needs to become a top priority.

Once the haemorrhaging of cash ceases, Faritec should be in a better position to pull itself together and get back on track to being a profitable entity.

Management is now taking the bull by the horns and is determined to turn the company around. New CEO, Fanie van Rensburg says: “We believe that our focus on executing the basics in our core areas, together with our hard drive to further improve efficiencies and grow our market share, will allow us to rebuild to our full potential.”

As Carr says, “let’s hope this is the end of the bad news”. With massive changes underway, Faritec could emerge as the top recovery stock for 2010. But we think it’s a bit early to risk any cash on that. Rather wait and see what happens over the next couple of months. If the share price starts to recover, it might be a great stock to gain exposure to. But, for the moment, avoid for now.

Recommendation: Avoid Market capitalisation: R113.493m

market itself, as the market continues to recover, so will its earnings.

The firm is trading on an undervalued PE of 9.49, well below the general market’s PE of 14.60. The share is looking great for a jump higher over the coming year as the market continues to improve. Take time to build up your holding in Cadiz, buying in on pullbacks in the market. Cadiz is a buy at 315c. Buy.

Recommendation: BUY at 315c Market capitalisation R772.186m

best of the financial columnists

Editorial The Economist

Why does the state prop up homeowners?

Justin Fox Time

Don’t let tax drive away our talent Dominic Lawson The Independent

Kill Goliath with a thousand cuts Niall Ferguson The Daily Telegraph

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9 October 2009

Nobody likes a party-pooper, says The Economist. When asset prices are going up, the bears who argue that they are about to fall are derided. If they dare to make money out of their beliefs by selling short, they are “decried as economic vandals and politicians call for their activities to be banned”. And historically, the odds are against them: Share prices tend to go up over the long run. But bears haven’t done so badly over the past decade. Dotcoms and houses in the US were indeed overvalued. The structured-credit products now clogging up banks’ balance sheets were risky. Rapid credit growth made America’s financial system and global economy vulnerable. “This decade, investors have lost more money listening to the bulls than to the bears.”

So when the bears say that this stockmarket rally is “built on sand”, we should listen. On historical measures, Wall Street looks expensive again.

The rally has been driven by interest-rate cuts; yet the fact they are being kept so low is a “sign of how many economic problems remain”.

Money talk

“For a nation whose citizens pride themselves on self-reliance, the US doles out an awful lot of welfare,” says Justin Fox. And no interest group “makes out quite the way homeowners do”. First, more than 80% of US mortgage loans made this year have been bought by government-sponsored entities, keeping interest rates on those loans artificially low. Then there are the tax breaks: The $8,000 tax break for first-time buyers ($14bn this year); the income tax deduction for mortgage interest ($80bn a year); the deduction for property taxes ($16bn a year) and the capital-gains tax break on sale of owneroccupied houses. These subsidies tempt us to buy bigger houses (wasting capital and energy), make the workforce less mobile and drive up prices.

So why keep them? Because the groups they benefit – estate agents, lenders and builders – have such power in Washington. The National Association of Realtors gave the most money to candidates in the last election ($4m) and has 1.1 million members. That’s a lot of lobbyists.

“I love ordering room service in hotels. I know the menu of certain hotel chains by heart.”

Singer Beyoncé Knowles (pictured above), quoted on Sky News

“There are few bleats less attractive to the general public than those emanating from wealthy people complaining that they will desert the country for tax reasons,” says Dominic Lawson. But Tracey Emin, who recently said she might move to France because of the new 50% tax, has a point. When governments “impose too heavily on the wallets of citizens with a readily exportable talent”, they leave. Under the last ‘old’ Labour chancellor Denis Healey, “dramatic” tax reliefs of up to 100% were introduced on work carried out abroad by Britishdomiciled artists and performers to dissuade them from moving abroad and making their entire earnings free of UK tax. To reverse its own brain drain, the French government is now offering a partial exemption from wealth tax for people moving to France. In fact, we can do well enough without artists, but scientists and innovative entrepreneurs are another story. They are the people most vital to a nation’s economic base – and exactly the people we don’t want to drive away.

It has often been said since the financial crisis began that an institution that is ‘too big to fail’ (TBTF) is too big to exist, says Niall Ferguson.

“I agree.” But how do we best get rid of them without increasing the power of government in the economy? Few of the proposed regulatory reforms do enough to solve this problem, but US Treasury Secretary Tim Geithner has uttered one “simple insight on which we need to build”: That the real aim of government should be to give TBTFs “positive incentives... to shrink and to reduce their leverage, complexity and interconnectedness”. The best way to do this is to reiterate that in case of failure, the largest firms would be wound up “in a way that protects taxpayers and the broader economy while ensuring that losses are borne by creditors and other stakeholders”. This “principle was thrown overboard in the crisis”. Removing that protection will raise the cost of credit for TBTFs, reduce their profitability and encourage them to split themselves up. Euthanasia achieved.

© MATT BARON/BEI/REX FEATURES

This time, let’s listen to the bears

“I got so fed up with the doom and gloom of the recession I bought a Mercedes.”

Television presenter Chris Tarrant, quoted on Sky News “It doesn’t come from Marks & Spencer.”

Defence Secretary Bob Ainsworth, justifying delays in supplying vital equipment to British troops in Afghanistan, quoted in The Mail on Sunday “Today we remember the effervescence of your philosophy towards life, the lobster-catching, the love of France that we both share, and that beautiful white Bentley we’ll now probably have to auction to pay for the funeral.”

Poppy Floyd pays tribute to her father, Keith, at his funeral, quoted in The Sunday Times “Doing nothing is very hard to do... you never know when you’re finished.”

Actor Leslie Nielsen, quoted in the Tulsa World

investment strategy

Avoid recent rights issues

A new way to spot value

by Tim Bennett

Warren Buffett “uncovers hidden gems”, says Chris Menon on Motley Fool, because he favours return on equity – profits after interest and tax divided by shareholders’ equity from the balance sheet – to other value measures, such as price/earnings or price/book ratios. That, says Jack Hough in Smart Money, has led two finance professors to a powerful new stockpicking system.

Hopes that the British economy might have turned a corner have led to a “flurry of rights issues”, notes Dylan Lobo on Citywire.co.uk. Leading the charge are banks and property firms, anxious to shore up battered balance sheets with fresh capital.

But investors should give most of them a wide berth.

©ALAN ADLER/REX FEATURES

A rights issue is often a last resort. That’s because it suggests that cheaper sources of raising capital – such as existing profits and cash flow (organic growth), or bank loans and bonds – have been exhausted. It gives a company the chance to raise fresh capital from existing shareholders who normally have a ‘preemptive’ right to buy first, assuming this has not already been waived by agreement. So what should you do?

The key to it, say Washington University’s Long Chen and Lu Zhang, is realising that “most successful companies earn a lot while using very little”. So you should use measures that focus on that, rather than on a firm’s share price that can be held ransom to Mr Market’s rapid mood swings.

Rights issues: why risk building on a house of cards?

Deciding to ‘take up your rights’ means you will be asked to pay for new shares, but at a discount to the market price. For example, a one for four rights issue at R20 per share is an offer to you to buy a new share at R20 for every four you currently hold, trading at, say, R40 each. Take up the offer and you can expect the average share to trade at around R36 ‘ex-rights’, ie R(160+20)/50.

Despite that dip from R40, you’ve lost nothing – prior to the rights issue you owned four shares worth R160 and now you own five worth R180, having paid the company an extra R20.

being equal, these rights are worth about R16 in the earlier example – the gap between the exrights price (R36) and the price demanded for the new share (R20).

“There are few bargains to be had”

However, you may decide you already own enough shares in, say, RBS or Barratt, and don’t want any more.

In which case, you can opt to sell your rights ‘nil paid’. This is usually done automatically if you fail to respond to the rights letter from the company within 21 days. Your rights are sold for whatever a broker can get for them. All other factors that influence a share price

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9 October 2009

Looking at the most recent rights issues, I’m not convinced there are many bargains to be had. “Stockmarkets have gone up too much, too soon, too fast,” says New York University Professor Nouriel Roubini. And while the IMF is forecasting a return to growth in 2010, the expected global rate of 3.1% is “anaemic”. Banks and property firms are in a hurry to raise money precisely because they could be battered should the recent “recovery” be derailed. RBS is a typical example. The bank is said to be “weighing up options that could include a rights issue” to raise £3bn-£5bn. But as one investor put it on FT.com, any attempt to do so is less a final solution to its woes than “the tip of the iceberg”. We’d avoid such issues while the recovery remains doubtful.

So they start with return on assets.

That’s profits after tax (say R75m) divided by balance-sheet net assets (say R500m) multiplied by 100 to give a percentage (15%). The higher, the better.

Next they look at stock levels, as “low or shrinking inventories often indicate an efficient company”. Lastly, they check the latest change in capital expenditure (by comparing this item in the last two cash-flow statements). Low or shrinking capital expenditure is more good news, as “frugal firms don’t spend as much” and return more to shareholders.

