Canadiantelecoms are set tosoar – buy in now

Why greatinvestment trendsare born in bubbles

From Greece toIceland, taxpayersare revolting

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

SECTOR 7 GLOBAL VIEW 14 BILL BONNER 28

12 MARCH 2010 SOUTH AFRICA EDITION 134THE BEST OF THE INTERNATIONAL FINANCIAL MEDIA

The next goldrushThe next goldrushThere’s money inrubbish dumps,page 16

There’s money inrubbish dumps,page 16

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Justin Urquhart-StewartSeven Investment

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from the editor

6 Markets Why Australia may be runningout of luck.

8 Gareth Stokes Rich pickings for ironore producers as Arcelor suffers.

10 Columnists Don’t blame the babyboomers; why regrets can be useful.

15 Funds Grab your share of the globalcash pile now.

19 Blogs Why Greece should sell itsislands; how to buy great wines cheaply.

22 Profile Can the man that every Man Ufan loves to hate see off the Red Knights?

23 Travel Where to stay in the Maldives –budget or family, there’s a resort foreveryone.

24 Toys Even better than its predecessor –the new sporty saloon from Lexus.

25 Blowing it How to benefit fromThailand’s turmoil and travel cheap.

Have you noticed apattern developing inglobal equitymarkets? SinceOctober 2009 shareprices in bothdeveloped andemerging marketshave been stuck in asideways trend. It’s asif investors are unsure

whether the next price action will be higher orlower. There are two reasons for thisuncertainty. The first is the ongoing valuedebate, with investors questioning whethercorporate earnings will underpin recent shareprice gains. The second uncertainty is rootedin the world of macroeconomics. Analystsaren’t entirely convinced the economicrecovery is sustainable.

Alwyn van der Merwe, director at SanlamPrivate Investments, reckons fund managersand investors are suffering a bad case ofindigestion. They’ve swallowed the marketrecovery story and gobbled up companies atprices well in excess of historic fair value.Now the feeding frenzy is over they realisethey might have bitten off more than they canstomach. The feeling of unease magnifies thelater you climbed back on to the equitybandwagon.

As Q1 2010 draws to a close there are freshfears of a dreaded ‘double dip’ in equities. Theglobal economy is like a minefield litteredwith countries in severe sovereign debt crisis.The boom times’ BRICS (Brazil, Russia, Indiaand China) have been replaced with creditcrunch PIIGS (Portugal, Italy, Ireland, Greeceand Spain). Governments are struggling tomeet their debt obligations. Greece owes$270bn to European banks with France($86bn), Switzerland ($60bn) and Germany($44bn) first in the firing line. Should one ofthe PIIGS go to the wall, the ripple willreverse financial stability in a heart beat.China could also become problematic. There

If PIIGS could flyare growing concerns the emerging marketsuperpower’s economy is tightening. If Chinesegrowth stalls you can expect demand forcommodities to dry up, and commodity pricesto fall. That’s not good news for the averageSouth African investor, because yourinvestments are closely linked to thecommodity-rich JSE All Share index.

South Africa Inc isn’t in great shape either. The3.2% quarterly annualised GDP growthreported in Q4 2009 is a bit of a misnomer. Itreflects improvements in the global economy,but largely ignores current low levels ofconsumer and business confidence. You won’tsee sustainable growth until private sectorinvestment and employment prospectsimprove... Equity markets are sitting on thefence right now and fund managers areinvesting funds with their ‘bearish bull’ hatsfirmly in place. Share prices surge or fallhundreds of points with each bit of positive ornegative news. And that’s not a good sign.

Finding value among locally listed companiesis becoming a painstaking exercise. Very fewcommentators expect double digit returns fromequities this year. They warn against anovercooked retail sector – wave red flagsaround ‘value traps’ in the construction sector– and suggest resource sector earnings willhave to surprise on the upside before interestin the sector flowers again. And if you decideto go with banking and financial shares youmight have to wait two or more years for adecent capital return.

It’s no wonder international investors arelooking for more creative ways to generatereturns. Eoin Gleeson reckons you can strikegold at your local rubbish dump. He considersopportunities as diverse as mine tailings andgarbage as he trawls the globe for the next bigthing. Turn to page 16 to find out how oneman’s rubbish is another’s treasure.

In this issue

South Africa Gareth Stokes – Editor

Annabel Koffman – Publisher

Editorial & Production Gary Booysen, Karin Iten, Jeremy Miles

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12 MARCH 2010 ISSUE 134

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12 March 20102

Gareth StokesEditor, South Africa

3

“Start negotiations now to avoid strikesduring the World Cup”.

That’s the message Cosatu is sendingcompany bosses to ensure that unionmembers don’t go on strike before thisyear’s long awaited FIFA 2010 SoccerWorld Cup in June. According to The Mail & Guardian, last weekThursday Cosatu’s secretary generalZwelinzima Vavi told reporters that thegroup could embark on “a nationwidestrike before October over the largeelectricity price increases granted toutility Eskom”.

Should the strike go ahead – whichwould include almost two millionmembers – it would damage thecountry’s hopes of using the biggestsporting event to showcase itself abroad.

“What’s the issue?” you ask. Well,besides the fact that Eskom’s 25% priceincrease could result in the loss of morethan 200,000 jobs, Cosatu is outragedby the news that the ANC holds a 25%stake in Hitachi Africa – the companythat “won a tender to supply boilers totwo new multibillion rand powerstations for Eskom,” reports The TimesLive.

news

It was an extremely tough year forStandard Bank (JSE:SBK). That’s theconsensus of analysts and shareholdersalike after viewing the group’s full yearresults released last week. And while thegroup’s not proud of its 20% drop inearnings, it’s “relieved the worst is over”reports financial director, Simon Ridley.

“Still plagued by economic conditions,impairments on bad loans and the poorperformance of Liberty (which is startingto turn around), the banking groupreported a 2% rise in total income and7% higher impairment charges.” Despitethis, the group’s lacklustre full year resultsmask a vast improvement in the secondhalf of 2009.

According to the Wall Street Journal:“Net profit fell 21% in 2009 as bad debtsrose among retail and corporatecustomers, and the Johannesburg-basedbanking group said that while a hesitanteconomic recovery is expected in 2010,employment and credit conditions remainunder pressure.”

When asked how they group wouldensure these poor results won’t berepeated this year, group deputy CEO SimTshabalala told Fin24.com that it would“up its game to become more profitable

This is the latest sign of the wideninggap between Cosatu and the rulingparty. Speaking at a press conference lastweek, Vavi told reporters that “theproblem with this is that the ANC willnot be able to ward off genuine concernsthat it might have decided to accept theextraordinary high tariffs imposed onthe poor and industry because it standsto benefit.” Vavi also told reporters that it would protest against thegovernment’s budget, which the tradeunion federation said “did not doenough to alleviate the plight of SouthAfrica’s poor.”

Basically it all boils down to Cosatu’sbelief that “the centre in the Presidencyis not holding and [it’s] blamed this onthe inept coterie of people appointed tomanage President Jacob Zuma at theUnion Buildings.” It’s also stated that it believes this inefficiency is what’s led Zuma into a number of publicrelations nightmares, including hisfailure to declare his financial interests.

And it gets worse. In an interview onMonday, Cosatu president SdumoDlamini said “Zuma should ‘fire’ hispolitical advisers for being a ‘disaster’and axe his communications team forfailing to guide him through a series ofPR nightmares that have plunged hisPresidency into crisis a mere 10 monthssince taking office.” Whether thishappens or not remains to be seen, butone thing’s clear: Since Cosatu played amajor role in securing Zuma’spresidency, ignoring these warnings willland him in hot water.

Cosatu to strikeduring 2010show case

Standard Bank:“Fortress-likestructures justaren’t enough!”

SA economy Companies

$2.5m The value of the Tiffany &Co yellow-diamond necklace wornby Kate Winslet (pictured right) atthe Oscars.

$50 000 The fee the averageAmerican would accept to killanother person. US soldiers getpaid $194 a month with $64 extracombat pay.

$25 000 The prize money upfor grabs at the InternationalGlutton Bowl. Cow brains, 15 metres of Sushi, bowls ofmayonnaise and bulls testicles are just a few of the items

contestants will be asked todevour.

£5m How much Tony Blair isestimated to have been paid bypublishers for his memoir, TheJourney, which will bepublished in September.

R12m The damages anAmerican tourist is suing a safari

lodge just outside Pretoria for afterslipping on wet patio tiles.

£61,000 The value of the goody-bag Oscar nominees received at thisyear’s awards. It included an African

safari and a Tiffany crystal-studded catcollar.

£9,000 How much the average woman spends on make-up in herlifetime, according to a survey bySuperdrug.

R200m Not even this vast amount ofmoney will get JubJub out of jail. Thejudge has denied the musician bail afterhe wiped out four school children in aSoweto drag race gone wrong earlier thisweek.

$50m The black market price of anAtomic Bomb.

12 March 2010

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news

● The way we live nowIf you’re prepared to carry a giant rabbitaround, you could pocket £70,000. The owner of the world’s largest rabbit isoffering the hefty salary to anyoneprepared to hold the animal at eventsaround the world. Annette Edwards, theowner of three-and-a-half-stone Alice therabbit, has spent £10,000 on plastic surgeryto look like Jessica Rabbit. As a result, shesays she can’t hold Alice when incharacter. “I know it sounds like a lot ofmoney, but it is a very important job and Ineed a safe pair of hands for Alice,” saysEdwards in the Daily Mail. Auditions willbe held on 1 April – and Edwards isadamant it isn’t an April Fool’s Day joke.

in the year ahead. According tomanagement, its immediate focus will beto “restore earnings to 2008 levels.”Although, as CEO Jacko Maree warned,“whether [it’ll] get there in one year is notclear”. The good news is the companystill maintained its dividend payout at thesame level as in the past two years.

The market, meanwhile has rejoiced atthe news of the group’s “better thanexpected results” – with Standard Bank’sshare price rising 130c (1.2%) afterresults were released. And analysts wereoverjoyed. “It’s the only banking stock wehold in our portfolio,” Francois du Plessisof Vega Asset Management toldFin24.com, describing the group “asextremely solid with plenty of depth inmanagement”. According to him,competitors would find it “hard tocompete with the bank elsewhere” on thecontinent.

Iceland votes ‘no’on debt repaymentIceland’s voters have overwhelminglyrejected a proposal to repay £3.4bn ofloans to Britain and the Netherlands. The UK and Dutch governments hadbailed out depositors in Icesave, asubsidiary of Landsbanki, which collapsedin the credit meltdown of late 2008. They now want that money back. But arepayment deal passed by parliamentearlier this year was vetoed by thepresident, which triggered the referendum.Talks to resolve the issue continue.

What the commentators saidIcelanders object not to repaying the debt,but to the terms, as The Independentpointed out. You can see why. £3.4bn is50% of Iceland’s GDP and the annualinterest owed would be 5.5%. At morethan $16,000 for each of the country’s317,000 people, it’s “too great a burden”,said Matthew Lynn on Bloomberg.com.Given that Iceland’s already sufferingfrom a deep recession – GDP fell by 6.9% in 2009 – “it could be crippled for a generation”.

But Iceland could pay a heavy price if theissue isn’t resolved, said Economist.com.It could jeopardise EU entry as well as a$4.75bn IMF support package, as theNordic countries who are contributingabout half the sum are refusing to goahead. Iceland already has to find $2bnnext year and half that in 2011.

Europe

Iceland could pay heavy price for ‘no’ vote

FTSE 100NikkeiS&P500NasdaqCAC40DaxTop 40All ShareRand/EuroRand/PoundRand/US$

% change

**2.054.122.022.913.012.441.101.13

-0.81-1.65-1.16

*10 Mar ** since 4 Feb

*5640.5710563.92

1145.612358.953943.555936.72

25190.0028088.00

10.0711.077.40

Vital numbers Best and worst-performing shares

Weekly change to JSE stocks as 10 March 2010

Losers % change Price

Lonfin (LNF) -20.00% 240c

Comair (COM) -10.21% 255c

Erbacon (ERB) -8.24% 156c

Cadiz (CDZ) -8.20% 280c

Simmers (SIM) -7.41% 125c

Onetime (1TM) -7.08% 105c

Metorex (MTX) -7.02% 437c

Jubilee (JBL) -6.98% 400c

ABE (ABU) -6.67% 140c

Urone (UUU) -6.52% 2049c

Winners % change Price

Palcap (PLD) 20.11% 215c

Anooraq (ARQ) 18.58% 1085c

SilverB (SVB) 17.86% 165c

Amaps (AMA) 15.33% 173c

S.Ocean (SOH) 14.29% 160c

Metmar (MML) 14.06% 430c

Rex True -N- (RTN) 11.76% 922c

Ceramic (CRM) 11.32% 11800c

Af & Ovr-N- (AON) 11.11% 900c

Rolfes (RLF) 10.58% 115c

4 12 March 2010

To make matters worse, ratings agencyMoody’s has threatened to downgrade itsdebt to junk. A deal should be possible,said Breakingviews’ Nicholas Paisner.Before the vote the two sides were closerto agreeing a lower interest rate. Indeed,the difference was less than 1%, which“doesn’t look insurmountable”.

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This week marks the one-yearanniversary of 2009’s bear-marketlow. Shares appear to have foundtheir feet again – the FTSE WorldEquity index has hit a six-week highand the FTSE 100 an 18-monthpeak. Better-than-expected USemployment data helped, as did thepositive reaction to Greece’s latestausterity package. It fuelled hopesthat the eurozone can now draw aline under the Greek debt crisis, andunderpinned a near-5% jump inpan-European stocks last week. The S&P 500 is up by nearly 70%in a year; the FTSE 60%.

Weak pound boosts the FTSEThe UK economic outlook may be farfrom encouraging, but the FTSE isbenefiting from the slide in sterling.Around 75% of the top 100 blue chips’sales base is overseas, says Adrian Cattleyof Citigroup. So the threat of a hungparliament and a worsening fiscal messare “more of an issue for the gilt andcurrency markets”. Indeed, “if the poundfalls further, the earnings outlook for UKplc looks better, not worse”, says HSBC’sKevin Gardner.

For example, one of the major dollarearners, publishing group Pearson, hasjust reported a 17% jump in annualrevenues. But adjust for currencyfluctuations and the rise was just 4%,says Neil Hume in the FT. Meanwhile,investors are seeking exposure to fast-growing emerging markets, sointernational companies such as BHPBilliton and Vodafone are highly prized.The FTSE 100 is “long global GDP”.

Global recovery set to disappointThe trouble is that the outlook for globalGDP is also fraught with risk. In the US,the world’s biggest economy, another36,000 jobs were lost in February. Thatcontinues the recent pattern of “minorlosses that look good compared to thebloodletting of early 2009, but rather sadcompared to a textbook recovery”, sayPhilippa Dunne and Doug Henwood ofthe Liscio Report. We normally see150,000 jobs added per month by thetime two and a half years have passedsince the Fed first begins to ease, addsDavid Rosenberg of Gluskin Sheff.

The turn in the US labour and housingmarkets is “refusing to arrive”, and mostof the numbers coming out of Europehave “disappointed” of late, says EdwardHadas on Breakingviews. Swedish GDPactually fell in the fourth quarter. A feeblerecovery “will only amplify” thechallenge to governments “alreadystruggling to find politically acceptableways to reduce big deficits”, raising the

risk that tightening will underminewhat little growth there is. A related problem is graduallywinding up special liquidityfacilities – a process that hasalready started. Then there’s thequestion of when to raise interestrates: “the tricky bit is knowingwhen the economy, and thefinancial sector, is strong enough tocope”, says Buttonwood onEconomist.com. Given governmenttightening, broken banking systemsand overleveraged consumers inmuch of the West, recovery will bea long slog once the boost from

fiscal stimuli and the inventory cyclewears off. “Get ready for the austeritydecade,” says Larry Elliott in TheGuardian. A renewed slowdown or shockin the West will also ripple throughemerging markets.

Are markets stuck in a range?With years of lacklustre growth ahead as we gradually work our way out of the credit bust, the medium-termoutlook for developed stockmarkets is uninspiring. A Morgan Stanley study of previous major bear marketssuggests we’re now set for a range-bound market – albeit in a wide range.That could last five years or more as we work through the structuralheadwinds we face. That makes it vitalto hold solid dividend-payers, saysMorgan Stanley’s Graham Secker. That means holding on to the defensivestocks MoneyWeek has been tipping forsome time. As many are internationalearners, they are currently getting anextra fillip from the weak pound.

the markets

The big picture: global trade climbs off the floorAfter plummeting at the fastestrate since the Great Depression inearly 2009, trade is rebounding.Global merchandise tradevolumes grew by 6% betweenOctober and December comparedto the previous quarter, accordingto the CPB Netherlands Bureau.That sort of pace is typical of thedecade as a whole. Yet for 2009,volumes were down by anunprecedented 13.2%. And therecent bounce may well fade, given that the developed world is set to struggle. Localtightening measures are likely to temper emerging-market growth too, says Capital Economics.Don’t expect trade to regain pre-crisis levels until at least mid-2011.

Source: Pacific Exchange Rate ServiceSource: Pacific Exchange Rate Service

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130

120

110

100

S&P 500 v. FTSE 100

Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb 2009 2010

S&P 500 IndexFTSE 100 Index

World merchandise trade volume (annual % change)

20151050

-5-10-15-20

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: www.finfacts.ie/CPB Netherlands BureauSource: www.finfacts.ie/CPB Netherlands Bureau

Shares find their feet – but on an icy road

Viewpoint“Gordon Brown … cannotbelieve [that] what he saw as atransformation of Britain’spublic services … has to befollowed by ... savage cuts. Until he believes it, and canconvince everybody he does,the markets … will continue tobelieve that a Labour victory,particularly a minority Labourgovernment, would be verybad for Britain.”

David Smith,

The Sunday Times

12 March 20106

the markets

Australia avoidedrecession in 2009,and the “remarkablyresilient” economylooks set to grow by2.5% this year, saysthe IMF. But there’sstill some “unfinishedbusiness”, cautionsCapital Economics.While most of theWestern world isgrappling with thefallout from bursthousing and creditbubbles, Australia’shave kept inflating.

Australia has beenlifted by its exposureto China’s stimulus.This bolstereddemand for itscommodity exports. A banking systemthat had avoided toxic paper helped too.So unlike in most countries, the fiscalstimulus went straight to consumers.It boosted disposable incomes by 4% inthe year to 2009’s fourth quarter, saysGerard Minack of Morgan Stanley. Aseries of interest-rate cuts added another5% (most mortgages are based onfloating rates). The government alsopromoted spending by boosting thehousing market through a rise in thesubsidy for first-time homebuyers,enticing “Australians back into mortgagedebt in droves”, says Steve Keen of theUniversity of Western Sydney.

All this fended off a downturn, but leavesthe housing market and the private sector

looking ever moreoverextended.House prices haverisen 15% to newrecords since early2009 and the ratioof prices toearnings is 40%above the long-term average.Houses in majorcities are “severelyunaffordable”,according toDemographia.

The privatesector’s capacityto take on moredebt “is virtuallyexhausted”, saysKeen. Householddebt is now at

100% of GDP or 160% of disposableincome; the latter figure is higher thanAmerica’s. The private sector hadactually started to shed debt in 2008before being encouraged to take onmore mortgages. Australia has taken the“‘hair of the dog’ approach to a debthangover”, but that can’t work forever.

Now cracks are appearing as interestrates rise. Fujitsu Consulting believes thatby December half of the 250,000 first-time buyers who entered the market inthe past 18 months will have troublemeeting payments. “This is eerilyreminiscent of early-stage delinquencies”in US subprime in 2005, says EdwardChancellor in the FT. “The luckycountry’s luck” may not last much longer.

Talk about blaming the messenger, says Tim Price of PFP Wealth Management.Whenever markets “highlight” unwelcome truths, such as Greece’s budget mess and thestrains inherent in European monetary union, hedge funds and ‘speculators’ are “awelcome distraction”. Some Europeans say that the credit default swaps (CDS) market,where investors buy insurance against debt defaults, undermined Greek bonds. The USDepartment of Justice is probing supposed hedge-fund collusion to drive down the euro.

In reality, hedge funds would be “crazy” to target the euro, note Christopher Swann andRichard Beales on Breakingviews. The currency market turns over $2trn a day and thedollar-euro trade $1trn. Even working together, hedge funds “couldn’t hope to manipulateit”. The sovereign CDS market is relatively opaque, so big players can move prices, saysLex in the FT, but it’s a “sideshow” to the more liquid bond markets. Trading volumesare 2%-12% of government bond trading volumes. Contracts on the likes of Greece andPortugal are worth just 1%-5% of outstanding government debt. Nor does the sovereignCDS market affect the cost of issuing new debt. The facts crush conspiracy theories.

Miners cash in oniron ore boom“It’s time to make hay once again forthe global miners,” says Garry White inThe Daily Telegraph. For 40 years, thebiggest mining companies have setannual benchmark prices for iron orewith key customers such as China –only about a third of iron ore is everavailable in the spot market. As theyattempt to finalise negotiations for2010-2011, the three top iron-oreproviders, Rio Tinto, BHP Billiton andBrazil’s Vale, are in a strong position.

The spot price has more than doubledto over $130 per tonne as the globaleconomy has recovered. Chinacontinues to add steel capacity and“even the steel market in Europe haspicked up”, say Patrick Flockhart of SteelBusiness Briefing. Last year the minersset a price of $60 per ton with Japan;now there is talk of a 60%-80% hike inbenchmark prices – quite a boost, giventhat iron ore comprises half of Rio’soperating profits.

The miners are now increasinglypushing for quarterly contracts basedon the spot price after steel-makersfailed to meet their annual purchasingcommitments early last year, saysJavier Blas in the FT. China, forinstance, simply headed for the muchcheaper spot market after pricescollapsed. Quarterly contracts “willbecome the norm”, says Jim Lennon ofMacquarie. Short-term contracts,however, amplify the downside forproducers if the global economy andsteel market take a renewed tumble.

Remarkably resilient to recession… so far

Australia’s luck is running out

Gold watchGovernments seek scapegoats Gold has traded sideways at around$1,120 an ounce over the past few days,kept down by a firmer dollar. Gold wasthe best-performing investment overthe last decade, according to Halifax. Itfinished ahead of property, shares andcash with a 277% increase. And the bullrun isn’t over yet. The long-term impactof all the stimulus programmes acrossthe world will be inflationary, saysRichard O’ Brien, chief executive ofNewmont Mining. Dwindling mineproduction should also help boost goldto more than $1,500 an ounce.

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12 March 20107

sector of the week

You can generally bank onpoliticians to cause confusion. The Canadian government is noexception. Its latest statements ontelecom companies (telcos) havebaffled the stockmarket. However,savvy investors who can seethrough the smoke will spot anopportunity to profit.

Until now, the telecoms sector in Canada has been almost aclosed shop. The federalTelecommunications Act hasstopped foreign ownership of thecountry’s phone companiesexceeding 20% of a firm’s votingshares. So far so cosy for Canadiandomestic telcos. But there’s a bigdownside. Competition and investmenthave been stifled by the rules, “longcriticised as overly restrictive and out-of-date”, says Money.canoe.ca.

So a change was overdue and, indeed,expected last week from Canada’sofficialdom. In last Wednesday’s annualkey policy announcement – ‘the thronespeech’ – the Conservative governmentstrongly hinted that both the country’stelecoms and satellite industries would be opened up to extra overseasmoney. This would “give Canadian firmsaccess to the funds and expertise theyneed”. However, the message was thenwatered down. Thursday’s budget speechspotlighted only the satellite sector as animmediate target for liberalisation. Thetelecoms sector overall would see just“increased competition and investment”.

The result? “Stunned silence and abjectconfusion,” says Ian Marlow in theGlobe and Mail. “Satellites are anobscure part of the broader telecomindustry that haven’t been the subject offoreign interest in years.” A ‘regulatorysource’ quoted by Marlow said thegovernment has “over-promised andunderdelivered”. In short, it’s all got a bitmessy – for now. The government says itwill clarify timing “in the coming weeks”.

However, that aside, the longer-termpicture looks clearer. “The good news isthat two earlier government-sponsoredreports have given a road map” forliberalisation, says Peter Rhamey atBMO Capital Markets. Indeed, “there’sa general sense that it’s only a matter oftime before the rules are changed, atleast in the cellular sector”, saysTelegeography’s CommsUpdate. Thetelecom industry also wants to see cash

from outside the country boostingboth wireless and landlineservices. Back in 2003, the thenboss of Canadian telco BCE tolda government StandingCommittee that he “believed thecomplete removal of ownershiprestrictions is inevitable”. That’sbecause nearly everyone wouldbenefit. More investment shouldbring in faster and cheaperbroadband services. In addition,if new Canadian governmentpolicy helps reduce borrowingcosts – because carriers would befreed to shop around more widelyfor funds – firms’ expenses andconsumer prices could both drop,

says telecom consultant Mark Goldberg.“If [the government] fully liberalisesforeign ownership, it’s likely to improvestock prices for everybody, because itremoves restrictions on who can buyCanadian carriers.”

And that’s the win for investors.“Depending on what rules are relaxed,and when, it could mean widespreadconsolidation,” says Marlow. “Mergersand acquisitions could ricochet throughthe telecom industry. Bell and Telus [oneof BCE’s major rivals] could merge. Cablecompanies could sell out to largeAmerican companies. Rogers might buyout Cogeco Cable Inc” – both are alsoCanadian telcos. “And huge internationalconglomerates might chose to invest insmall Canadian start-ups.” So, exploitcurrent uncertainty to nab the sector’s key players on the cheap. We look at onein the box below.

The best bet in the sector

Nab Canada’s telcos on the cheapby David Stevenson

Canadian PM Stephen Harper: mixed messages on telcos

BCE (CN: BCE), formerly Bell CanadaEnterprises, is Canada’s largest telco, with2009 revenues of C$17.7bn and a market capof C$23bn. It provides landline servicesdirectly in the east (in Ontario and Quebec)and also via its 44%-owned affiliate BellAliant in the Atlantic provinces. At end-2009it had 6.8 million wireless subscribers, up5% year on year. It’s Canada’s largestprovider of high-speed internet and videoservices, each with about two million customers.

BCE already “boasts healthy cash flow and strong brands”, saysMichael Santoli in Barron’s. While the company isn’t immune to

price wars, there’s plenty of room foroverall industry growth, agrees SimonFlannery at Morgan Stanley. Only 67% ofCanadians are wireless customers, asopposed to 92% in America.