It seems to work. Between 1972 to 2006 this approach “all but snuffed out” the predictive power of “share-price momentum, asset growth, earnings growth” and “other stockpicking anomalies”, says Hough. But he warns: “no formula can sum up everything that goes into judicious stockpicking”.

Nonetheless, the screen throws up two stocks that cut the mustard on other measures too. The first is software firm Microsoft (NASDAQ: MSFT). It produced a 19.3% return on assets over the last 12 months, shrank stocks by 27% and reduced capital expenditure by 2%.

The forward p/e is 14 and the yield 2.2%.

Discount US clothing seller Aeropostale (NYSE: ARO) managed a return on assets of 28.3% last year, while reducing stock by 4% and capital expenditure by 55%.

Its p/e is 13. As Forbes notes, last-quarter earnings rose 84%, making it a “best buy”.

personal view

Profit while the rand’s still strong with 2 long-term value plays What I would invest in now

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

Looking at the broader investment environment, it’s clear the rally we’ve seen since the beginning of March has helped markets shake off the blues.

The Dow Jones, for example, has run up 47.28%. And the FTSE 100 – the index which our local JSE follows the closest – has climbed 42.34% over the same period. It’s been a phenomenal run and I believe a full recovery should be on the cards by the end of the year.

Here in South Africa, our strong banking system meant the affects of the global recession were less severe than they were elsewhere. Another feather in our cap has been the way in which Tito Mboweni and his team have tackled the recession. By cutting interest rates 5% since December last year, we’ve seen our inflation rate fall to just above our target of between 3% and 6%. This has helped aid our market’s recovery.

And, with inflation this far down, there’s room for one more cut. I believe the Monetary Policy Committee might shave a further 50 basis points off interest rates before the year is up.

But there is a worry. And when I attended a private gathering with Mboweni early last week, I realised I’m not the only one who’s concerned.

Right now, the rand is super charged. We’ve seen our currency bounce back from a high of R11.84/$ to a low of just R7.28/$ last month.

According to the real effective exchange rate (or the REER), the current rand value is too high. It’s sitting at 107. For a developing economy like ours, the REER should come in well below 100.

A sustained REER higher than this (like we have right now) ultimately harms export industries and that’s what’s happening at the moment.

Will lower rates be enough to put the value of the rand under a bit of (much needed) pressure?

Probably not considering the ineffective attempts

by the Reserve Bank to control exchange rates in the past. But since the failed MTN/Bharti deal sent the rand tumbling 1.25% in less than a week, I expect the currency will rebalance to a more sustainable level by the end of the month. If you have money to spare, now’s the time to invest some of your funds offshore.

Turning to sectors that’ll benefit from this, you’d be silly to ignore the virtues of shares that were unfairly run down alongside the rest of the market dregs in last year’s crash. And that’s why I’d consider adding the following two shares to your portfolio:

1. 1time holdings (JSE:1TM) With oil down $78.01 from its all time high of $146.06 and passenger numbers up 12% from one year, 1time is capitalising on the stabilisation of local consumer spending. In the past six months, the group performed particularly well.

Revenue is up 35% to R613.8m – turning an operating loss of R5.4m into a profit of R65m.

The share’s currently trading at a 24% discount to its 2007 high of R1.09.

2. Massmart (JSE:MSM) Because the group represents several industries, including building, hardware, food and clothing, wholesale retailer Massmart serves as a proxy for what’s happening in the retail economy. With rate cuts starting to show stabilising affects on consumer spending, the group’s run up 37.62% since March and is currently trading at levels close to where it was before the financial meltdown. The group also recently got the nod from the Competition Tribunal to acquire Finro, a Port Elizabeth-based grocer. This means Massmart’s on track for further growth.

The shares Gary likes: 1time

12mth high R0.89

12mth low R0.35

Now R0.82

Massmart

R90.29

R61.20

R85.85

*Prices as at 7 October 2009

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expert view

The way to play China In the first of an occasional series, Jody Clarke talks to investment analyst Russell Napier.

Looking at all the periods when we have gone from deflation or low inflation to rising inflation, I’ve found that equities do well until inflation gets close to 4%. So this isn’t a suckers’ rally – I think it could go on until next year and into the year after.

But equities are not cheap. In fact, they’re a bit above fair value, so they can get a lot cheaper than this. For example, if you use all the valuation metrics, you keep coming up with a number of about 400 in the S&P 500, which is where the S&P could bottom, sometime in the next five years. So it’s hard to recommend that investors buy equities when we have one final shock to come. And I’m more convinced every day that this shock will come through a disintegrating government debt market.

So you think the British government will inflate its way out of debt?

History suggests that for a large democratic government, defaulting on your debt is not an option. If you look at the post-World War II period, particularly in Britain, which was on the verge of bankruptcy after the war, the way they managed to meet every interest payment

was through inflation. And in 1976 Britain ended up going to the IMF for a loan too.

But there was no technical default on the British gilt [government bond]. It just lost 84% of your purchasing power.

How should investors protect themselves?

You have to be prepared for inflation and depreciation of the exchange rate. So a British or European investor must have more money outside their own currency in other assets than they normally would.

You should have something that performs well during inflation. That could be index-linked gilts or gold. Exchangetraded funds (ETFs) are a great thing as well, as they allow flexibility. I think an ETF that prudently shorts government debt is a fine way for private individuals to try to cover their risks.

Do markets in the Far East still have more potential than Western ones?

Yes, and there’s one big reason for this.

What we’ve gone through is not a cyclical change, it’s structural. Emerging markets have realised that they cannot rely on Western consumption anymore. All the data say it’s dangerous to believe that emerging markets will diverge from the West, but I think that what we’ve seen is enough of a shock to convince Asian countries to change their policies to try and improve domestic consumption.

Who is Russell Napier?

The son of a butcher, Russell Napier, 44, knew that he didn’t want to go into the family trade “the first time I had to take meat off a cow’s head for pet food”. From Donaghadee in County Down, Napier went on to study law. His first job after university was with Edinburghbased Baillie Gifford, and he later became a respected market strategist with Hong Kong-based CLSA Asia-Pacific Markets.

But it wasn’t until 2005 that he set himself apart from the pack with the seminal book Anatomy Of The Bear: Lessons From Wall Street’s Four Great Bottoms. The book

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9 October 2009

looked at the four occasions in the 20th century when investors could have made the most from investing in US stocks: 1921, 1932, 1949 and 1982.

Based on his findings, by looking at measures such as Tobin’s Q ratio (which compares the market value of an index to the replacement cost of its underlying assets), he predicts the S&P 500 could fall as low as 400 by 2014, but that the next couple of years will see a bear-market rally as central banks try to fight deflation by printing money. Eventually those efforts will fail as rising government debt devalues the dollar and investors flee US assets. At this point, “equities will be incredibly cheap,” and a new bull market will start.

©PURESTOCKX

Is this just a bearmarket rally?

Timber is a great way to profit from China

Is China a good way to play this?

I would warn individual investors about investing in China – it’s dangerous enough for professionals. The key problem is this: most of their big listed companies are ex-state-owned. Some people in this country won’t own Royal Bank of Scotland because it’s owned by the government. Yet they’ll flock to China to buy state-owned firms. I have no problem recommending China as a wonderful place that will meet its economic growth targets in years to come. But that’s not the same as making money from equities.

However, you should absolutely align your global portfolio to making money out of China. You just don’t have to own any shares there. Forestry is a great way to play it because this area will benefit from the rise of the Chinese consumer and their impact on commodity prices.

I own Plum Creek Timber (NYSE: PCL), the biggest listed forestry stock in America. I own palm oil stocks too.

The thing with timber and palm oil stocks is that it takes a painfully long time for the supply side to pick up, so you can do very well.

Were you always interested in finance?

Not particularly. I probably would have taken any job after university. It was just sheer luck. And that’s the real problem with capitalism – it’s largely pure luck.

When it goes in your favour you pretend it’s down to intelligence and charge a great big fee for it. That’s what’s gone wrong in the global financial system for the last decade. A lot of people got lucky, and convinced people that they were smart. And everyone backed them.

opinion

The housing market may be back on its feet – for now – but it won’t lead a recovery equity withdrawal but there will be a tick-up in sentiment. However, it would be a big mistake to expect a house-price recovery to spark another boom.

Estate agents have a glint in their eyes again, the property sections of newspapers are back in business, and even mortgage lending is picking itself up the floor.

Matthew Lynn from The worst of the housing crash appears to be over.

Global view

©IMAGES.COM/CORBIS

And it is not just in Britain. The far larger and far more important US housing market has crawled out of the intensivecare ward. Since it was the collapse in property prices around the world that plunged the financial system into chaos and started the recession, it might seem reasonable to suppose that property can drag us out too.

First, there is too much supply on the market. The decade-long bubble in property prices led to construction booms in America, Spain, Ireland and, to a lesser extent, the UK. The Spanish coast is cluttered with new apartments and villas.

Old industrial cities such as Leeds and Newcastle are full of smart new blocks of flats, most of them empty. It will take a long time to clear all that surplus stock – and until that happens, prices aren’t going to rise much further.

Low interest rates are a lifeline for housing

The stockmarket certainly seems to think so. Every time the house-price indexes tick up another point, equities rally on the news. But the property market isn’t going to be able to re-boot the global economy. It may have led the last boom, but it won’t lead the next one.

Still, that doesn’t mean the signs of recovery aren’t real. Last week, the Nationwide Building Society reported that British house prices rose for the fifth month in a row. This week, meanwhile, Halifax reported a 1.6% monthly rise.

Prices are now back to the same level they were a year ago, when the collapse of Lehman Brothers triggered a global panic. They aren’t quite back to their peak, but they aren’t too far off it.

Mortgage lending is steadily picking up and even if volumes are thin, properties are shifting. It may be a while before the TV schedules are packed out again with shows on how to make a quick million from tarting up a semi in Wrexham, but the market looks healthier than it did six months ago. Much the same is true in the US. American house prices notched up their biggest monthly gain in four years in July. They rose 1.6%, the third consecutive monthly rise. Of the 20 largest cities, 18 reported price rises. With prices a third off their 2006 peak, it will 14

9 October 2009

take a long time to recover all the losses.

Still, the trend looks to be upwards.

Of course, we can question how durable that recovery will prove. Interest rates remain exceptionally low. With base rates at less than 1%, most people can afford at least to pay the interest on their mortgage. When rates start getting back to normal, monthly mortgage bills will soar. A lot more people will be repossessed, pushing more properties onto the market at fire-sale prices. And we may well be only half way through a double-dip recession. There could be lots of economic pain ahead. None of that will be good for the housing market.

The more interesting question, however, is whether housing markets can kick-start the global economy. The banking system, for starters, is critically dependent on property prices. A property – either commercial or residential – is the collateral for most loans. As prices recover, the banking system will start to look a lot healthier, and that will strengthen the economy.

Consumers will also start feeling more confident. As their houses recover some value they will start spending more.

There may not be a recovery in mortgage

There won’t be much fresh demand either. A big part of the housing boom was demographic change. As populations rose and waves of immigrants moved into booming countries, demand soared. But over the next couple of decades, those trends will go into reverse. Low birth rates mean static or falling populations.

And migrants are not going to be moving to countries where stagnant economies are not creating new jobs.

The financing isn’t going to be available either. Over the last decade, mortgage lenders gradually loosened their criteria.

They decided not to worry too much about whether you had a job, or a deposit or, indeed, showed much inclination to pay off your debts. Some of that was justified – there was never much point in excluding the self-employed from the mortgage market, for example.

But it went too far. And it’s going to be a long-time before the 125%-selfcertification loan returns.

Lastly, there are too many burnt fingers.

Bankers aren’t going to pile into mortgage lending again in a hurry.

And home-owners will go back to thinking about their homes as a place to live, rather than an extension of their bank account. As a rough rule of thumb, it takes the financial markets about 20 years to forget – so it will be 2030 before we’ve erased all memory of the credit crunch and the housing bubble that led into it. So although the global economy will start booming again at some point – it always does – it won’t be the housing market that re-boots it.

funds

Strike offshore while the rand is hot!

by Gary Booysen With the South African rand gaining almost 29% against the US dollar, 19% against the euro and 18% against the pound sterling, the local currency is turning out to be one of the world’s strongest currencies for the year to date.

Many potential investors are asking if it’s a good time to increase international exposure.

Dr Prieur du Plessis, Plexus group chairman, councils against trying to make a quick buck by timing the bottom or banking on the rand suddenly weakening. This isn’t the way to generate good solid returns. If you’re going to try to make money off the strong rand, now is the time to apply rand cost averaging.

Even better: Get some of that money offshore.

While some market participants predict that the rand may strengthen to below the R7 level, Du Plessis believes international diversification is imperative for a sound investment portfolio.

“This is especially true if most of your assets are invested in an emerging market such as South Africa.”

According to Du Plessis, the results of the latest World Survey of Business Confidence by Moody’s Economy.com indicate that the global economic recovery has begun. Du Plessis says, “Business strongly expects conditions to further improve later this

year and early next year. Sentiment is strongest in Asia and South America and among business service firms. European businesses and those that work in government are the least upbeat.”

Invest in companies, not economies The US economy faces an uphill struggle, particularly compared to its more nimble emerging market rivals, says Jodie Clark, MoneyWeek UK’s editor. With unemployment still rising and the banking system and housing market vulnerable, US growth is likely to remain sluggish for years. So surely it’s the last place to invest in right now?

quarter,” says Clarke. This is not to say he’s overly adventurous. When the world threw itself into reverse in 2007, he didn’t have a single bank in his portfolio.

But it’s the oldest most sacred tenant of value investing. Buy low, sell high. And right now, the US is about as low as they come.

“History has shown that outperforming the S&P 500 over the long-term is extremely difficult. The Neptune US Opportunities Fund has managed this over the past five years,” says Hargreaves Lansdowne. This fund is one that’ll continue to impress in the future.

Neptune v S&P 500 100% 80% 60%

This fund is heavily invested in US health care. “President Obama’s reforms are nowhere near as damaging to the industry as was feared.”

Neptune

40% 20% 0%

One place to tuck away a couple of super powerful rand is with Felix Wintle, manager of the Neptune US Opportunities Fund. “We’re investing in companies, not in GDP,” he argues. Consider looking at the companies that led the world into a global era of capitalism. His approach has certainly paid off. Over five years, the fund is up 90% against a 5% rise for the S&P500.

“An alumni of the City of London School, Wintle intends to invest the fund’s 9% cash position over the next few weeks, as he expects the rally to continue into the fourth

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9 October 2009

S&P 500 index

-20% -40%

31Jan 2005

31Jan 2006

31Jan 2007

31Jan 2008

31Jan 2009

Neptune US Opportunities Fund top ten holdings

If you’re looking to use up a little of the R2 million investment allowance granted to South African taxpayers, this isn’t a bad way to go. If you’ve already tapped out that avenue, you can approach a financial institution and ‘purchase’ foreign investment capacity from them at a fee.

They will apply to remit the funds offshore on your behalf and you can invest in offshore funds of your choice. When you sell the investment, the proceeds will have to be remitted to South Africa.

Name of holding by sector Healthcare

% of assets 20.10

IT

18.00

Energy

13.70

Consumer staples

8.80

Materials

8.60

Money market

8.10

Consumer discretionary

8.10

Financial

6.40

Industrials

4.70

Utilities

2.40

cover story

It’s time to flee to Canada Canada is having a good recession, and will do well from its natural resources. Here’s how to grab a slice of the profits, says David Stevenson.

The world’s worst economic slump since World War II may be easing up a little, but that’s scant consolation to those joining the ever-lengthening global dole queue.

Lose your job in the current climate and you could be out of work for a lot longer than during the last recession.

Except, that is, in Canada. Most Canadians being laid off are finding new work almost as quickly as those who became unemployed prior to the downturn, says Benjamin Tal at CIBC World Markets. “In Canada, average unemployment duration is currently 15 weeks, a modest increase from the prerecession level of 14 weeks.” During the 1991 recession, the average was 20 weeks. And the ‘long-term’ jobless rate – those out of work for over six months – is 30% below the level it was at during the same stage of the 1991 recession.

In short, “Canada had a better recession than most”, says the FT’s Lex. Despite the severity of the international financial crisis, none of Canada’s major banks has failed, cut its dividend, or requested government help. Indeed, they’re now in

better shape than before the meltdown.

As Robert Cyran of Breakingviews says, this was down to “a combination of regulatory restraint and conservative management”. The total market value of the big five Canadian banks (Royal Bank of Canada, Toronto Dominion, Bank of Nova Scotia, Bank of Montreal and CIBC) has actually grown by 8% since the start of 2007. “By comparison the five biggest American commercial banks lost almost 40%, vaporising more than $350bn of market value.”

Nor do Canada’s banks look like they’re about to trip up. In its 2008-2009 Global Competitiveness Report, the World Economic Forum ranked the country’s lenders as the least likely in the world to need a government bail-out. US financial institutions languished in 40th place. And although interest rates are as low as in America, the Bank of Canada hasn’t done much quantitative easing (ie, it hasn’t minted lots more new money, unlike Britain and America), “meaning inflation isn’t too much of a worry”, says Martin Hutchinson of Moneymorning.com.

So private-sector finances are pretty healthy. But even more unusually for a Western economy these days, the public

finances are in good shape too. Prior to last year’s budget deficit – which even then was just C$5.8bn, only 0.5% of GDP – Canada had enjoyed a long run of budget surpluses. A two-year C$47bn (£27bn) government stimulus package (equal to just over 4% of GDP) will push up the annual deficit, with a 4.7% gap expected in the current fiscal year.