An ongoing cost-cutting campaign isfeeding through into analysts’ forecasts of a7% climb in net profits in 2010. That puts thestock on a forward p/e of just 11.4, with a

forward yield of 5.7%. “The shares could easily trade 10% higherover the next year,” says Santoli. Add in the dividend payout,and they offer a “high-teens percentage return”. Any futureforeign investment in the sector could put the icing on the cake.

BCE

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Price in Canadian Dollars

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diversified miner with net operatingprofits from a number of divisions. Thegroup earned R1.905bn from coal andR1.830bn from commercial operationsin the year to 31 December 2009. Theseprofits were unfortunately eroded bypoor performances from its mineralsands businesses. Margins across all

who’s tipping what

Gareth Stokes, MoneyWeek’s analyst, picks the best – and worst – tips from the press and brokers’ reports,and suggests a share for the brave.

Construction shares are out of favour at the moment. The majorityof analysts believe government’s ongoing commitment to large-scale infrastructure projects are largely priced in. Does this mean weshould ignore the companies responsible for building South Africaand the continent? We think Basil Read Holdings (JSE: BSR) isworth a look at current levels – though investors should be mindfulof the value trap.

Basil Read was established in 1952 and today offers services acrossthe full spectrum of the construction industry, including buildings,opencast mining, road construction and civil engineering. Thecompany has delivered outstanding returns to its shareholdersdespite tough economic conditions, meeting an ambitious R4.5bnturnover target in 2009 and boasting a full order book till 2011.

The future for SouthAfrican constructioncompanies lies in the restof Africa. Basil Readbelieves there areopportunities to exploit asthe growth trend in sub-Saharan Africa resumes,albeit at a lowertrajectory. They also believe there are opportunities for constructioncompanies to partner with cash-strapped local municipalities increating innovative ways of financing future projects... There’splenty of construction work up for grabs. Aside from R15bn intargeted private-public partnerships we could see as much as R30bnworth of water supply projects (to power stations) in the next coupleof years. And that’s before water treatment facilities fall under thespotlight.

Gamble of the week:Basil Read

Steel giant’s contract dilemma offers richpickings for iron ore producers!Tip of the week:Coal and iron ore company is “positioned tobenefit” – FinweekIron ore is the ‘in demand’ commoditythis year – demonstrated by the massivebattle raging between Kumba Iron Oreand ArcelorMittal. Investors dumpedshares in South Africa’s largest steelproducer after threats to its long-termcontract to receive ‘cost plus 3%’ ironore from Kumba. If the contract isabolished – and even if it isn’t – ExxaroLimited (JSE: EXX) should earn morefrom its 20% stake in Sishen Iron Ore in2010. It received R1.9bn from the

Kumba subsidiary in 2009.

How does Exxaro keep thewolves from the door? “Exxarois particularly well positioned tobenefit from future domestic andexport demand for coal due toits dominance in the Waterbergcoal field,” writes Brendan Ryanin Finweek. He says the R9.5bnexpansion at the group’sGrootgeluk colliery (to feedEskom’s Medupi coal-firedpower plant) is on track. Thegroup upped its coal productionslightly in 2009, producing 16

486Mt of coal at Eskom-tied mines and 20Mt atcommercial mines. Annualproduction included 2 020Mt of coking coaland 6 638Mt of steamcoal. The good news forshareholders is the 44% year-on-year increase in export coalthrough the Richards Bay CoalTerminal.

Is there more to Exxaro thancoal? A closer inspection reveals a

12 March 20108

business segments were further erodedby rising production costs.

Exxaro is cautious about prospects forthis year. “The rate of recovery from theglobal recession remains uncertaindespite a number of positive indicators,”said chief executive, Sipho Nkosi. Heexpects strong demand for export andlocal power-station coal, and firmdemand for steam and metallurgicalproduct. Exxaro will also benefit fromits iron ore interests. There areexpectations of significant iron oreincreases from 1 April 2010. “Overall,the group’s consolidated results for 2010will largely be driven by the recovery indemand and the prices for itscommodities,” added Nkosi.

Future profit will be driven by increasedcoal exports and the group’s hunger foriron ore. Exxaro is worth adding to yourresources portfolio at R115.50/share.

Recommendation: BUY at 11550cMarket capitalisation: R41.964bn

Turkey of the week:“Admiring of the kit only gets you so far,”says the Financial MailIntegrated leasing and capital equipmentgroup Eqstra Holdings Limited (JSE:EQS) has cherry-picked some of theworst-hit industries through the recentrecession. Each of its main divisions –passenger and commercial, industrialequipment and construction and mining – operate in sectors that have been pummelled by the global financial

crisis and subsequent sluggishrecovery.

“It’s the company to talk to if youare looking to get your mitts on anearth mover with tyres largeenough to flatten a minibus taxi,”writes Jamie Carr in his latestDiamonds and Dogs column in theFinancial Mail. He mixes adescription of Eqstra’s core businesswith an activity that will resonatewith many of South Africa’s roadusers. Problem is demand for majormining, industrial and constructionequipment (and motor vehicles) hit theskids over 2008/9. You need only look atBell Equipment’s recent performance toappreciate the decimation in this segment.

Eqstra has suffered more than most as thecountry’s mining and construction giantsdelay capital expenditure. In the latestinterim period – six months to 31December 2009 – the group’s revenuedecreased 20.5% from R4.412bn to justR3.507bn. Operating profit plummeted58.4% to R306m and owners of thecompany were left shouldering a loss ofR58m. The headline loss per share was23.3c.

The group’s construction and miningdealerships performed dismally.Equipment sales declined 63% (from1.434bn to R530m) and the divisionweighed in with an R89m operating loss.These dealerships have extensive exposureto struggling platinum and diamondminers who simply cannot secure finance

for capital equipment. Industrialmachinery sales weren’t much better.Revenue fell 12.9% and operating profitby 25.2% despite efforts to reduce costs.In the United Kingdom, fortunately asmall contributor to the overall business,operating profit declined 52.9% to R8m.The passenger and commercial divisionsurprised analysts with a stable financialperformance.

There’s not much to get excited about inthe short-term. Management says activityin its main sectors remains depressed,adding they are unlikely to meet theearnings growth forecast made in August2009. Eqstra will focus on skillsdevelopment, working capitalmanagement, curtailing costs andmaximising cash flow until confidencereturns. “The big question is how long itis going to take before the recovery reallybrings some life back into the relatedsectors,” says Carr. Avoid.

Recommendation: AvoidMarket capitalisation: R1.524bn

who’s tipping what

Latest interim results (to June 2009) show a 47% surge in turnover,to R2.1bn and an equally impressive 43%increase in profit attributable to ordinaryshareholders, to R122.1m. Divisionalcontributions to revenue came fromconstruction (R1.703bn), mining(R339.706m) and developments(R31.106m). The question is whether thegroup can maintain this momentum in thesecond half? In their latest trading updateBasil Read says earnings per share (andheadline earnings per share) will bebetween 10% and 29% higher for the yearto 31 December 2009.

These results don’t include the contribution from the recentlycompleted merger with TWP Holdings. Basil Read issued 37.3m

new ordinary shares and R143m in cash to complete the deal. Chiefexecutive Marius Heyns observes:“Globally there will be a need for largenumbers of skilled engineers andarchitects to tackle the imminentpopulation growth issues of food, waterand energy scarcity, as well as majorinfrastructure requirements.” Thegroup’s clients are happy with the one-stop turnkey solution the combinedentity offers. Basil Read is nimbler thanthe country’s larger construction playsand we believe it’s worth accumulatingat 1230c/share.

Recommendation: BUY at 1230cMarket capitalisation R1.547bn

12 March 20109

12 March 201010

“The head of British Gas

says its profit margins are

less than Marks &

Spencer. The difference he

fails to recognises that

thousands of old people

don’t die every year

because they can’t afford

to shop at M&S.”

Comedian Frankie Boyle,quoted in The Sun

“Young players, young

boys, rich boys – this is

the problem.”

England football manager,Fabio Capello, says money

is spoiling the game,quoted in The Sunday

Times

“Hugh Hefner could have

told us that by showing

us how many zeroes are

in his bank account.”

Dr Steven Platek, ofGeorgia Gwinnett

College, USA, on researchshowing that curvy

women have the sameeffect on men as beer or

drugs, quoted in The Mailon Sunday

“I was angry with the

bank but I wasn’t crying

into my pillow. It didn’t

upset me as much as I

thought it would. It’s not

like I’ve had a call from

my doctor and been told

I’m not funny any more.”

Comedian Frank Skinneron losing millions

due to bad investmentadvice, quoted in the

Sunday Express

Money talk

best of the financial columnists

Our proudinheritance toour children

Boris Johnson

The Daily Telegraph

We baby boomers stand accused of mortgaging our children’s futures,says Boris Johnson. We’re “the most selfish, greedy, job-hogging,pension-grabbing bunch of egomaniacs history has ever seen”. Hangingout at university at taxpayers’ expense then telling our children to paytuition fees, “luxuriating in housing” we can’t afford, with “lifestylessplurging CO2 that posterity will have to pay for”. But wait a minute.“We haven’t ripped off our kids” – we’ll probably leave them with amuch better world than the one we came into. From 1955 to 2005,‘real’ average global incomes rose by a third, infant mortality fell bytwo-thirds and medical advances lifted life expectancy by a third.“Baby-boomer technology will deliver incredible improvements in thenext generation’s standard of life.” Our tolerance has helped breakdown sexism, racism and homophobia. Despite today’s financial andenvironmental woes, “human beings have solved those problems in thepast. I’m sure the next generation is well up to the challenge.”

What crisislooks like in Iceland

Janice Turner

The Times

“I’d come to Iceland to see what a wrecked Western economy lookslike,” says Janice Turner. Instead of panic, I found 4x4s and restaurantqueues. But having to jump through hoops to get euros from localbanks “made me realise these people are tethered by their witheredcurrency to their black, volcanic moonbase”. The bad news for Britonsis that “we’re bound to the Icelanders by a similar fate”. Icelandersdon’t yet know the effect of their national debts. Britons are told deficitcuts will be grim. “The root problem is our financial illiteracy. How canwe take bankers to task when, like ‘muggles’ oblivious to the workingsof the wizard world, we can’t comprehend what they do?” Afterreading Whoops!, a guide to the crisis “for the economically dyslexic,I’ve learnt I was right all along”. Dubai’s new money always lookedfunny, as did Ireland’s, as did young people maxing out credit cards.“We must learn to stoke our anger. The wizards are counting on ourennui: They plan to fly away before we disarm their spells.”

Why Britainneeds more boffins

Anthony Hilton

Evening Standard

A few years ago, National Grid told me of its problems findingspecialist engineering graduates in the UK, says Anthony Hilton. Thetrouble was that the few who had the necessary skills “headed for theCity, not industry, because that was where the money was”. Now SirJames Dyson has issued a report on how to rebalance the UK economyand help science and engineering flourish. But that “will prove verydifficult as long as City salaries continue to be so vastly in excess of”earnings elsewhere. And this has been an issue in Britain for decades –in 1980, the Finniston Report warned that unless action was taken, alack of engineers would hurt innovation and competitiveness and raiselong-term British unemployment. Sir James is absolutely right to wantto encourage science-based careers. The financial crisis has shown that“finance and housing can no longer provide the illusion of growth”.But “saying it is the easy bit. It is getting it done which seems to bebeyond the wit of any government we have had in the past 30 years.”

Regrets? We should all have a few

John Kay

Financial Times

“Which large financial services company leader recently confessed toshareholders of ‘a very expensive business fiasco entirely of his ownmaking’?” asks John Kay. Plenty of chief executives owe apologies toinvestors – but most have just blamed someone else. The penitent wasWarren Buffett, whose “investment record is such, he could own up toAbraham Lincoln’s assassination and be cheered to the rafters”. Youmight think his past success makes it easy for him to admit failure. Butthis capacity “predates his popular fame”, and is in fact probably a keyreason for his success, rather than a product of it. Others should learnfrom this. “One of Gordon Brown’s many problems is that a world inwhich no errors have been made in economic and fiscal policy since1997 is so divergent from reality.” Yet in his view, he has made nomistakes. The trouble is, as philosopher George Santayana said, thosewho cannot remember the past are doomed to repeat it. If we learn noother lesson from the past decade, “we will be fated to learn that one”.

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politics & economics

Saddam Hussein won the 2002Iraqi presidential election by aneye-popping margin of 11,445,638to zero. Now, as Bret Stephen notesin The Wall Street Journal, a rathermore representative election hasbeen held. This time it involved 19 million voters; 50,000 pollingstations; 6,200 candidates; 325parliamentary seats and 86 parties.It seems democracy has finallyarrived – first by force of Americanarms and then by dint of Iraqi will.It’s a remarkable feat, not just inthe context of the past seven yearsof US involvement, or the eightdecades of Iraq’s sovereign existence, but “in the much longer sweep of Arab civilization”.

Indeed, says The Australian, “irrespectiveof who wins, or of how many pitfalls lieahead as a new government is formed inBaghdad, this is cause for internationalcongratulations”. Those who keeparguing the invasion of Iraq was amistake “will be challenged by thesuccess of last weekend’s poll. While 38deaths at the hands of insurgents linkedto al-Qaeda are tragic, millions of Iraqisdefying the bombs to vote demonstratesthe strong hope in the youngdemocracy”.