Yet while the government isn’t projecting a return to a budget surplus for five years, this shortfall still compares very favourably with the long-run, doubledigit deficits currently being run up by both Britain and America.

Now, most of Canada’s economic numbers are perking up too. June output grew month-on-month for the first time in almost a year, July new house sales set a new record, and 27,000 jobs were created in August. July’s retail sales fell 0.5% from June after two good months, but that’s less important in Canada, as private consumption accounts for just 56% of GDP, compared with twothirds in Britain and 70% in America.

The Conference Board of Canada’s August consumer confidence index climbed for the sixth straight month.

As Lex puts it, “Canada’s economy seems to be righting itself quickly”.

Top picks in the tar sands

But it’s been a lot quieter in the town’s few bars of late. Only 23,000 oil workers have turned up for work this year, according to The Economist. Projects have been thin on the ground ever since oil fell below $80 a barrel. It’s not that it’s uneconomical for oil groups to work here – companies say they develop tar sands projects at an oil price of $50 to $60. It’s just that there are far cheaper places to source oil. And oil groups are in retrenchment mode at the moment.

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Everyone works in the town of Fort McMurray, but nobody lives there. Ever since Great Canadian Oil Sands (now Suncor) pulled a barrel of oil out of the heavy tar sands that surround the town in 1967, Fort McMurray has been a temporary haven for Canada’s oil workers. There were 27,000 of them living in makeshift camps around the area last year. And with an estimated 2.5 trillion barrels of petroleum to be mined from the Alberta tar sands, the locals should have a long time to get used to their temporary neighbours.

The Alberta tar sands could yield up to 2.5 trillion barrels of petroleum Between 2008 and 2010, developers were expected to spend C$128bn on tar sands projects. Now it looks like around C$80bn of that will go through, says the Oil Sands Developers Group. The Canadian Association of Petroleum Producers has scaled back its

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cover story

The economic storm clouds have been largely absent from Canada Of course, the general reaction from the rest of the world might well be, “who cares”? After all, Canada is “invisible on the world stage”, as Carol Gear puts it in Thestar.com. A “bit player” in the United Nations, it may once have been seen “as a country that punched its

weight globally”, but “now it’s barely in the ring”. However, this lack of prominence is one of Canada’s many attractions. It’s often a good idea to focus on markets that aren’t fully part of mainstream thinking. And smart investors are already starting to do that.

estimate of four million barrels a day by 2020 to 3.3 million.

But all that is about to change. Last month, Chinese state-owned megalith PetroChina arrived in Alberta to buy a controlling share in Athabasca Oil Sands Corporation for $1.7bn. The investment gives China a 60% stake in two undeveloped oil sands projects in the north of the province.

That has really incensed the Americans, who are getting a bit sick and tired of the Chinese buying up all the things America needs to keep its economy afloat. This is the second major Canadian commodities investment the Chinese have made this year, having injected another $1.7bn into metal producer Teck Cominco in July.

How long before other energy groups stake their own claim to the tar sands? Not long. Canada’s share of the American oil market could grow to 27% by 2035, from 19% last year, according to Cambridge Energy Research Associates. It won’t be much fun for the Americans if they have to pay the Chinese to get at the oil.

So who might they buy? Oil Sands Quest (AMEX: BQI) looks a good candidate. The company has 731,000 acres along the

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Within the last 12 months, net foreign purchases of Canadian stocks and bonds rose sharply to hit a five-year high in July, according to the latest statistics from the Canadian Census bureau.

Continued overleaf

Saskatchewan and Alberta Border and 488,000 acres in the Pasquia Hills oil shale, notes Investopedia’s Aaron Levitt. It’s a small company, with a market cap of $330m. And it’s been hit pretty hard as oil collapsed – dropping from a peak of $6.24 last August to around a dollar today.

Just north of Fort McMurray, Canadian Natural Resources (NYSE: CNQ) is sitting on an estimated 16 billion barrels of bitumen along 115,000 acres of leased land. Around six billion to eight billion barrels of that stuff is reckoned to be recoverable.

The company is an unlikely buyout candidate – weighing in at $30.5bn. But there are a lot of things working in its favour at the moment. With cheaper steel, cement and labour at its disposal following the events of the last year, it can justify new developments with oil at $60 a barrel.

The low price of natural gas is also helping. Natural gas is one of the most cost intensive inputs in the production of oil sands. It takes 1,200 cubic feet of natural gas to produce just one barrel of bitumen, because it is burned off in the refining process. The company is beginning phase one of developing the project and trades on a forward p/e of 12.3.

cover story Continued from previous page

Canada is a play on emerging markets One of the main reasons for this – and another key reason for investing in Canada – is that, unusually for a Northern hemisphere ‘mature market’, Canada’s stock exchange is firmly geared towards commodity producers.

Nearly 45% of the TSX Composite index comprises resource stocks, nearly triple the US market share. What’s more, almost 60% of Canadian exports are linked to the commodity sector, roughly double the American position.

stocks and you have to ride through them.”

Secondly, with 75% of its exports bound for America, Canada’s fortunes are quite closely tied to goings-on south of the border. So any signs that the US economic recovery is proving more sluggish than expected could hold Canadian stocks back to a degree.

However, says Rosenberg, sell-offs based on weak US growth or corrections in commodity prices “are long-term buying opportunities. [Canada] ought to be bought on pullbacks.” In the long run, it’s not America but Asia that holds the key. “Emerging Asia is expanding again and growth forecasts for the region are still being revised higher.” That’s good for Canadian resource producers.

As David Rosenberg of Gluskin Sheff puts it, that makes Canada “a low-beta way to play the emerging markets via commodity exposure”. In other words, “And there’s another reason to be bullish while buying directly into emerging on commodities. It’s called trade markets such as China and India protectionism,” exposes you to Rosenberg relatively high risk The Loonie v commodities 500 continues. “First levels and greater The Loonie v US dollar (RHS) came US tariffs on volatility, Canadian 1.00 400 CRB futures index (LHS) Chinese-made tyres. stocks offer a lower 0.90 Then we saw the risk, less volatile 300 0.80 EU impose alternative. anti-dumping duties Rosenberg reckons 0.70 Loonie strengthening 200 of nearly 40% on that “if the history 0.60 imports of steel of long cycles is any ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 pipe from China. indication, this And now we hear period of Canadian out of Australia market that its foreign outperformance is investment barely halfway regulator wants done”. to impose 15% caps for global purchases of the country’s And there’s another key benefit (particularge companies.” In other words, this larly for British investors) to be means growing tensions in the resource investing in Canada: its currency. The markets. That’s likely to be another Canadian dollar is known as the Loonie longer-term positive for prices. because of the Common Loon bird inscription on the reverse of the dollar The third risky factor when it comes to coin. It has a 65% correlation (as the chart above shows) with the Commodity Canada is a political one. The current minority Conservative government of Research Bureau (CRB) index, the Stephen Harper has done a good job, world’s longest-established commodity but the opposition Liberals have price barometer. So if commodity prices withdrawn parliamentary support, so rise, the Loonie is likely to appreciate there may be an election this autumn. against most other major currencies.

However, “Canadian elections are a much smaller risk than you get in most What are the risks? countries”, says Hutchinson. “A Liberal But there are risks. Firstly, there could majority government would be no well be a short-term correction in disaster. They might be a bit sticky commodities and resource stocks. No about oil-drilling permits, but wouldn’t bull market runs up in a straight line otherwise rock the boat.” In all, Canada and if investors get the jitters about is a low-risk way to play the biggest global recovery, as we suspect they will, investment theme around right now – then miners will fall along with the shift of global power and wealth everything else. As Richard Buxton at from West to East. We look at the best Schroders puts it: “Such setbacks are stocks in the column on the right. part and parcel of investing in mining

“Canada’s Loonie has a 65% correlation with commodity prices”

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The best plays on Canada The biggest stocks in Canada’s TSX index are the banks. These may be about the best of the global bunch, but if you’re looking to play Canada, you’ll want some commodity exposure.

Canada’s proven oil reserves are second only to Saudi Arabia in the world table, and in the box on page 16 we look at the tar sands stocks. Elsewhere, Potash Corporation of Saskatchewan (TSX: POT) is the planet’s biggest fertiliser producer. It’s currently in contract talks with China, and has idled 70% of its production capacity this year. That’s kept the share price suppressed while much of the rest of the stockmarket has been surging. But boss Bill Doyle recently said he expects China to sign soon, probably in November, which will prompt countries such as Malaysia, Indonesia, Australia and New Zealand to follow up with orders. He reckons North American buyers will start rebuilding inventories in December in preparation for the early planting season in the southeast US. It could all add up to a 50% year-on-year boost to potash sales volumes in 2010. At C$98, and on a forecast p/e of just over 12 times for next year, Potash Corp looks cheap. John Chu at Research Capital has a price target of C$124.