That the Iraqis are a brave people isn’t in doubt, says Robert Fisk in TheIndependent. “How many Brits would go

to the polls under mortar fire? OrAmericans, for that matter?” But anelection in Iraq “doesn’t represent furtherproof of the values of our Westerndemocracies. While we think electionresults, however fraudulent or complex(Iraq’s next government may take monthsto form), are an improvement, we don’tstop to ask who really wins theseelections.” The answer is Iran, whose“demented president” knows how tohandle ‘democratic’ polls. Its twoenemies, the ‘black Taliban’ and Saddam,have now both been vanquished “withouta single Iranian firing a shot”.

Besides, “Iraq still has far to travel on thelong road to normality”, says The Times’seditorial. Its security forces will needbetter training, and its police force mustaddress endemic corruption. And the new

government must build improvedrelations with its neighbours, suchas Saudi Arabia and Syria. Thatsaid, the economic outlook ispromising. The country’s oilreserves are the second largest inthe region. If it can keep attractingmultinational companies, Iraq canbecome the world’s second biggestoil producer. “Inevitably the abilityof the new government todistribute the economic rewards ofits oil industry equitably betweenSunnis, Kurds and Shias will becentral to its chances of success.”But Iraqi democracy is at leastbeginning to produce leaders

“capable of expressing their differenceswithin the framework of the partypolitical system”.

The trouble, is “in the US and Britain,Iraq is yesterday’s story”, says TheGuardian. America wants out, and “inWashington hopes are rising for a finalexit from the quagmire George Bushcreated”. Despite the risk of renewedmilitia violence, America could “imposean agreement – any agreement – to avoidjeopardising its withdrawal timetable”.US Vice-President Joe Biden “has spun aclever line about how ‘politics havebroken out’ in Iraq”. But the truth is thatin Iraq politics and violence go together.There’s no certainty that Biden’s“politics” will by themselves allow thisfractured country “to slog on towards thestability it deserves”.

Iraq elections: 19 million turned out under mortar fire

Tories and Labour head for stalemate“What if the man pre-crowned as the next prime minister doesn’tmake it?” As the election approaches, the unthinkable idea thatGordon Brown could actually hold on to the keys to No.10becomes more and more plausible, says Anne McElvoy in theEvening Standard. “It’s slipping away from us,” one senior Torytold McElvoy, while another “just looked as miserably anxious asI’ve ever seen him”.

New polls at the weekend revealed that the Conservative lead inthe key marginal seats – expected to decide the outcome – areslim, to say the least. The expected swing of voters from Labourto the Tories is about 1.5 to 2 points higher in those battlegroundseats than nationally, reports The Times. This near parity withLabour in seats where the Tories previously held a clearadvantage is “concerning”, says McElvoy. It’s also no surprise.The country is “staring in bored distaste at a leatheryopportunistic PM it loathes but semi-trusts with the economy and

a shinily opportunistic pretender it vaguely likes but trusts onnothing”, says Mathew Norman in The Independent. So theparties could be heading for the stalemate they deserve.

Cameron must remember the importance of the Tory brand, saysDaniel Finkelstein in The Times. He has convinced a lot of peoplethat the party has changed. But he must try harder to “drop theold Tory negatives”. Whatever he does, “it is a rule that beforeevery election in which the Tories have every chance of winning,they suffer an attack of the vapours”, says Michael Dobbs in TheDaily Telegraph. But they “must not panic”. Cameron has a tightorganisation behind him and he is “a man of gifts, untainted bythe disasters of the past decade”. If he and his party “show beliefin themselves, the country will, too”. At least 82% of people thinkit’s time for change, agrees Finkelstein. “The voters are out thereto give the Tories a landslide, but the party needs to help themover the finish line”. They just need to show “a bit of bottle”.

by David Stevenson

Democracy in Iraq: will it work?

12 March 2010

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personal view

A look at the global economy in recentmonths, shows us the stimulus packagesimplemented back in late 2008/early 2009 areworking. Despite the volatility we’ve seen,things have turned around and numerouseconomies are reporting the end of therecession.

Add to this the fact that there are two keyeconomic factors that support the continuingrecovery, and we’re sure to see the globaleconomic situation go from strength tostrength in 2010.

The first factor is the China story. Two yearsago, the Chinese State Council approved a$586 billion stimulus package to boost theEastern super power. This was one of the firstof many moves that sparked the currentrecovery. There’s recently been much talkabout whether or not China will cut back itsstimulus, but the Chinese have beencompetent thus far. It’s unlikely that they willmake moves that will compromise the effortsalready made. Until the global economy fullyrecovers, China will continue to stimulate itseconomy.

The second factor is the Greece debacle.Things looked tough for the Mediterraneancountry a few weeks back, but I’m happy tosee the Eurozone has handled the situationwell and things are under control again. Theeuro has, subsequently, stabilised and looksset to recover the losses against the dollar. As I mentioned earlier, the signs of acontinued recovery are there. Using a topdown approach for selecting shares, it’s clearcertain sectors will be buoyed more thanothers by the two key factors mentioned. Thefirst sector that will benefit is non-foodretailers. Boosted by lower interest rates andhigher expected consumer spending figures,this sector will run up sharply as GDP figurescontinue to grow in 2010. The second sectorthat offers huge promise for investors (thecommodity sector) will be boosted byincreased demand from China.

For this reason, I’ve picked my favouritesfrom each sector for this week’s issue.

The first is none other than furniture groupLewis (JSE:LEW). There are many thingsstanding in Lewis’s favour right now. The firstis South Africa’s impressive fourth quarterGDP figure of 3.2%. This shows the economy

is growing again and consumers are likely tohave more discretionary spending in thecoming months. This is positive news for theleading household furniture, electricalappliances and home electronics retailer thatsells the majority of its products on credit tothe ever expanding middle income market.

When you look at its recent sales figures, it’sclear things are turning around. Afterreporting a good performance duringDecember trade (posting sales growth of 7.9%for the quarter to December), Lewis toldreporters it expected to see positive signs inJanuary trade. And it did – sales were, in fact,in line with what the group experienced inDecember and showed a gradual sectorrecovery is under way. Another plus is that ona forward PE of 9.26, Lewis is cheapcompared to its peers. The group alsoprovides the highest level of earningsconsistency in the sector, which shouldcontinue to improve as consumer spendingturns the corner. Expect the group to reach atarget price of R64 in the next 12 months.

My second share tip is diversified commodityminer, Metorex (JSE:MTX). The group’s beenthrough the wars in recent months thanks to atight lending environment, subdued demandfor its products and problems at its Congomines. But these issues are a thing of the past.In a radical plan to survive the economicdownturn, it turned to former Gold Fields’CEO Terence Goodlace to get it through thetough times. And produce the new CEOcertainly has. Just last week, the group, whichoperates in Zambia, the DRC and SouthAfrica, reported profits of R452m for the sixmonths to December. It posted adjustedheadline earnings per share of 11.8c,compared to an adjusted headline loss of 0.7cpreviously.

Add this to the fact that commodity priceshave surged strongly over recent months – andwill continue to do so in 2010 – and there’sno doubt Metorex’s share price will improvefrom here on out. The share’s also tradingaround 80% lower than its all-time high ofR28.75. And that means the potential toshoot up is enormous. Expect the share toreach R9 in the next year.

This week,

Martin Lentsoane,

portfolio manager at

Absolute Alpha

Investment

Management, tells

MoneyWeek where he

would put his money.

What I would invest in now

12 March 201012

The two key factors driving the recoverywill light a fire under these shares…

The shares Martin likes:12mth high 12mth low Now

Lewis R32.10 R59.30 R59.59

Metorex R1.15 R5.55 R4.37

*Prices as at 10 March 2010

12 March 201013

investment briefing

China’s dollar peg is distorting prices, with potentially disastrous consequences for the worldeconomy. Will China give way and let the yuan float? Simon Wilson reports.

What’s new?China saw a 46% surge in exports in theyear to February, lending fresh weight tocomplaints that its currency is undervalued.It follows recent predictions by severaleconomists, including ‘Doctor Doom’Nouriel Roubini and Goldman Sachs’ chiefeconomist Jim O’Neill, that China is set torelax or remove the renminbi’s unofficialdollar peg. This has been in place since July2008. Most analysts agree it undervaluesthe renminbi (or ‘yuan’) by around 25%-40%. Currency traders got excited lastweekend when the governor of the People’sBank of China, Zhou Xiaochuan, hintedthat a revaluation – or least appreciation –was on the way. Zhou said the currencypeg was a “temporary” policy for dealingwith the financial crisis. But his remarksseemed to contradict more non-committalcomments from other senior figures,including the commerce minister.

Why is a fixed dollar peg a bad thing?The most fundamental argument in favour of genuinely free-floating currencies rests on a basic tenet of market economics:that if you distort prices you distort the overall allocation ofresources, leading to inefficiency and bigger trouble down theline. Whether it is consumer goods, assets such as equities orbonds, or national currencies, the ‘price mechanism’ is anessential gauge by which households and firms make spendingor investment decisions. If those decisions are not based on truedemand and supply, then bad decisions get made. In this case,the Chinese government is holding its currency at an artificiallylow price to keep its exports cheap – a distortion that couldhave dangerous implications for the entire global economy.

Why does it matter so much?For many years, China’s exchange-rate manipulation didn’tmatter much. Indeed, in the aftermath of the Asian crisis of1997, China won international respect for maintaining its dollarpeg (held at 8.27 RMB/dollaruntil 2005), in effect leavingthe renminbi overvalued whileneighbouring economiesundertook competitivedevaluations. The Chinesecurrency only becameobviously undervalued in theyears that followed, as first thetechnology-led stockmarketbubble and then China’s 2001entry into the World TradeOrganisation fuelled a surge ininvestment and exports. Then, as the dollar beganfalling against other floatingcurrencies in the years before

the 2008 banking crisis – and the renminbiwith it, despite the largely cosmetic 2005decision to let it float within a narrowband – the value of the renminbi becameeven more clearly out of line.

What about more recently?This perception that the renminbi isundervalued has only grown since it wasonce again pegged to the dollar in July2008. China’s economy is now poweringahead with 8% growth rates, and itsforeign reserves last year surged 23% to$2.4trn. This is a problem, as is oftenargued by President Obama and many USpundits, because an undervalued currencygives China an unfair advantage when itcomes to exports and manufacturing andso is a none-too-subtle form ofprotectionism. But of course, this isprecisely why China is less keen to revalue– its reliance on exports means that any

significant rise in the renminbi could hurt economic growth and, more importantly for Beijing, push up unemployment. And as Andrew Batson in The Wall Street Journal points out,when Japan let the yen appreciate under US pressure in the mid-1980s, the resulting slowdown in growth “pushed thegovernment to boost spending and lower interest rates. A real-estate bubble and years-long slump followed.”

So why should China let the renminbi rise?Unemployment is a big concern for the Chinese government. But so is inflation, which is an equally big threat to socialstability. Consumer prices rose at an annual rate of 1.5% inJanuary. It might not sound much, but prices are expected tocontinue rising in the coming months. China can only keep itscurrency pegged to the dollar by printing money to buy green -backs, and all those billions of renminbi ultimately feed back intothe real economy – chasing assets, creating bubbles and stokingprices. A stronger currency would help contain inflation on twofronts. It would cushion the impact of rising import prices; and

it would give the central bankmore flexibility to raise interestrates without attracting ‘hotmoney’. China also recognisesthe need to rebalance itseconomy in favour of domesticconsumption: revaluationwould help that, but it’s a bigrisk when its export marketsare already threatened bysluggish demand. Whatever itdecides, the timing and extentof any strengthening are likelyto be dictated by domesticstresses, rather than mountingcalls for new tariffs on Chineseimports by US senators.

Zhou Xiaochuan: dropping hints

Will China float its currency?

What will China do?A large, one-off revaluation would please economic purists, butseems an unlikely move for China’s cautious leaders. On theother hand, a resumption of the gradual appreciation of therenminbi against the dollar (the trend seen between 2005 and2008) also presents difficulties. This would be likely to attractinflows of ‘hot money’ – speculative currency flows in search ofa one-way bet – likely to frustrate Beijing’s efforts to controldomestic asset- and consumer-price inflation. Someeconomists, such as Bank of America-Merrill Lynch’s Chinaspecialist Ting Lu, believe China’s best bet would be tobenchmark the renminbi against an undisclosed basket ofcurrencies, which is similar to the system used by Singapore.

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opinion

It’s a statistic tosober up themost bullishinvestor. On 10March 2000,the US Nasdaqindex hit 5,132.Dotcom maniawas in fullswing, and thekey Americantechnologyindex looked

like it would never stop rising.

But that day, it did. After hitting thatpeak, the Nasdaq went into a steepdecline that made even the drop in theJapanese Nikkei index in the 1990s lookbenign by comparison. By 2002, it hadplunged all the way back to 1,300,wiping out three-quarters of its value inaround 18 months. The dotcom bubble,of which the Nasdaq was always the bestmeasure, had well and truly burst.

A decade on, what can investors learn?Two lessons are important. Bubbles, forall the hype associated with them, usuallycontain an important grain of truth. Andjust because something is overhyped, itdoesn’t mean you can afford to ignore it– a lesson that clearly applies to Chinaand the rest of the Bric economies now.

Future economic historians will no doubtcast the dotcom bubble, along withDutch tulips, as one of the best examplesof a capitalist system going completelyhaywire. And with good reason. For atime, it seemed like any vaguely plausibleyoung man or woman with a convincingline in patter about ‘eyeballs’, ‘land grabs’and ‘first-mover advantages’ could loadup with a few million in venture capitaland bank a fortune from the initial publicoffering a few months later. Mundanematters like having any revenues, orindeed any knowledge of how to build a website, could be convenientlyforgotten. In the ‘new economy’,everything seemed possible.

So it’s no surprise that many dreamsturned to dust. Investors lost a hugeamount of money. And yet, looking back,the main surprise is just how much truththere was to many of the claims made atthe height of the bubble. The internet

genuinely was a disruptive technology.Big industries have been consigned tohistory. Others have been changedcompletely. Look at the state of thenewspaper industry. Observe the plight ofonce-mighty record labels, such as EMI.Music stores, bookshops and travelagents are vanishing from local highstreets. And the process hasn’t stopped.Internet-enabled mobiles are only juststarting to reach the mass market. Plentymore industries will be changed foreverbefore the web’s impact has played out.

And it really was a ‘land grab’. Want tolaunch an online book store againstAmazon, an auction site against eBay, ora search engine against Google? Forget it.Those companies dominate their space,brushing aside all rivals. They will be thegreat monopolists of the 21st century –precisely because they got in early and,where necessary, spent big money toestablish themselves.

All the ‘new economy’ evangelists gotwrong was the timing. It all took a bitlonger than they predicted. Yet even onthat they were only out by a few years.The dotcom boom was more like therailway boom of the 1880s than the tulipcraze. Railways had a huge economicimpact. Just like that bubble, the dotcom

boom took something of real importanceand magnified it to daft proportions.

So what’s the equivalent today? Thereseem to be plenty of bubbles in the worldright now. British house prices, forexample. Or government bonds. Or equities in China, or any of the otheremerging markets giants, such as Brazil,Russia and India. Some are just bonkers.Why are British house prices as high orhigher than they were before the creditcrunch hit, when they should be muchlower? And how can it make sense tolend money for ten years to a practicallybankrupt Spanish or Italian – or indeedBritish – government at rates of around4%? Those are just bubbles. You don’twant to go anywhere near them.

But the Brics? They’re different. Sure, it’shard to value stocks accurately in China.We’re not sure we really believe thegrowth figures Beijing publishes, nevermind the price/earnings ratios that appearon the Shanghai bourse. We have no realidea whether Brazil can grow in the nextdecade as rapidly as it did in the last,whether Russia is at long last a stabledemocracy, or whether India cancomplete its journey to modernity. We may well look back on the mania forthe Bric stockmarkets in 2020 andwonder what on earth we were thinking.

But it’s unlikely that we’ll think nothingof significance was going on. The Briceconomies have passed the point of noreturn. They are too far along the path ofindustrialisation to go back to beingagricultural, resource-based economies.With a combined population of 2.8 billion, that is going to have a hugeeffect on the global economy. Wholeindustries, trade patterns, and cycles ofcapital will be changed permanently.

It’s very similar to the dotcom bubble.Overhyped and oversold maybe, but still of huge significance. The key lesson is simple. Don’t get fooled by thebubble – you must be very selectiveabout how you invest and you may needto get out early. But also don’t let thefact that it’s a bubble lead you to ignoreits long-term impact on the rest of theworld and on your portfolio. If you do,you may well miss out on one of thegreat trends of this century.

Don’t ignore the hype: great investmenttrends are born in bubbles

Matthew Lynn

Brics: overhyped, but still the trend of the century

Globalview

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15 12 March 2010

It is hard to find an investor with a bad word to say aboutAnthony Bolton. And for good reason. During his 28 years atFidelity’s Special Situations Fund he returned an average of19.5% a year. If you’d invested R10,000 in 1979, you wouldhave been sitting on R1.43m by the time Bolton retired in2007.

No wonder, then, that the talk of the town is Bolton’s return tothe fray. He is about to launch a new fund with his oldemployers – the Fidelity Investment China Special SituationsFund. To most investors this is a dream come true: If you caninvest in everyone’s favourite market with everyone’s favouritefund manager, why wouldn’t you?

Lots of reasons. This fund isn’t going to come cheap. It’s aninvestment trust, which is good, as its closed-end structuremeans it won’t ever grow too big, plus Bolton won’t have to buy and sell assets as investors move in and out of the fund.

But the main advantage of investment trusts is that they tendto have lower management charges than unit trusts. But not sothis one. Investors are to be charged 0.5% when they put theirmoney in. Then there will be a 1.5%-a-year management feeand, worse, a performance fee, which, says David Wighton inThe Times, will be charged if the fund makes anything over2% more than its benchmark Chinese index. That earns thateven if the fund falls in value, investors will still pay the fees –as long as the fund falls less than the index. We don’t like thesound of this. These days even hedge funds tend to operatewith “high water marks”: they don’t charge a fee unless theyare actually in positive territory.

And there is one other big problem with Bolton’s new fund: Itis to be invested in China. Most investors expect the market toperform well over the next few years, but this is far from agiven. Not only are bubbles building across the economy, but ahuge level of growth – which may or may not appear – isalready factored into stock prices. Our verdict? This fund istoo expensive and too risky.

With shares pricesrocketing left rightand centre, thefinancial press hasbeen ignoringdividend income toyour detriment.Dividends remain oneof the best ways to

generate returns without SARS grabbinga slice of your interest.

It’s not just the tax exempt status thatmakes them attractive. Last yearcompanies across the board werepanicking about how expensive creditwas becoming. Enticed by fear the cashpile grew quicker than the Allies and Axisarms race of 1939. They slasheddividends to build their massive cashmountain. But with economic datapointing to a solid sustained recovery,companies can’t just let it sit on thebalance sheet. They need to either investit or pay it back to shareholders. Theproblem is the economy has a lot ofspare capacity in the wake of the credit

crisis, leaving them only one option… payout juicy dividends.

One fund that’s going to take advantageeither way is the Marriott Dividend

Growth Fund. This medium-risk fundseeks ever increasing dividend paymentsfrom solid JSE listed companies. Itdoesn’t limit itself to the top 40 butincludes blue chips like Reunert (6.07%),Tigerbrands (5.52%) and Steinhoff(5.02%). See the adjacent table for the top10 holdings.

Its benchmark is the Financial andIndustrial Index and its performance isnothing to sniff at. Over the last two verydifficult years – a period where evenAnglo American cut its dividend – itmanaged to return more than any otherfund. It returned 41.14% weathering thegreatest non-war time recession inhuman history.

To get involved visit www.marriott.co.zaor call 0860 378 466 for more information.

Fund of the week

Performance to 9 March 2010

3 months 7.94% 0.78% 8.71%

6 months 15.87% 1.77% 17.65%

1 years 44.49% 12.25% 49.84%

5 years 74.48% 29.40% 103.87%

Invested Price Income Total

by Gary Booysen

Snap up your share of the world’s growingcash pile with one tax free tool…

Bolton’s back – but should you buy in?

12 March 201016

cover story

The crew of theOcean Guardianhave landed rightin it. Within daysof sinking their

semi-submersible oil drilling rig off thecoast of the Falkland Islands, they’vemanaged to set off the most explosivediplomatic row between Britain andArgentina since the 1982 Falklands War.The Argentines have accused them ofpiracy. President Cristina Kirchner hasbeen rallying allies across Latin Americato banish the crew from the region.

This is the last thing Falkland oilexplorers needed. Up to 60 billion barrelsof oil are thought to lie beneath thesewaters. But the treasure trove is proving anightmare to get to. Forget the diplomaticproblems. It took almost two years ofwrangling to secure the Ocean Guardian.And having hauled it across the SouthAtlantic for 62 days, there’s still noguarantee the crew will strike oil afterdrilling 3,500 metres through sandstone.It’s not getting any easier to find the stuff.

Gold miners will say the same. At theKloof and Driefontien mines in SouthAfrica, Gold Fields is operating as deep asfour kilometres below ground to minegold. The company will spend $0.7bndeepening the mines… The problem isoperating costs skyrocket the deeper intothe bowels of the Earth you go.

There’s an easier way to find gas andgold. If you venture to the outskirts ofany major city, you’ll find huge depositsof gold, silver, cobalt and gas – justwaiting to be shipped. Where are they?Why not try you local rubbish dump!This is where the next mining rush willtake place. To mine one gram of gold,most companies will move a ton of ore.But you can pull the same amount ofgold from just 41 mobile phones,according to a United Nations report onelectronic waste published last week.

Silver, cobalt, palladium – metals that areincreasingly sourced from unstable,despotic countries – are all found inabundance at your local landfill. And it’snot just electronic waste – there’s money

to be made from landfill methane, animalgrease and medical waste too.

Electronic wasteElectronic waste is the fastest-growingform of rubbish worldwide. China alonewill produce 2.3 million tons of electricalrefuse in 2010 – dumping 500,000 tonsof refrigerators, 1.3 million tons oftelevisions and 300,000 tons ofcomputers. Huge mountains of electronicrefuse are piling up outside China’s cities.And locals clamber over the parts left byrecyclers, tearing apart televisions andcomputers for copper wire and gold fromcircuit boards.

The trouble is that this waste is highlytoxic. The cadmium from just onemobile-phone battery is enough to pollute600,000 litres of water – a third of anOlympic swimming pool. In Britain, wediscard a million mobile phones everyyear. As a result governments have beenintroducing laws that require electroniccompanies to use professional recyclinggroups to deal with their waste. TheEuropean Union’s Waste Electrical and

Strike gold at your local rubbish dump

Miners shift tons of ore to extract a mere gram of precious metal. But there isan easier way – and it could prove to be the next gold rush, says Eoin Gleeson.

Garbage is the ultimate play on a growing global population.Since 1960, the amount of solid waste we create every year hastripled, while the population has grown by less than 100%.America produces 700kg of municipal waste per person,compared to Nairobi’s 220kg, says The Economist. We can nolonger let this waste just pile up in the dump!

We throw away thousands of computers, televisions and mobilephones each year. Regenersis (LSE: RGS) is one of Europe’sleading phone recyclers, collecting unwanted mobile phonesfrom major phone companies and selling them to suppliers in thedeveloping world. Paul Hill’s Precision Guided Investmentsnewsletter says the stock is very cheap.

The world’s greatest investor is also on the prowl for rubbish.Warren Buffett recently raised his stake in garbage groupRepublic Services (NYSE: RSG) from 3.6m to 8.3m shares. Much

of US landfill space is split between Republic and its rival, Waste

Management (NYSE: WM). The latter is investing heavily inwaste-to-energy technologies and now operates 115 gas-to-energy facilities. Waste Management maintains a solid profitmargin of 7%, trades on a forward PE of 14, and pays a dividendof 3.5%.

South Africa’s waste management landscape is littered with badnews stories. Earlier this year it emerged contractors weredumping medical waste in open landfill sights in blatantcontravention of the law. The Environmental ManagementInspectorate (Green Scorpions) unearthed a number of illegallandfill sites, where sharps, pharmaceuticals, vials, syringes,drips, dirty bandages and general medical waste were disposedof. The bulk of the country’s waste management businesses areprivate unlisted companies, and since the de-listing of EnviroServ(in August 2008) local investors are stuck for investment choice. If

Forget trash – there’s gold in mine dumps too

12 March 201017

Electronic Equipment (WEEE) directive –now law in Britain and across the EU –has set firm targets for the collection andrecycling of electronic goods.

In practice, this means that electronicsmanufacturers and retailers are dumpingtheir wares into public recycling sites.There, the computers and TVs arestripped for reusable microchips andparts. These are sent back to the likes ofApple for remanufacture. Then recyclersstrip the rest for the metals. A tonne ofscrap from discarded PCs contains more

gold than can be produced from 17tonnes of gold ore, Christian Hagelückenof Belgian recycling group Umicore tellsSpegil.

Not every electronics firm has thescruples to recycle their waste like this.It’s far cheaper to ship your waste off toun-regulated foreign shores, where it isdumped in huge toxic piles outside thelikes of Nairobi and Shanghai. Germanyalone exports around 100,000 tons ofelectronic scrap each year, saysHagelücken. “Old cars awaiting export in

cover story

you want listed exposure to waste processing you shouldconsider mine dumps rather than rubbish dumps.

A number of the country’s gold miners are reclaiming theprecious metal from the massive mine dumps scatteredthroughout Gauteng. Simmer & Jack Mines (JSE: SIM) is onesuch company. The gold mining junior is actively expanding itssurface operations to supplement costly underground activities.In the latest quarter (to 31 December 2009) the company achieveda 37% increase in surface production at its Buffelsfontein GoldMine. The mine produced 170kg of gold from 499 503 tons ofsurface mine dumps at a yield of 0.34g/t. The undergroundoperations at the same mine produced 668kg of gold from 178488 tons of ore, at 3.74g/t. The company’s Transvaal Gold MiningEstates recovered 27.5kg of the precious metal from itsElandsdrift Heap Leach Pad and a further 37.6kg from rock dumpsand other surface sources. Simmer has finally settled a longrunning dispute between management and its major BEEshareholder and can refocus on mining. It delivered R8m in cashoperating profits in the latest period from 903 kilograms of gold.

The business of animal rendering and recycling is serving Darling International (NYSE: DAR) well during the recession.Darling is America’s biggest independent rendering group –collecting and handling animal by products and grease fromrestaurants and slaughterhouses. A deal with oil refining giantValero Energy also means the company will be processing wasteinto bio-diesel. The deal could add another $137m to its $660mmarket cap by 2013, reckons analysts at Jessup & Lamont. Thegroup has $22m in net cash on the balance sheet and trades on aforward PE of 12.4.