Sherritt International (TSX: S) is a diversified natural resource firm producing nickel, cobalt, thermal coal, oil and gas, and electricity. It’s a world leader in nickel production (used for stainless steel, rechargeable batteries and coinage) from lateritic ore, with operations in Cuba and Canada, while a Madagascan project is under development. With nine surface mines, Sherritt is the largest thermal coal producer in Canada, and is developing Canada’s first coal gasification project.

It also licenses its technologies to other metals firms. At C$7.53, Sherritt is on a forecast p/e of 10.8, with a yield just below 2%. Raymond Goldie of Salman Partners has a price target of C$10.50, around 40% above today’s price.

If you’re a less adventurous investor, but would still like a slice of Canada, you could plump for an exchangetraded fund (ETF), such as the iShares MSCI Canada Index (NYSE: EWC).

the best blogs What the bloggers are saying

The return of small, personal markets http://freakonomics.blogs.nytimes.com Do the thousands of US farmers’ markets bring communities together? asks James McWilliams. Milling around a farmers’ market with other foodies, buying fresh produce from local farms and listening to local musicians play local songs, is all pleasant enough. But that aside, I’m not sure why they exist.

In the past, interacting with the person who grew your food was the norm.

But doing so “was fraught with risk and tension”. In colonial America, for example, face-to-face interaction made markets intensely competitive and exclusive. Because “everyone knew everyone”, the court records of colonial New England are “replete with personal market transactions gone awry”.

It was only when merchant-led expansion allowed trade with distant lands that markets become larger and less personal – intermediaries put a buffer between buyers and sellers.

“Neighbours became customers. Legal battles continued apace, but they were not personal. Just business.”

So as we return to local markets (up from 400 in the US in 1970 to over 4,000 today), “who is to say that the novelty of personal exchange will not gradually fade”? While we may not be about to see punch-ups over the price of baby arugula, if we did “there’d be a historical precedent for it”.

Why we prefer lookers at elections http://stumblingandmumbling.typepad.com “Good-looking politicians are more likely to get elected than munters,” writes Chris Dillow.

According to a new paper from the Australian National University, candidates in the 2004 Australian House of Representatives election who scored one standard deviation higher in looks won 1.5%-2% percentage points more of the vote. Meanwhile, politicans such as Peruvian lawyer Luciana Leon (pictured) find getting elected easier. Why? It was easier for Luciana Leon There’s a “labour-market premium on beauty”.

Good-looking people tend to be more confident, so employers have been shown to prefer them. “Should we blame voters for doing what employers generally do?” And in politics a looker can raise a country’s profile internationally. Above all, elected politicians appear in the media more often than defeated ones. So “if we must look at their faces more, why shouldn’t we choose the prettier ones”?

The facts that destroy Gordon Brown’s reputation http://www.adamsmith.org/blog Next year, government spending in Britain will reach 54.1% of gross domestic product, writes Allister Heath in Monday’s City AM. That’s up from 36.6% in 2000. “This devastating statistic, buried on the OECD’s website”, has been pretty much overlooked. But it’s one of the most important facts that everyone should know about today’s Britain. It shows that roughly an extra a fifth of our economy (17.5%) “has come under state control under Labour’s watch since the start of the century”. And “that’s not the only devastating statistic” buried on the site, adds Tom Clougherty.

Have a quick rummage and you’ll find everything you need to “destroy Gordon Brown’s absurd reputation for economic competence”. For example, in 2000 we had the seventh lowest public spending in the 30 OECD countries. In 2010, we’ll have the sixth highest. In 2000, we were the 16th most indebted country in the OECD. Next year, we’ll be the eighth. And while in 2000 we had the seventh lowest deficit in the OECD (in fact, we had a surplus) next year, the UK will have the biggest budget deficit of any country in the OECD. Those figures expose the true legacy of “Brown’s disastrous decade”.

Crunch time for tips http://www.economist.com/blogs

But is this really such a good thing? asks David Mitchell in The Observer. “Tips are embarrassing and stupid.” They are a sad remnant of haggling in a society that has otherwise moved on. In any case, why is the price of delivery of a meal open to negotiation but not the ambience, heating and use of furniture?

Deciding on what to tip is an awkward task – we all know waiters have an exhausting and underpaid job. And until the

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©SUPERSTUDIO/GETTY IMAGES

Good news for those who dislike forced tipping, writes The Economist’s Gulliver blog. The 20 restaurants established by Terence Conran (and now owned by D&D London) will stop adding a 12.5% service charge to bills. They claim this will make things easier for customers in “the current climate”.

law changed last week, employers would often use service charges to bump up their staff’s minimum wage. “It’s interesting that D&D London’s generous abandonment of the automatic tip coincided so precisely with that development.”

entrepreneurs

How I made my own dream supercar he persisted, spending 18,000 hours of his spare time between 1992 and 1999 analysing other supercars and assessing the exact parameters for the safety, weight, and comfort for his perfect car. “Nobody helped me financially and I came across more people who didn’t believe in this venture” than who did.

But “I have always followed my instinct and I am sure that the difficulties I have overcome are true testament to this”.

by Jody Clarke Horacio Pagani, 53, is proof that dreams really can come true.

He has wanted to build a supercar ever since he came across the dramatic wedge-shaped design of an Alfa Romeo Carabo in Auto Mundo magazine in the 1960s.

With the production of the Zonda, a £1.1m boy racer’s fantasy, some say he has built the world’s finest.

The son of a baker, Pagani grew up on Argentina’s Pampas, in the small rural town of Casilda, where “my parents couldn’t understand why all their son wanted to do was design and build cars”. At the age of nine, Horacio Pagani, Pagani Automobili he was making miniature cars out It wasn’t the best start to their new life of balsa wood and Nesquik cans. abroad. Indeed, Pagani started off as a Later, he built his own racing cars from janitor with Lamborghini, sweeping the scratch. However, with the political floors of the engineering department, situation in Argentina precarious, Pagani before his dedication and enthusiasm (he knew that he would only be able to was often the first to arrive and the last pursue his supercar dream by emigrating. to leave) was noticed and he was offered a stint as a designer. He grabbed the So, in 1982, he and his 19-year-old wife chance and by 1991 was one of the Christina (neither of whom spoke company’s best. That year he decided to Italian) borrowed a tent and moved to a set up his own firm, Modena Design, camp ground in Bologna, near the home hoping to use the money from this of the Italian sports car industry in venture to go on to make his own car.

Modena. “My wife and I were both incredibly in love so we saw it more as It wasn’t easy. Bugatti’s bankruptcy in an adventure. But the first night it was 1995 created big problems – Pagani was raining loads both outside and inside the by then offering the firm design and tent”, while “the blow-up mattress had a engineering consultation. Nevertheless, puncture and quickly deflated”.

MY FIRST MILLION

By 1999, having designed all 3,700 parts, besides the engine and gearbox, Pagani was ready to make his debut at the Geneva Motor Show. Selling at 470,000,000 Italian lira (approximately €250,000), the car was a sensation, with Pagani landing 57 orders. “But we were very prudent in asking for deposits upfront,” he says, which kept orders to a minimum.

The company, however, has been profitable since day one, making just 17 cars last year and turning over €12m.

This should increase as a new plant, capable of making more than 60 cars, comes on stream this year. Meanwhile, the company’s order book is full for the next three years.

Pagani’s advice to would-be car designers is simple: “Believe in your intuition, work and study hard. If you have talent, all the better; if you don’t, you have to work that little bit harder.”

The MoneyWeek audit: Tiger Woods

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• How much has he made from playing golf?

Tiger Woods first picked up a golf club when he was three years old. He won his first tournament five years later and turned professional at the age of 21. Since then he has earned more money than any other sportsman in history, overtaking Michael Schumacher in 2002. To date, he has won £62m in prize money from golf tournaments.

• What does he make from sponsorship deals?

Good looks and a wholesome image have helped Woods land numerous sponsorship deals. The most successful by far is his collaboration with Nike. Sales of Woods-branded golf products

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have made the firm over £500m a year, with Woods pocketing £20m a year. He also has a £12m deal with management consultants Accenture; Gillette pays him £8m a year; Gatorade pays £6m; Tag Heuer pays £3m; and Woods’s computer games earn him £5m a year from Electronic Arts.

• So what is he worth now?

Forbes estimates that Woods has now made over $1bn (about £620m) from the combined earnings of his tournament wins (he has received a a £6.2m bonus for winning the FedEx Cup), sponsorship deals and his highly lucrative golf-course design contracts – he is currently developing three courses, with each expected to net him £6.2m. He is the first athlete to make $1bn, but two others aren’t far behind. Forbes estimates that the former basketball star Michael Jordan has made $800m so far and should reach $1bn in the next five years, while Formula One star Michael Schumacher’s total career earnings from all sources sit at around $700m.

personal finance

Do you have R1m to spare?

If you don’t, your child’s future may be at risk

by Karin Iten If you have young children (or are considering having kids), you’re probably more concerned about the cost of nappies than the price of education right now. But, did you realise the 16 years of schooling and university your child requires will set you back almost R1m?