Sharps Compliance (NASDAQ: SMED) is a medical wastedisposal expert in America. Hospitals pack their needles, surgical knives and other sharp implements into its punctureresistant containers and send them off to a disposal centre. The $95m company has more than $20m in deals with bigpharmaceutical companies sitting in the pipeline, says JoelGreenblatt on Seeking Alpha. With big pharmaceutical andgovernment contracts the forward PE 8f eight makes it worth the risk.

Continued overleaf

Hamburg harbour are often stuffed to theceiling with electronic scrap.”

But other electronic items are quitelucrative to recycle. Take mobile phones.The average phone returned to retailershas a working life of between six andseven years, notes Paul Hill in thePrecision Guided Investments newsletter.Each mobile phone that we dump inBritain is worth around £16 to a recyclinggroup. The Chinese are particularlyinterested in importing laptops and

China alone will produce 2.3 millions tons of electrical refuse in 2010

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mobile phones to source rare-earthmetals. We look at the leader in mobilephone recycling in the box on page 24.

Landfill gasThe last few years have brought a seriesof breakthroughs for gas explorers. Vastreserves of hydrocarbons were foundthousands of feet beneath the sea floorfrom Africa to the South Atlantic. Andexplorers in the Marcellus Shale region ofAmerica have perfected a method ofhorizontal drilling, whereby they lowerdrills thousands of feet into the fracturedrock and twist them to reach onceunreachable reserves.

But it would have been far cheaper tosource the gas from the dump. Landfill isan excellent source of methane gas. Asrubbish degrades, methane rises up to thesurface. When waste is subjected to heat,it breaks down to yield a blend ofhydrogen and carbon monoxide calledsyngas, which can be burned in enginesand turbines. There are some 1,000projects underway worldwide selling gasgleaned from degrading rubbish toindustrial outfits. By fermenting thecellulose in paper at landfills, you can alsoproduce pretty decent ethanol.

But who buys the methane siphoned fromlandfills? Utilities companies for one! TheUS turns about 12% to 15% of its solidwaste into electricity a year – generatingenough energy to serve 2.8 million homes.Already the world’s 700-odd waste-to-energy plants generate more power thanall its wind turbines and solar panels puttogether.

Last month, British Airways said it plansto start sourcing some of its fuel supplyfrom rubbish. A jet fuel plant, set to bebuilt in east London by US bio-energygroup Solena, will initially supply 16million gallons of “green airline fuel” ayear – about 2% of BA’s fuelconsumption. The plant is expected tobegin active production by 2014,according to Kevin Hammond of BiofuelsWatch. The biggest problem for thecompanies developing these waste-to-energy projects is there are cheaper waysto deal with rubbish. A plant with acapacity of 1,300 tons of waste per day islikely to cost around $30m to $180m tobuild, according to a report this monthfrom research group Frost & Sullivan.

But governments worldwide are offeringbig incentives to waste firms to fund these

projects. While methane only accounts for4% of greenhouse gas emissions – largelyfrom rotting food – landfill gas is one ofthe few sources of emissions over whichthey have jurisdiction. In Britain wediscourage waste firms from allowingtheir dumps to fill, by taxing themheavily. The tax has risen by £8 a tonnein recent years (it’s now at £32). And byrecovering energy from waste,governments can compensate fordwindling energy resources.

There are also a number of waste-to-energy technologies that could radicallycut the costs of producing gas fromlandfill. Waste Management, the biggestwaste group in the States, has beenexperimenting with a type of landfillcalled a bioreactor. This is designed tospeed up the decay of biodegradablewaste by pumping in air, water andrecycled leachate (the liquid that drainsfrom a landfill). This produces gas fourtimes faster than normal and cuts thevolume of waste to 35%, says TheEconomist. Waste Management is alreadyoperating 115 gas-to-energy facilitiesacross America. We take a closer took atthe company in the box on page 24.

Animal fatNot everything at the dump is worthrecycling. As the price of paper, glass andplastics dived during the recession,recycling efforts rapidly tapered off. And

a lot less is being dumped too. If you’dvisited your local landfill six months ago,it would have been very quiet. Operatorsat the Puente Hills Landfill in SanFrancisco, one of the largest in the US,recorded a 30% drop in tonnage aroundthis time last year.

But one type of trash has been thrivingduring the recession: junk food. “Eatinghealthily has been one of the bigcasualties of this economic downturn,”says Harry Balzer, author of a recentreport on eating patterns in America.Cash-strapped consumers are findingsolace in their local fast-food chains. InEurope, McDonald’s recorded a 6.9%jump in same-store sales last year.

That keeps the landfill sites busy. But it’sthe organic waste that’s the reallyinteresting sideline here. Cooking meatgenerates a lot of fat that you can’t simplydump. So there is a steady business incollecting and handling animal grease andother by products from restaurants andslaughterhouses – particularly in the US,where a few independent groupsdominate. Why is animal fat useful?Because you can run a car on the stuff!We’ve long known that you can fuel a carwith chip fat. But it turns out that bio-diesel from animal fat is far better thanvegetable oil. A number of major oilrefiners have already developed greendiesel plants in the US – with thegovernment handing out loans that cover80% of the building costs for anyonewho’ll ask. We look at one group leadingthe green bio-diesel industry on page 24.

Medical wasteAmerican hospitals create a huge amountof waste each year. Discarded medicaldevices are often shipped to hospitals indeveloping countries that could neverafford it otherwise, or recycled for re-usein US hospitals.

But much of this waste can be extremelydangerous if not dealt with properly, or ifthrown away with ordinary garbage. InGujarat last year, for example, officialsseized hundreds of tonnes of recycledmedical equipment after an outbreak ofHepatitis B killed at least 70 people andleft about 240 infected. So as with anyother form of hazardous waste, there’s asteady line of business available forcompanies that can deal with it safely. Afew specialist groups do very welldisposing needles, equipment and devicesfrom hospitals throughout the West. Wehave a look at one group in the box onpage 16.

Cars run better on this than chips

“You can run a caron animal fat”

Continued from previous page

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http://stumblingandmumbling.typepad.com“It is perfectly normal for a company infinancial difficulties to sell some assets. So whyshouldn’t countries in financial trouble – asGreece is – do the same?” asks Chris Dillow.After all, “economic efficiency requires thatassets should go to those best able to managethem”. And that should include territory.

“There is a good precedent for this.” Two-fifthsof the US landmass was acquired throughmarket transactions. The main objection seemsto be that such deals “violate nationalsovereignty”. But what does that mean? “If it has any value then surely it derivessimply from the fact that individuals have a right of self-determination.” That isirrelevant for many unpopulated Greek islands. And where potentially tradeableterritories have populations, letting them decide their future might result in theminsisting their territory is transferred “to more competent governments”.

19 12 March 2010

the best blogs

Why doesn’t Greecesell a few islands?

What the bloggers are saying

http://blogs.reuters.com/felix-salmonWhy would a wine-maker go to the trouble of making organicwine, but not tell his customers? asks Felix Salmon. The answeris surprisingly simple. Research reveals that while certifying awine increases the price by 13%, including an eco-label actuallyreduces it by 20%. This rather confirms “the negativeconnotation consumers apply to ‘green wine’”.

This “is a huge result”. It implies that if you take the “organic”label off, say, Californian wine, you can jack up its price. That in turn presents an opportunity. Just buy wines labelled asorganic, “and you’ll save lots of money”. Wine-makers know thatorganic wines taste better, but consumers think they taste worse.“So wine-makers often make organic wines without telling. And

consumers will happily pay up for them as long as they don’tknow they’re organic. Sure, organic wine can age badly onceopened. But that’s the only downside. Until consumers wise up,those of us in the know “can continue to play the arbitrage”.

Why Europeans preferthe couch to a job

http://blogs.wsj.comScientists are “puzzled”, says JustinLahart. Why did new H1N1 swine flucases dwindle this winter? “Perhaps theeconomy has something to do with it.”With unemployment high, “fewer peopleare sniffling around the water cooler”.And that matters, according to researchby economists from Emory University.

Looking at data from the Centres forDisease Control and the LabourDepartment’s household survey ofemployment, the economists usedregional differences in flu cases and

employment rates to calculate whetherincreased hiring can lead to a rise in thenumber of people laid up in bed. They then cross-checked their resultsagainst Google Flu Trends data on thenumber of flu-related web searches bystate. Sure enough, they found that forevery 100,000 new employees, there are2,246 new flu cases during flu season.OK, so the economists didn’t apply theirwork to what’s happening now, “but wecan”. Nearly 3.9 million fewer peopleworking in the US in January than a yearearlier translates into about 87,000fewer flu cases. “Nothing to sneeze at.”

http://www.adamsmith.org/blogWhy do unemployed Americans workharder at finding work than Europeans?asks Tim Worstall. According to a newpaper from America, the average USunemployed worker devotes about 41minutes to job hunting on weekdays.That’s substantially more than theirEuropean counterparts. The reason liesin another finding – across the 50 statesof the US, the amount of job huntingdone is inversely related to the value ofthe unemployment benefits available. It also spikes just as unemploymentbenefit is about to end.

In other words, “if you pay people to beinactive, there will be more inactivity”.No surprise, then, that in manyEuropean countries, state unemploymentpayouts are high. And the evidencemounts further if you breakunemployment down into short term(under a year) and long term. You thenfind short-term unemployment is around4% of the workforce in America andEurope. But in Europe there are another4% who have been out of work for overa year, compared with almost none inthe US. Why?

It’s simple: US unemployment benefitsrun out after six months, while in mostof Europe they continue for years, “orindefinitely”. This merely confirms that“long lasting unemployment benefitsreally do provide an incentive not tolook for work”.

Unemployment is bad news for flu viruses

Organic wine: not to be sniffed at

Greek islands: a potential source of cash

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entrepreneurs

With legendary Irish racehorse trainerVincent O’Brien for an uncle, it’s nosurprise that Mary Ann O’Brien, 49, gother first proper job in the horse-racingindustry. “That’s all everybody I knowdoes,” says the founder of £16m-a-yearchocolatier Lily O’Brien’s Chocolates. But she’d always wanted to run her ownbusiness. So when the Dublin racetrackshe worked at as a marketing directorshut down, she grabbed the first businessopportunity she saw with both hands.

Tipperary-born O’Brien was on holidayin Cape Town in 1993 when she venturedinto the hotel kitchen. The owner’sdaughter had a tiny business makingchocolates. “I spent the whole two weeksof my holiday in a bikini in the hotelkitchen making chocolates. The minute Icame back from South Africa I made thesame batch.” She sold them that sameday, at her local hairdressers. They weresimple ‘chocolate crunchy hearts’, madefrom honeycomb and rice krispies, butpeople liked them, and she sold the lot.

O’Brien continued cold calling. She’dmelt and hand-pipe chocolates everynight, then box them up and drivearound the country in her car with them.“I was the only employee, so I used tocry when things broke because I didn’thave an engineer.” With the firm gainingsome traction, O’Brien borrowed£36,000 from AIB in Dublin and

approached the supermarket Superquinn.“I was a great woman for knocking on adoor with a briefcase and prototypes,even though I didn’t really have afactory.” They liked the moulds of lion’sheads and crocodiles she’d brought backfrom South Africa. “So they allowed meto put some of my chocolates in thechocolate section of the bakery. Andwithin nine months, the Belgians wereout and I was in.” The contract wasworth £250,000 at the time. O’Brien put

her daughter Lily, whose name sheadopted for the business, in a crèche andtook on the deliveries, production,packing and sales herself.

In 1994, Aer Lingus asked O’Brien totender for its trans-Atlantic andEuropean contract, making six millionmint pins and three million ‘two-choc’boxes. I laughed and said, “Look lads, Icouldn’t make that in a year.” But in1995 the airline came knocking again.By then, O’Brien’s sales had hit the £1m mark and she had her ownpurpose-built factory. She took on theAer Lingus deal, and “went immediatelyto British Airways, where I won my firstvery large BA contract. After that, I wasaway like a shot from a gun.” It was bigbusiness. Everyone in the businesssection of every plane, from noononwards every day on every flight got atwo-choc. “That was four million two-chocs a year, which allowed us to getinto the airline catering business.”

In 2008, the group served 17 millionbranded Lily O’Brien’s chocolates on 23airlines around the world. Turnover hit£16m last year. The business has openeda store in Manhattan, and O’Brien istrying to keep a handle on the recessionand a sky-high cocoa rice price.“Speculators can really push the priceup, which makes me very cross becauseit’s my livelihood. But what goes upmust come down – if you’re at it longenough you just hang on.”

● When did he get his big break?Johnny Depp’s big break came in1987 when he won the lead rolein US TV show, 21 Jump Street.The show turned the actor, now46, into a heart-throb and earnedhim $45,000 an episode. In 1990he made the move to the bigscreen with Edward Scissorhands– his first collaboration withdirector Tim Burton.

The film grossed $54mworldwide, but Depp recently stated that many in the filmindustry saw him as “box office poison” during the 1990s, due tohis odd, cult film choices. He didn’t entirely shake off thisreputation until he signed up to play Captain Jack Sparrow inPirates of the Caribbean in 2003. He was paid $10m for the first

film – it was such a phenomenal success that his fee wasdoubled for the second instalment.

● How important is Tim Burton to his career?In 2008 the Guinness Book of Records named the pair as havingthe most lucrative partnership in Hollywood. At that stage theirsix collaborations had grossed £550m worldwide. But in terms ofpersonal wealth, the Pirates of the Caribbean franchise hascontributed the lion’s share to Depp’s fortune. A royalties deal onthe film and the merchandising is believed to have earned theactor more than £100m so far – he earned $72m in 2008 alone.And he is set to make a fourth film in the series next year.

● What does he spend his fortune on?In 2004 Depp splashed out $3.5m on a 35-acre private island inthe Bahamas, which comes with six private beaches and a Tikihut. He also co-owns the Man Ray restaurant in Paris with fellowactors Sean Penn and John Malkovich.

The MoneyWeek audit: Johnny Depp

Redundancy was the push I needed

MY FIRST MILLIONMary Ann O’Brien, Lily O’Brien’s Chocolates

by Jody Clarke

With credit being tight right now, gettinga loan is hard. And since more and moreinstitutions have access to your personalfinancial records, a bad credit ratingcould be the very thing that stands inyour way of getting the best possibleinterest rate. Or even worse, having yourbond or car loan application denied.

That’s why it’s become so important tounderstand what your credit rating is, aswell as knowing how to improve yourpresent score. Here are our top tips todoing just that.

Five factors that determine yourcredit rating...Credit bureaus tend to base your creditrisk on five factors:

1. Payment history (35%): Do you pay your bills on time?Obviously, on time is better, andbeing late becomes progressivelyworse depending on how late, howfrequently and how recently theevent occurred.

2. The amount of money owed (30%): What is your credit limit and howmuch have you used up? In somecases, your score can be hurt if youaccept a credit limit increase offeredby a credit card issuer that’s slow toreport the new limit. If the lenderdoesn’t immediately report your newlimit, a high balance can show up asexceeding your credit limit.

3. Types of credit in use (10%):Lenders like to see a mix of debtbeyond credit cards. A bond or a carloan shows you can handle yourmoney. But be warned, getting creditfrom a finance company will appearas a black mark on your record (oneway to tell a finance company froma bank is that banks generally offercheque and savings accounts; financecompanies don’t).

4. New credit (10%): When you apply for credit, theprospective lender calls up yourcredit report and the credit bureau

makes a note of the inquiry on yourrecord. Too much activity on youraccount will make potential lendersnervous. Statistically speaking,someone seeking a lot of credit in ashort time is inherently riskier thansomeone who doesn’t.

But what about shopping around forthe best loan? you ask. Your ratingwon’t be penalised if you’re huntingfor a car loan or a bond within ashort time frame. But your score willbe affected if you shop around forthe best credit card or personal loandeal by applying for it.

5. Length of credit history (15%):When a credit card company offersyou a higher limit, it’s like anotherball in the air for a juggler. Can youhandle the added burden? The creditbureau presumes you can’t, until youprove over time that you haven’ttaken on more than you should andcan continue to make payments ontime.

7 strategies to improve your rating!1. Make loan payments on time and for

the correct amount.2. Avoid using more than your

available credit limit.3. Never ignore overdue bills. If you

encounter any problems repaying

your debt, call your creditor to makealternative arrangements.

4. Make sure you don’t have a creditcard from a financing company, as this can negatively affect yourscore.

5. Open numerous store accounts andbe sure to pay these accounts ontime – this can dramatically increaseyour rating!

6. Keep your outstanding debt as lowas you can. Continually extendingyour credit close to your limit isviewed poorly.

7. Limit the number of creditapplications. When another companylooks at your credit report, it’sviewed negatively.

Bottom Line: Three months before youapply for any kind of a loan, get a copyof your credit information. Visitwww.mycredit.co.za to apply for yourannual report – free. If your creditinformation is inaccurate in any way,contact TransUnion on 0861 886 466,and ensure the information is correctedBEFORE you apply for a loan (or youcould run the risk of being denied!).Remember to include any additionalinformation too. The more informationyou can provide about yourself, themore comfortable lenders may feelabout extending credit to you. Andcertain information – such as having thesame job or address for a few years –can make you appear to be more stablein lenders’ eyes. Make sure the bureauadds the following:

• If you’ve had your current job lessthan two years, your previousemployer and job title should belisted as well.

• Is your address listed and correct?• Is your identity number listed and

correct? This is the way most lenderswill identify you.

• Is your telephone number listed andcorrect? Many lenders may notextend credit if they can’t call toverify your information.

• Does your report include all theaccounts you’ve paid on time? Youcan send a letter to the bureau witha copy of your latest statement andcancelled cheques to prove you’repaying on time.

personal finance

Seven sure-fire ways to secure that crucial loanwith minimum fuss...

A bond shows potential lenders you canhandle your finances

by Karin Iten

12 March 201021

22 12 March 2010

By all accounts, Malcolm Glazer has athick skin. But even he must have wincedwhen he heard “Malcolm Glazer’s gonnadie” chanted around the stands at OldTrafford when he bought ManchesterUnited in 2005. Since then, Glazer, now80, has suffered two strokes and handedcontrol of the club to his sons. But as formercy, forget it, say Manchester Unitedfans. If anything, the chants have gotworse. Yet for all the vitriol and threats,the Glazers seem determined to fend offthe Red Knights’ bid for the club, or atleast hold out for the highest possibleprice (see box). That won’t surpriseanyone who knows Glazer, says The Tampa Bay Business Journal. He hasalways been a “high-stakes poker playerwho holds his cards extremely close tohis vest and only offers subtle hints as tohow he will play them”.

Glazer likes to describe his rise as a “true American success story”, says The Guardian. The son of JewishLithuanian immigrants, he worked in thefamily watch-parts business in Rochester,New York, as a child. When his fatherdied in 1943, he assumed responsibilityfor the business at the age of 15.“Thereafter the tale has less charm.” His60-year career – spanning everythingfrom property and sports clubs, to fast-food, fisheries and nursing homes – hasbeen punctuated with bizarre court cases.He was dubbed a “slumlord” after he

illegally charged the residents of one ofhis trailer parks $5 a month for keepingpets. And, even after making his fortune,he fought his six siblings for a decade inthe civil courts over his mother’s $1mestate.“He’s like a machine – money,money, money. There’s no otherdimension,” one sister later observed.

“Gimpish, orange-bearded and given tobelting his trouser waistband ludicrouslyhigh”, Glazer is a man “with nodiscernible friends”, says the DailyMail. The recurring theme in his careerhas always been leverage, combined with“high nerve and astute analysis”. Hemade his first pile borrowing heavily tobuy cheap rental properties in Rochester.Then, in the 1980s, he reinvented himselfas a corporate raider. A decade later, hemade a killing in junk bonds. Given hisreported dislike and ignorance of sport,Glazer’s move into American football –with the 1995 acquisition of the TampaBay Buccaneers for $192m – surprisedsome, says The New York Times. The rumour goes that “he once cheeredfor the wrong side”. But, like his lateracquisition of Manchester United, it wasa pure business play.

Say what you like about Glazer – nowreckoned to be worth $2.2bn – but atleast he’s consistent, says The Guardian.Back in 2005, Manchester United seemedan “enticing prospect for Glazer-style

financing”: A rock-solid asset that hecould mortgage up to the hilt to crank upthe potential returns. So it’s little surprisethat the top of the gripe list for fans isthat Glazer and his three director sonshave saddled a previously debt-free clubwith liabilities of £700m, while liningtheir own pockets. But after years offruitless battle, the Manchester UnitedSupporters Trust has been invigorated bythe Red Knights’ attempted putsch. “In the coming days and weeks we canchange everything”, the group is tellingits members. Maybe.

profile

This week: Malcolm Glazer

Friendless money-making machine whosaddled Man U with £700m in debt

The plot to snatch control of Manchester United from the Glazershas electrified both Old Trafford and the City, says The Observer,mainly because of the collective pedigrees of the Red Knights.The group is led by Jim O’Neill, chief economist of GoldmanSachs. It also includes Keith Harris, chairman of broker SeymourPierce, plus sundry other hedge-fund supremos, hot-shotlawyers and senior advertisers. But can what is perhaps theworld’s most powerful group of football fans pull off the coup?

Many in the City are sceptical, says The Sunday Times. It isthought that the Knights may need anything up to £1.5bn to buyout the Glazers and leave the club debt-free – hardly smallchange. They intend to raise about £500m from 50 or 60 “super-investors”, a further £250m from rank-and-file fans, and would

probably retain a £500m bond. But the supporter-owned modelis fraught with difficulties – and it is far from clear if they wouldget the backing of the club’s CEO, David Gill (reported to dislikeKeith Harris), or its manager, Sir Alex Ferguson.

Besides, the tilt carries personal risk for O’Neill, once describedby BusinessWeek as “Goldman’s rockstar”. The Glazers arelongstanding clients of Goldman Sachs (which helped with the£500m bond issue) and are threatening to terminate theirrelationship. Rule one of Goldman’s business principles states:“Our clients’ interests always come first.” Rule two begins: “Our assets are our people”, notes Nils Pratley in The Guardian.So what happens when these principles collide? We may beabout to find out.

World’s most powerful football fans plot a coup

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With the Maldives opening up to a wideraudience, it’s not just kids who are now welcome.

There is also now a more wallet-friendly way to enjoy paradise.It isn’t quite a budget option, but Lily Beach Resort’s all-inclusive Platinum Plan is as close as you’ll get in the Maldives.The package includes flights, villa accommodation, unlimitedbranded drinks, fine dining and even unlimited cigarettes forseven nights.

Renovated in April 2009, the Lily Beach Resort &Spa “exudes barefoot luxury”, says Deepa Shah in

The Independent. The modern decor executed in traditionalwoods and natural stones blends discreetly with the lushvegetation. There are 115villas, one of the mostprivate of which is theSunset Water Suite. Thisthree-room villa features aking-size four-poster bed,free mini-bar, a showerwith a glass floor over thesea, and a private deckwith infinity pool and stepsdirectly into the sea.

The resorthas three restaurants which serve “beautifully-presented,international fare including everything from home-made wafflesto sushi”.

Seven nights all-inclusive cost from R24,132pp withKuoni. Find out more at Kuoni.co.uk.

Forget thetraditional

image of the Maldives asa honeymoon-only zone.The archipelago in theIndian Ocean is nowluring families andchildren with kids’ clubs,children’s menus andentertainment. Anantarais one of four islands thatoffers free child care forchildren aged four andover.

Anantara is“my

favourite family-friendly”resort, says Jane Knight in The Times. And there’s no fear ofdisturbing loved-up honeymooners. The hotel is split betweenthree islands: children stay on Dhigu Island; couples on Veli andNaladhu. On arrival there “was not just a welcome toy but awhole gift pack, incorporating every-thing from toothbrush andchild toiletries to a make-your-own rocket kit”.

The food “was the most diverse that we tasted inany resort”, with eight restaurants offering Thai, Japanese andItalian cuisine and seafood. Knight’s son was “always servedfirst at mealtimes – a full child is a happy child”.

Seven nights B&B with flights and transfers cost fromR22,279pp with British Airways. www.ba.com.

Spending it

Anantara

What the travel writers are saying

Heaven on earthis Fish Hoek inSouth Africa,says BrianBlessed in TheSundayTelegraph. Thistown lies at themouth of theSilvermine River and is “the mostbeautiful place in the world”. The TudorHouse Guest Lodge (Tudorhouse.co.za)is right by the sea and “boasts the mostfabulous views”. There is a “terrific”restaurant on the beach called TheGalley (fishhoekgalley.com), which“serves the tastiest fish I’ve ever eaten”.

My dream holiday

There should be an award for best motion picture backdrop, say Kate Quill and TomChesshyre in The Times. If there was, here are the films that would be this year’snominees. The “stunning landscapes” of the planet Pandora in Avatar do exist – “if a littleless digitally enhanced”. Kauai Island in Hawaii was used for the backdrops as it has “allthe requisites of paradise: palm trees, aquamarine sea, waterfalls, canyons, ravines,rainforest and dramatic cliffs”. Bon Voyage Travel has a ten-night Hawaiin island-hoppingtrip, with five nights on Kauai costing from R21,161pp. Bon-voyage.co.uk.

Vasquez Rocks Park in Los Angeles County has featured in numerous films, mostfamously Star Trek, but most recently Tom Ford’s A Single Man. The strange rockformations are part of the San Andreas fault. The park is a 30-minute drive from LosAngeles, entrance is free and the park is open daily from 9am-5pm.

The scenes where the murdered Susie watches her family cope with her death in TheLovely Bones were shot on South Island, New Zealand, a “real-life heavenly location”.Bales Worldwide offers a 13-day “Highlights of New Zealand” tour from R24,975ppincluding flights. Balesworldwide.com.

What’s sospecial?

How theyrate it

The menu

The cost

What’s sospecial?

How theyrate it

The menu

The cost

Where to stay – the MaldivesA family-friendly resort versus a budget paradise

Lily Beach Resort & Spa

12 March 2010

toys

This is the updated Lexus IS-F, its luxury,

high-performance saloon, and it’s even better

than its already-impressive predecessor, says

Ollie Marriage in Evo magazine. Pull away

and it feels almost identical to the old model.

But that’s only until you “really start

working the throttle through corners”. That’s

when the new car’s limited slip diff comes

into its own. The torque-sensing diff has

lopped two seconds off the IS-F’s lap times

and improves traction and stability in high-

speed corners. “What strikes you first is not

only how much earlier you can get on the

power, but how much harder.” The steering

isn’t as well weighted and consistent as a

BMW M3, but the IS-F does have a “truly

bonkers engine, a proper roarer that goes

rabid over 3,700rpm”. In fact, it compares

very well with its nearest rivals, the M3 and

Mercedes C63 AMG. That’s assuming you

can “see past the badge”.