And that’s without the added costs of boarding, school uniforms and even textbooks. Add these costs, and this estimate shoots up another 10% or so.

The mere thought is likely to leave you gasping for air.

That’s why experts such as Clive Cotton, a chartered accountant, believes you should start planning for your child’s future as soon as “you’ve paid the bill from the maternity clinic,” reports the Business Times. Even if you don’t, the sooner you start, the easier it’ll be to save enough money to cater for your child’s tuition.

To do this, you must stick to four basic investment rules:

Rule #1: Invest to beat inflation Education is so pricey, the yearly increase in fees has surpassed the average inflation rate by at least 1.5% every year. And that means saving for your child’s future is no longer just a matter of ensuring you can afford to send him or her to university, reports personal finance journalist Neesa Moodly-Isaacs.

That’s why, no matter how you choose to come up with the money, you need to make sure your savings plan beats inflation.

Rule #2: Don’t forget about the magic of compounding Einstein once declared compounding “the most powerful force in the universe”. And he was right. Similar to retirement planning, saving for education involves a long-term investment horizon.

So stop trying to beat the market and rely on the compounding effect of frequent reinvestment and interest instead. The longer you save, the more

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interest you’ll earn. Let’s have a look at an example:

trusts are the best savings vehicle for long-term goals like education.

Let’s say you invest a lump sum of R10,000 when your child is born. By the time he/she is 15, there’ll be R27,590 in the kitty (provided you receive a compounded interest rate of 7% each year). That’s not bad. But now consider the following: If you add an extra R1,000 to this investment each year, the amount will almost double to R54,478.37. And this takes us to my next rule…

According to Spalding Fourie, a specialist planner for FNB Investment Product House, if you have enough time to save for your children’s studies (say ten to 18 years) you can afford to ride out market volatility. As such, a general equity unit trust or targeted absolute and real return fund with an inflationlinked mandate is a great way to save the money you need.

Rule #3: Set up a recurring deposit If you invest over a long period (for example, your child is two, and you have 16 years to plan for his/her university fees), you don’t have to commit a huge amount of savings to the education plan right from the start. But what you must do is invest regularly and without fail.

To work out how much money you need to invest each month, visit www.financialsense.co.za and click on educational calculator. Once you know how much you need to pay each month, set up a debit order to ensure you’re putting this amount away.

Rule #4: Plan ahead Wealth Corporation MD Nigel Scott believes you should factor education funding into your holistic financial plan. “Education is a critical part of setting up financial objectives, apart from paying off debt and retirement. It is one of the most significant targets, but shouldn't be compartmentalised and financed separately.”

He believes time horizons play an important role in planning. If you, for example, can afford to pay school fees from your monthly cash flow, factor this into your budget. It’ll also mean you have 12 years to build up the cash to pay off your child’s varsity tuition.

The single best vehicle for investing in your child’s future: Provided you have the discipline not to cash it in, financial experts agree: Unit

But remember, don't just park your money in a fund and leave it. Review the performance of the fund every year and make adjustments as and when necessary. When your child is five years away from starting varsity, consider shifting your money into growth and income share funds. This will reduce your exposure to market ups and downs while still allowing you to aim for high returns.

6 vital factors to help you select the best fund out there According to Fourie, the fund you select will largely depending on the following six factors: 1. The capital you require to fund your child’s tuition. (Sites like www.financialsense.co.za will help you calculate this.)

2. How much money you have available to save.

3. The term of the investment (or how long you’ll invest in the fund).

4. The fund’s portfolio mandate.

(This determines what type of shares the fund manager may invest in and what percent this type of investment can cover. For example, some funds have higher risk mandates than others and, as such, they invest more heavily in mining and commodity shares than other funds do.)

5. The expected rate of inflation over the investment period.

6. And your risk profile. (How soon you need the money will determine how much risk you’ll be comfortable with.)

profile This week: Michael Moore

The ordinary American Joe who became America’s most feared film maker

In his baseball cap, ill-fitting jeans and plaid shirt, the man from Flint, Michigan, is “both fat enough and angry enough to be convincing in the role of a real American”, says The Big Money.

Therein lies his secret. A talented film maker and best-selling author/lecturer, he’s first and foremost a movie star. “For all his girth, Moore fits the mould of the little guy in classic Hollywood movies,” says Time. “He bucks the odds and takes on the power elite.”

In Fahrenheit 9/11, it was the warmongering Bush administration; in Bowling for Columbine, the gun lobby; in Sicko, big pharma. But whatever the target, Moore strikes a chord with the public as the ordinary Joe who got mad.

That gives him power. His publicity blurb claims he’s “the most feared film maker in America”. He’s certainly one of the most provocative. There are now nearly as many movies attacking Moore as there are films directed by him.

Moore’s enemies accuse him of distorting facts and “acting”, but in the early days the rage was real enough. Born into a blue-collar family dependent on General Motors for its livelihood, he came to prominence 20 years ago with Roger & Me. The film chronicled Moore’s attempts to stalk GM chairman Roger Smith, whom he blamed for the mass layoffs that had crippled Flint. The film successfully made a monster of GM, an idiot of Smith, and a star of Moore.

From the nostalgic home-movie footage sewn into the film, it’s clear Moore was an “impish” child, says The Times.

He grew into a bolshie student (dropping out of the University of Michigan) and an articulate, argumentative, journalist.

In 1986 he moved to California to edit radical liberal magazine Mother Jones, but was fired after four months. Moore sued for wrongful dismissal, eventually settling out of court for $58,000. That was his seed money for Roger & Me. Now heavily garlanded with Oscars and Palmes D’Or, Moore has produced three of the top six grossing documentaries of all time and become a brand himself. It is arguably the worst thing that could have happened to him, says the Canadian National Post. He might live simply with his wife and step-daughter, and insist on driving a five-seater mini-van, but critics claim his credibility is shot to pieces.

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Michael Moore is back with his angriest movie yet. Capitalism: A Love Story features the usual stunts, misty-eyed emotion and polemic that have become Moore’s trademarks, and it has opened in the US to mixed reviews (see box). Early signs, though, suggest yet another blockbuster, says the Boston Globe. After all, if anyone can turn “a kernel of truth into a barrel of popcorn”, it’s Moore.

Moore is rich! He’s out of touch with the common man! Indeed, many regard him as far more controversial than the topics he investigates – not just “a pinko”, but a godless “anti-American” to boot.

“But who really cares?” asks Time.

Publicity, good or bad, only boosts his star. In Capitalism: A Love Story, Moore finds himself back outside the gates of GM 20 years on. The company, after declaring bankruptcy, is “far less solvent” than Moore himself. Talk about the little guy triumphing over the system.

What the critics say about his film Capitalism: A Love Story lacks focus, says James Scurlock on The Big Money. “When it comes to settling on a particular villain, a convenience we’ve come to expect from Moore, he doesn’t deliver.” Instead, pretty much everyone who’s ever worn a suit is fingered. The Founding Fathers, whom he clearly thinks wiser to keep sacrosanct, are excepted. But, in doing so, he rewrites history. Washington was a speculator; Jefferson a slave-owning serial debtor.

Even so, there’s lots to enjoy in “his most vigorous, rollicking and broadly ambitious work yet”, says Time. There’s the usual

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grandstanding, such as his attempted citizen’s arrest of AIG executives. But “the movie’s strongest moments are when he trains his camera on Americans who’ve lost their homes”, says the National Post.

“There are scenes that might spark the audience to descend on the banks with pitchforks and torches.”

Yet Moore’s nihilism is beginning to grate, says the Boston Globe. Yes, banks need reform and the haves have profited at the expense of have-nots. But he makes us seem more helpless than we are. It’s “a movie about the inarguable ravages of the free market that omits the possibility of free will”.

Spending it Where to stay in Paris

Left Bank luxury versus bohemian living on a budget Grand Hôtel Jeanne d’Arc In a previous incarnation, this hotel was the setting for Oscar Wilde’s final days. It’s described as one of the world’s first hip hotels and has recently had a revamp, so it is now even more luxurious.

What’s so special?

The “legendary Left Bank hangout” has had a makeover which has added a “sexy, starry lobby and a swimming pool in the catacomb basement”, says The Daily Telegraph. “But this is still recognisably the haunt of Oscar Wilde and the music-hall star Mistinguette.” Last year L’Hôtel was named Best Urban Hotel In The World by Harper’s Bazaar. It’s perfect for a romantic break. The interiors “could have been decorated by Helena Bonham Carter’s couturier”, says Ferne Arfin in The Sunday Telegraph. “Emerge from its faded velvets and striped silks only to buy chocolate or to visit Saint-Germain des Pres.”

How they rate it

The menu In 2008 the hotel’s Le Restaurant was awarded a Michelin star. Highlights on the menu include veal sweetbreads lacquered with soya and served with white asparagus or panfried frogs’ legs served with morel mushrooms and macaronis.

The cost Rooms cost from €255 (R2,875) per night. For more information visit L-hotel.com.

This budget hotel is situated on the edge of bohemian Marais, “the most atmospheric quartier in Paris”, says The Sunday Times. The hotel has been going for years and has a “devoted following”.

What’s so special?

Some of the rooms have been “redone with taffeta curtains and modern bathrooms, others remain endearingly floral with slightly psychedelic bathrooms”, says Natasha Edwards in The Daily Telegraph – so an inside tip is to request the brighter street-side rooms. But it’s the hotel’s location “that really dazzles”, says The Sunday Times. The exquisite 17th-century Place des Vosges is just five minutes walk away, and in ten minutes you can be at the Picasso Museum. “This must be the best blend of price and location in the city.”

How they rate it

The menu The hotel doesn’t have a restaurant, but for a great Parisian meal on a budget, Edwards recommends you feast on oysters, steaks or choucroute at the art deco Vaudeville at 29 rue Vivienne. Two courses will set you back around €21 (R237) or €27 (R304) for three.

The cost Rooms at Grand Hôtel Jeanne d’Arc cost from €90 (R1,014) per night.

To find out more, visit the website at Hoteljeannedarc .com.

What the travel writers are saying

My dream holiday

The Times has picked the 20 best travel books of the past century, as chosen by a selection of authors and travel journalists. Here are the top three:

The Oberoi Rajvilas in Jaipur, India, is “just the most beautiful place”, says Jodie Kidd in The Daily Telegraph. It’s “an oasis of calm” where you can retreat from the “whirl of noise and smells” and the hordes at busy markets which make India so exciting. The service is “second to none” and the restaurant’s food is “fantastic”. Rooms cost from R4,360.

For more, visit Oberoirajvilas.com.

● The Danakil Diary: Journeys through Abyssinia, 1930-4 by Wilfred Thesiger: The author travelled for three decades as an explorer, military man and historian in Arabia and Africa. Of his numerous books this one covers his most interesting journey, to discover the source of the Hawash River. ● A Winter in Arabia by Freya Stark: A prolific travel writer, Stark was also an archaeologist, geographer and historian. She wrote more than 20 travel books, “but her soul belonged to Arabia”. This book covers her travels there in 1938. ● Antarctica: The Worst Journey in the World by Apsley Cherry-Garrard: Cherry, as he was known, was one of two paying members of Scott’s second polar expedition.

This book chronicles the disastrous expedition and its tragic end. Cherry’s regret at failing to save Scott and the other dying men “brings added poignancy to what is the greatest account ever written about men on the ice”.

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©REX FEATURES

L’Hôtel

cars

A Veyron for the school run If you were thinking of buying the Bugatti Veyron but were put off by the fact that it only had two seats, then worry no more, says Harry Metcalfe in The Sunday Times. The Bugatti 16C Galibier is about to bring Veyron performance to the “relatively sedate world of saloons”. Sedate no longer: the Bugatti has a “plain mad” top speed of 386km/h and reaches 100km/h in less than three seconds. An exciting proposition, if you can lay your hands on it.

The Bugatti Galibier has a hatchback rear, which adds to the practicality of the car and gives it a nice clean look, says Harry Metcalfe.

Officially, it’s still a concept car, but Bugatti has revealed a fully functioning model, so if all goes well we can expect the green light in spring 2010 with sales beginning within three years, says Phil McNamara in Car. Bugatti is back to what it does best: wonderful cars with an unhealthy dose of power, says Metcalfe. “Watch out in your rear-view mirrors for the arrival of the Galibier.”

Inside, the beautiful maple-wood dash and LCD screens make the Bugatti utterly unique, says Metcalfe.

Wine of the week: would you like to join the“lunatics”?

Wine: Reyneke Cornerstone 2007 R95 at exclusive wine retailers I discovered biodynamic winemakers many years ago in France and was immediately converted. What a fantastic surprise to find a lone devotee in Stellenbosch in the late nineties – Johan Reneke.

by Marilyn Cooper

For those not familiar with biodynamic farming, it follows the teachings of Alfred Steiner – an Austrian who believed we should be in perfect harmony with natures’ forces, working with them during specific phases of the moon.

And, before you all jeer and laugh, consider this – if you prune your roses when the moon is waxing (on the rise), you’ll lose a lot

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of sap. If pruning them when the moon is waning, the sap will remain within the plant. This is also true when you plant. If you plant when the moon rises, this ensures good growth. But it’s not only about the moon. Biodynamic farmers also attract natural predators (e.g. ladybirds) to the vineyard to control pests and diseases. They don’t use artificial fertilisers or additions to the wine.

Can you taste the difference in the wine? I think so. The fruit appears purer, and it’s certainly more healthy!

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

blowing it

Drink, dancing, jazz and the Queen Mother people up. It’s the same story with Valium.

©GETTY IMAGES

The Queen Mother’s life was not a good advertisement for health fanatics, as William Shawcross’s new biography reminds us. On her first visit to Paris in 1921, she went to Ciro’s nightclub and danced until 2am, when she “staggered out”. At a house party in 1923, she “danced till nearly 4! Home at 4.30. Ate biscuits & sherry.

Bed 5.” By 1924, says Shawcross, “dancing and jazz had become widespread passions, and with the dancing came more drinking”.

Back in Paris that year with her husband, “they danced in rather risqué nightclubs, including Les Neants, where ‘we drank off a coffin, surrounded by skeletons’”. When pregnant with the present Queen in 1925, the Queen Mother found herself off wine for a while and worried she might never recover her “drinking powers”.

She needn’t have worried, says Shawcross.

Whether accepting the role as patron of a drinking club called the Windsor Wets, presiding over a cocktail party for 200 bishops – where she and they tossed down “martini after martini” – or referring to a log cabin on her Scottish estate as “the old Bull and Bush”, she never lost her fondness for the bottle.

Nor, given that she lived to 101, did it seem to do her much harm.

The 19th hole was her favourite

Healing is believing In the past few decades the pharmaceutical superpowers have spent a fortune persuading us that pills will cure just about anything. But now the likes of GlaxoSmithKline are worried.

Their concern is not the recession; it’s the growing attraction of placebos.

As Mary Wakefield reminds us in The Independent, all drugs have to show they work better than a placebo (a sugar pill or some other fake medicine) before they can be sold in shops. Curiously, however, placebos have now begun to outperform real pills. So while Prozac might be thought the undisputed king of happy pills, its “sugary placebo twin” has proved itself just as good at cheering

The mind has always worked in mysterious ways. One day, says Wakefield, “an anaesthetist friend of mine was called in to administer an anaesthetic to an old lady who was due to have heart surgery. He talked to the old lady first, explaining gently how she’d fall asleep under the influence of the gas, and so she did. Lady conked out; surgeon cracked open her ribs, but when my friend came to wake again he discovered that the gas had never been turned on. The lady had had open heart surgery with no anaesthetic – but because she assumed she’d be OK, she was.”

What’s strange is that the placebo effect has grown stronger with time. Now the pharma giants have launched an investigation, and so far they’ve found branded sugar pills are better than plain ones at alleviating pain; sunshine-coloured ones are best for making us happy; red pep us up and blue calm us down – except in Italy where the blue is the colour of the national football team. The lesson seems to be: if you’re convinced something will cure you, your head will take over and make it happen. Or, as Wakefield puts it, “healing is believing”.

Tabloid money… the kindness of strangers pays off in the end

■ Former Nazi stormtrooper Heinrich Steinmeyer has bequeathed his home and life savings – worth R5.3m in total – to the Scottish village of Comrie, says the Sunday Mirror. When he was captured in 1944 and

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©REX FEATURES

■ If you want a good insurance deal, always apply as a new customer, says Fergus Shanahan in The Sun. My mother-in-law needed to renew her home insurance.

Her current firm’s quote looked high, “so I went to their website, entered her details as if she was a new customer – and guess what? The online quote was 75% cheaper. Yep, R2,450 came down to R613 for the same policy as before. I rang the firm for an explanation and was told new customers always get special terms.”

sent to a POW camp near Comrie, he was amazed by the friendly way he was treated. “I didn’t expect to find this attitude – I was not just the enemy, but a Nazi as well.

They fed us well and it was so much better than being told to lie in a filthy foxhole.” Heinrich, 84, who lives near Bremen, says his entire estate will pass to a special trust he’s founded to help the elderly who live in and around Comrie.

■ “Why does Naomi Campbell look like a million euros while Kate Moss looks like a dried-up, pimply death’s head?” asks Tony Parsons in the Daily Mirror. “It’s a complete mystery. But let me hazard a few wild guesses. Fags. Drink. Drugs. Pete Doherty. Staying up past her bedtime. Stop me if I’m getting warm.”

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

PUNTS Company

Media

Reason

Current price

The Rand Currency

Financial Mail

“Who’d a thunk it?” says Jamie Carr in Diamonds & Dogs. “The global economy falls out of bed, and before you can say ‘flight to quality’ the rand has the dollar squealing like a piggy, while the pound is bent over, trousers down, enjoying the mightiest thrashing since Madam Whiplash left the Conservative party.”

The numbers really speak for themselves. The rand has gained around 35% against the dollar and the euro, while it’s added a massive 56% against the pound. But, this isn’t just an excuse to shop till you drop on foreign shores. The strong rand is powerfully shifting the economic landscape. But, while the flood of cheap imports is decimating the manufacturing sector, anything that relies on foreign inputs is loving life. Buy... them all!

R7.37/$

Murray & Roberts (MUR) Imara SP Reid Construction

Financial Mail

1Time (1TM) Airline

Oando Plc (OAO) Oil & gas

Finweek

The analysts at Imara SP Reid like Murray & Roberts. The group has plans to expand into the Middle East, South America and Asia. It has a growth focus and this should treat the share price well. The balance sheet is particularly strong and will protect the company from anything that the recession can throw at it.

Murray & Roberts is an entrenched fixture in the construction industry and it’ll handle the reduced contracts with its usual flair and when it rebounds we’ll see something spectacular. Buy. 5806c Larry Claasen at the Financial Mail believes the airline industry is the place to be. Out of all the airlines, he singles out 1Time as performing particularly well. Its revenue is up 35%. And most impressively it’s turned R5.4m operating loss into R65m profit.

Passenger numbers are up and the price of jet fuel is down. The future only holds bright things for this little carrier. Buy.

82c

Though very illiquid, Finweek’s Shaun Harris likes this share.

But if you can get hold of it, it exposes you “to all those good things investing used to be about”. It has interests in oil (refining and exploration), natural gas and petrol spread across West Africa and Nigeria – Where it’s primarily listed. This is an oil play for the high risk/reward investor. Just last week it’s price rocketed 25%. Buy.

520c

Data Vendor Company

Contacts

Dealings

Services

Profile

Address: 7 Sturdee Ave, Rosebank Johannesburg

I-Net Bridge provides on-line services for business use, including in-depth financial data, breaking business news and solutions to assist any business to serve its community, clients, suppliers, employees and investors.

• 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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9 October 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

Datatec (DTC) Software

Summit TV Michael Levin, Cannon Asset Managers

Reason

Current price

Datatec is a “little gem of an IT business,” according to Michael Levin or Cannon Asset Managers. It’s had a rough ride with the downturn but as things improve and people begin spending on IT systems and generally expanding their business this is a share that will rocket. It has a very strong balance sheet – very cash heavy. It’s going to take advantage of the recovery, get in before it’s too late. Buy.

2800c

DOGS Company

Media

Faritec (FRT) Computer services

Financial Mail

Reason

Current price

“It is something of a triumph that Faritec has a future at all,” says Jamie Carr in Diamonds & Dogs. The economic downturn has hit this black empowered IT services and solutions company harder than most. Its share price has collapsed from 113c to 6c in just two short years. That means it’s wiped out 95.58% of shareholder capital. This has forced it to refinance and has managed to coax a new equity partner, Shoden Data Systems, onboard. Hopefully, this reshuffling and the change of management will “create a brighter future.” But until we see some improvement steer clear. Avoid.

6c

Reason

Current price

WATCHLIST Company

Media

Rolfes Technology (RLF) Speciality chemicals ELB Group (ELR) Industrial suppliers

Dynamic cables (DYM) Telecom Equipment

Sallies (SAL) General mining

Financial Mail

Financial Mail

Financial Mail

Financial Mail

“Revenue is up but the fall in gross margin has hurt the company,” says Larry Claasen in the Financial Mail. Hold.

115c

ELB Group looks set to profit from the infrastructure spend going on in South Africa and Australia. It’s earnings before tax were a little disappointing, down 15%. It’s earning per share was even worse with a 17% slump. Sasha Planting sounds like a fortune cookie when she says, “Conservative cash management and outlook are wise under the circumstances.”

All in all not a bad company though. Hold.

1200c

Larry Claasen at Financial Mail advises: “Hold until it turns.”

The earnings numbers are down but it’s “managed its cash flows well”. Despite an 18% drop in earnings it’s managed to boost cash reserves from R16.2m to R20.6m. Hold.

13c

Razina Munshi doesn’t have much encouragement for the miner. “Sallies hoped to exit its run of bad luck during this financial year but was thwarted by the recession.” As demand dissipated so did the sales. She believes that the share is cheap when compared to its R1.50 peak in 2007 and, with it trading on a PE of 7.82, compared to the sector’s 12.07, it just might be.

As yet there isn’t enough evidence to prove this one’s changed its tune. Hold.

18c

**Closing prices as at 7 October 2009

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last word

Chronic depression Why the slump won’t go away it ended, so did auto sales. New house sales could be traced to a tax credit that cut the down-payment by at least 20%.

That scheme is set to end in November.

This week the Australian central bank became the first to declare victory. It raised its key lending rate by 0.25% and gave a whoop, signalling an end to the slump. The European Central Bank vaguely threatened to raise rates too. But the Americans stayed in their trenches. New York Fed Governor Bill Dudley said that even though the economy is recovering, any rate hikes in the US will be over his dead body.

Bill Bonner

Now the White House frets about jobs.

Unemployment is meant to be a lagging indicator, but this time it seems to have dropped out of the race all together.

Still, Congressional elections are coming up. Unemployed voters are surly and unreliable. So the Obama administration is considering a $3,000 tax credit to bribe

Then, word came that even Alan Greenspan thinks a recovery is underway.

“This is what a recovery looks like,” said the maestro. That settled the matter as far as we are concerned. Greenspan didn’t see history’s biggest financial bubble until it exploded in his face. In the following few words we undertake to show that Greenspan is as blind as ever.

Foreigners have noticed too. Colleagues in London say they’re thinking of moving to Florida, where they will get far more for their money. The dollar falls; foreign purchases go up. Stocks, for example.

In the first quarter, foreigners were dumping US shares. Now they’re buying more than $100bn worth per month.

It’s a deflationary world, at least that part of the world between the Rio Grande and the 49th parallel. Consumer price index inflation is negative and falling faster than at any time in 59 years. Households can only be induced to spend money by cutting prices. ‘Cash for Clunkers’ cut prices on new cars by about 20%. When 28

9 October 2009

Supplying cash-for-this and cash-for-that is expensive, especially when tax receipts are falling. The money has to come from somewhere. As it turns out, the feds borrow it from the very people who are trying to rebuild their personal balance sheets. Of the $1.6trn the US government will borrow this year, the biggest single lender is the private sector, chipping in $700bn. But instead of being put to use in a way that might stimulate a real recovery – providing credit for small business and consumers – it is taken up by the US government and frittered away.

The banks are happy to play along.

They can borrow overnight money from the Fed at a rate of just one quarter of 1%, annualised. But lending to small business is hard, risky work. Why bother?

The US Treasury will pay them 4% for lending back to the government, long term. This is practically free money to the banks. Both bankers and politicians end up ahead – with a bigger piece of the economy under their control.

©TIM MCGUIRE/CORBIS

“Great time for US consumers, America is on sale,” says a YahooFinance piece.

The “discounts are unbelievable”, adds a blogger known as Frugal Rhode Island Momma. Across the nation, merchants no longer sell the merits of their products; they sell price. McDonald’s advertises its “dollar meals”. Hotel room rates are down 20% in the last year. House prices are down 30% since 2006. Sellers are offering bargains and they want buyers to know it. “Sold for $365,000 in 2006.

Now $195,000,” says a typical advertisement for a house.

people most of the time. They think they can dupe them again – with bail-outs and boondoggles. But real demand has vanished as households try to repay debt.

That is not going to change anytime soon. Not while the federal government is sabotaging a genuine recovery.

The real economy is on its knees businesses to hire them. If the typical employee costs his firm about $40,000, this effectively cuts the cost of labour by 7.5%. It’s beginning to look more and more like the Roosevelt years. By the end of this year, all the jobs created during the bubble era – 2002-2007 – will have been eliminated, making it the first decade with no job growth since the 1930s.

We’re expecting a fireside chat any day.

Typically, big businesses cut workers in a recession. When the economy recovers, small businesses are quick to take them back. But this is unlike the typical postwar recession. This time, deprived of capital as well as customers, small businesses don’t have a chance. Neither does a genuine recovery. The authorities still do not understand what is going on.

They are used to fooling most of the

Meanwhile, the real economy staggers.

The US needs to create a million and a half new jobs a year just to keep up with population growth. There are 15 million people without jobs already, and a couple hundred thousand more unemployed each month. If this recovery continues long enough there won’t be a single person left in America who still has a job.

Even if the economy could be stabilised, it will leave millions without jobs – more or less permanently. Add the people working reduced hours, and those who have been looking for work so long they are no longer counted, and their families, and you have a quarter of the population without money to spend. That’s why this slump won’t go away soon. As in Japan in the 1990s, we may have to live with this depression for the rest of our lives.

To read Bill’s thoughts, sign up to Money Morning’s free email at www.moneymorning.co.za.