The IS-F is excellent and offers BMW-like

levels of overall performance, luxury and

safety, says Automotive Addicts. The new

model has more technology and standard

equipment, including a new sat nav, and

driving it is “pure excitement and pleasure”.

A sporty saloon from Lexus

Price: R776 900. Engine: 4,969cc, V8. Power: 417bhp @ 6600rpm. 0-100km/h: 4.8secs (claimed).

Top speed: 270km/h (limited).

Allee Bleue Starlette Blanc 2009Approximate retail price: R30

Situated in Groot Drakenstein, close toFranschhoek, this picturesque estate isdefinitely worth a visit. Not only can youtaste their range of wines, but you canalso experience their peppery intenseOlive Oil. They produce a wide selectionof fresh herbs, which are soldcommercially around the country, fromrocket, watercress, basil, coriander,

lemongrass, parsley etc. Look out for them in your localsupermarket.

The farm is centrally situated, so you can visit wineries in Paarland just over the mountain in Stellenbosch while staying in

Kendall Cottage, an historic residence datingback to 1920. It also makes an ideal weddingvenue.

The wine I enjoyed while sitting under thetree enjoying a picnic was the StarletteBlanc, the first wine made by the newwinemaker Van Zyl du Toit. An 80%Sauvignon/Chenin Blanc blend, it iselegantly zesty – a characteristic from theSauvignon, while the Chenin adds a hint ofpasion fruit and mango both to the aromaand the palate.

● Marilyn Cooper is a Cape Wine Masterand Managing Director of the Cape WineAcademy.

Wine of the week: from Allee Bleue, a great place to visit

by Marilyn Cooper

12 March 2010

There can be few things moresatisfying than seeing hugelywealthy people scuppered by theday-to-day annoyances thatbeset the rest of us. I read withglee at the weekend that stupidlyrich US comedian Jerry Seinfeldhas landed himself in hot waterover parking spaces, of allthings.

Despite the fact that Seinfeld’seponymous sitcom ended morethan a decade ago, reruns of theshow earned him around $50mlast year, adding to overallannual earnings of $85m and atotal fortune of more than$500m.Even so, he still can’t get aparking space in New York.Seinfeld has complained about NewYork’s lack of parking spaces numeroustimes in his stand-up routines.“Everybody in New York knows there’sway more cars than parking spaces. It’slike musical chairs, except everybody satdown around 1964,” he once said.

Seinfeld even based a whole episode ofhis sitcom around the problem of findinga parking space. In The Parking Space,the character of George Costanza sets outon a mission to find a free parking space,explaining: “It’s like going to a prostitute.Why should I pay when, if I apply myself,maybe I can get it for free?”

Now it seems that Seinfeld’s driver has

come up with a novel, if not entirelylegitimate, way to get around the parkingproblem. When Seinfeld arrived to filmhis new show, The Marriage Ref, hisdriver used an expired police parkingpermit. An “alert television reporterspotted the prized police placard on thedashboard”, reports James Bone in TheTimes. The reporter contacted MayorBloomberg to ask why Seinfeld had it. “Ihave absolutely no idea,” respondedBloomberg.

It’s not the first time a celebrity or publicofficial has been caught abusing policeparking permits. But Seinfeld certainlychose the wrong time to be caught up ina parking scandal. New Yorkers are still

grumbling about a New Year’sEve bomb scare in TimesSquare. This was caused by avan that had been abandonedthere for two days, having goneunnoticed due to a policeassociation sign on thewindscreen.

Seinfeld said the permitbelonged to his driver, a retiredpoliceman, but a quickinvestigation by the New YorkPolice Department revealed thatthe permit actually belonged toa female detective, and hadexpired in 2007. To add to themystery, the permit doesn’t evenhelp you park in Manhattan –all it entitles the bearer to is aparking space at the Bronx

Narcotics unit. Somewhere I’m assumingSeinfeld doesn’t go very often.

But my favourite part of the story waslearning that Seinfeld once spent $2mconverting a building in the veryexpensive Upper West Side of Manhattaninto a climate-controlled garage for his20 Porsches.

May I suggest travelling by helicopter infuture, Seinfeld? You’ll have far lesstrouble finding a parking space – andheli-pads don’t need air-conditioning.

blowing it

Seinfeld’s long struggle with parking

■ Political turmoil has hit Thailand’s tourism industry hard with thenumber of tourists dropping to 14.1 million in 2009 and revenueshrunk 3 percent from 2008. To get tourists back into the country,government are offering free insurance coverage worth $10,000(around R75,000) to any tourist harmed in riots or politicaldemonstrations. According to IOL, “victims will also receive freemedical treatment and a daily $1,000 (around R7,456) incompensation if sent to hospital for more than 10 days”. If tourists’travels are delayed due to riots they will be given $100 (aroundR745) per day. IOL also reported that tourists of all nationalities nolonger have to get visas for Thailand – this policy will be in placeuntil March 2011 but may become permanent. Thai government willbe giving airlines 10 percent discount off parking fees and reducelanding fees by 20 percent. Hotels can also expect discounts offtheir electricity bills.

■ A “lucrative industry” surrounds some of Britain’s deadliestprisoners, says Jane Moore in The Sun. Serial killer Peter Sutcliffe is using public money to fight for release from prison.Lawyers are “coining it in” via “taxpayer-funded ‘legal aid’”. Thenthere are the “doctors and other experts all being paid tosupposedly ‘cure’ these sick minds”. Not to mention the costsincurred every time one of these prisoners “seeks to exploit somelaw imposed by the European Court of Human Rights”. But sayingthat a serial killer has “a low risk of re-offending” is not at allreassuring for the women who might meet Sutcliffe on the street ifhe is released. “Hopefully, his ‘life’ conviction will prevail, but notbefore hundreds of thousands have been spent pursuing the‘human rights’ of a man who callously denied others thefundamental right to live.”

Tabloid money... Thailand’s tourist discounts

12 March 2010

shares at a glance

MoneyWeek’s comprehensive guide to the week’s shares in the news

PUNTSCompany Media Reason Current price

Exxaro (EXX) Financial Mail Exxaro is the largest supplier of coal to Eskom and as Mining Charlotte Mathews notes this company is moving from

strength to strength. It’s managed to increase exports andis even looking for other energy opportunities. “Management shows vision and the long-term prospects are good.” Buy. 11750c

British American Summit TV, Rudi van der Merwe of Standard Financial Markets says: Tobacco (BTI) Rudi van der Merwe, “The market is looking stretched and vulnerable at this Tobacco Standard Financial stage so I’m disinclined to be rush in.” But he adds that if

Markets you’re looking to get into equity, you stay with the defensives. British American Tobacco is one share that will hold value if the markets turn bad. Buy. 24650c

PETMIN (PET) Financial Mail According to Charlotte Mathews, Petmin’s prospects have Mining improved recently. It’s considering anthracite and iron ore

expansions. If these pay off, we’ll see a strong improvement in the share price. Add to this the fact that the share has improved its operating margin in difficult markets, and it’s definitely worth a punt. Buy. 243c

Harmony (HAR) Imara SP Reid Imara SP Reid is looking to Harmony as a long-termMining growth asset. The recent movements in the rand price

have been favourable for South African gold miners. But at these levels, the share’s looking a little underpriced. “I-Net consensus forecast shows the market is already pricing in an 80% rise in earnings.” Buy. 7152c

Mondi (MND) Financial Mail Razina Munshi explains in the Financial Mail why, despiteMining the difficult environment, Mondi actually looks like a

good investment. It’s been slapped with low demand and European operations have struggled through the first quarter. That said, the business is going through a period of consolidation and will use its substantial cash reserves to reduce debt and reward shareholders. If you pick it up now, you could be in for some handsome dividends. Buy. 5050c

12 March 201026

Company Contacts Dealings Services Profile

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Data Vendor

shares at a glance

MoneyWeek’s comprehensive guide to the week’s shares in the news

**Closing prices as at 10 March 2010

DOGSCompany Media Reason Current price

Wesizwe (WEZ) Stockmarket Sleuth This platinum miner had a lot of potential but there’s no Mining end to its funding problems. Gary Booysen of

Stockmarket Sleuth points out that the platinum price may be rising ahead of expectations, but the car market remains depressed. The management squabble continues and without funding, Wesizwe isn’t going to be able to extract the platinum from its assets near Sun City. Avoid. 230c

WATCHLISTCompany Media Reason Current price

Blue Label Telecoms Finweek Simon Dingle of Finweek likes the look of Blue Label (BLU) Telecoms. It’s had large growth from its international Fixed line divisions and its cash reserves have jumped substantially. telecoms The international divisions in Nigeria, Mexico and India

have exposed Blue Label to currency volatility, but there are plenty of positives for this stock. It’s disposed of assets that weren’t performing and has explored some very lucrative strategic partnerships offshore. The group currently earns 90% of its revenue in South Africa and this will allow the group to expand quickly. 482c

Imperial Holdings Finweek Svetlana Doneva of Finweek likes the look of Imperial car (IPL) holdings. Its entry-level car market helped it to perform Industrial above expectations in the six months to end 2009. The Transport group reported a 109% increase in profit and Imperial is

in the market for expansion. It’s announced a number of sizable acquisitions. It’s also going to benefit from the influx of tourists thanks to its large exposure to the rental car market. It holds brands like Europcar, Tempest Car Hire and AA Autobay. That said its International Logistics division isn’t doing well and the strong rand could wipe out profits there. Increases in car prices thanks to the carbon emission tax set to be introduced later this year may also impact the company negatively. 10475c

12 March 201027

Deals in any security can be done in two

ways. One is via a regulated public market

such as the London Stock Exchange. But

many transactions are done privately

between counter parties and with no

exchange involved. These are known as

over the counter, or OTC. OTC deals have

a number of advantages for each party,

including the fact that details of the trade

are not published. Furthermore, in many

markets OTC deals are subject to less reg-

ulatory scrutiny as they are not generally

open to the investing public. However,

OTC deals also have their critics, who

complain that the existence of ‘dark pools

of liquidity’ – large deals being done regu-

larly off-exchange – exclude private

investors from the best trades.

I wish I knew what over-the-counterwas, but I’m too embarrassed to ask

Most investors make money by buying

low, then selling high – the classic ‘long’

trade. But you can also make money by

selling an asset first, then buying it back

cheaper later. Often the stock being

‘short-sold’ is borrowed. For example, a

hedge fund might borrow 1,000 shares

from a pension fund and sell them

straight on for R2.50. Later, they are

bought back for R1.50, netting the hedge

fund a profit of R1 per share less any

borrowing charge (interest) paid to the

pension fund. Short-selling can backfire

badly if the borrowed shares rise in

value after they’ve been sold. They still

have to be returned to the lender, mean-

ing a big loss for the short-seller when

they have to buy them back for more

than they sold them for.

I wish I knew what short-selling was,but I’m too embarrassed to ask

12 March 201028

last word

“Masked youths… attacked thehead of Greece’slargest tradeunion, who wasaddressing thecrowd, and hurledstones at thepolice. GSEEunion boss YiannisPanagopoulos

traded blows with the rioters before beingwhisked away, bloodied and with tornclothes.” The Daily Mail account puts theblame for these disturbances onGermany’s finance minister, who warnedthe Greeks that “the German governmentdoes not intend to give acent”. At least Bild, apopular German newspaper,tried to be helpful. Itsuggested Greece sell Corfuand that Greeks get upearlier and work harder.

Meanwhile, from Icelandcomes news that every voterwith an IQ above airtemperature has cast hisballot against a bail-out plan.The Icelanders were slated tomake good $5.3bn in banklosses (see page 4). But whyshackle common voters tothe banks’ losses? The planwas so outrageous and so unpopular thatIceland’s normally compliant primeminister called for a referendum. Given achance to vote on it, 93% said no. The other 7% probably read it wrong.

Insurrection is in the air. In England,government employees are preparing thebiggest strike since the 1980s. InAmerica, dissatisfaction with Congress isat record highs; four out of five of thosepolled say “nothing can be accomplishedin Washington”. Herewith, an attempt todeconstruct the rebel yell. By way ofpreview, it’s not the principle of the thing,we conclude; it’s the money.

There are more clowns in economics thanin the circus. They invented an economicmodel that has been very popular formore than 50 years, particularly in theUS and Britain. It began with a bogusinsight. John Maynard Keynes thoughtconsumer spending was the key to

prosperity. He saw savings as a threat. He had it backwards. Consumer spendingis made possible by savings, investmentand hard work – not the other wayaround. Then, William Phillips thoughthe saw a cause-and-effect relationshipbetween inflation and employment; raiseprices and you raise employment too, hesaid. Jacques Rueff had already explainedthat the Phillips Curve was just aflimflam. Inflation surreptitiously reducedwages. It was lower wages that made iteasier to hire people, not enlightenedcentral bank management. But the scamproved attractive. The economy has beenbiased towards inflation ever since.

Economists enjoyed the illusion ofcompetence; they could hold their headsup at cocktail parties and pretend toknow what they were talking about.Now they were movers and shakers, notjust observers. The new theories seemedto give everyone what they most wanted.Politicians could spend even more moneythat didn’t belong to them. Consumerscould enjoy a standard of living theycouldn’t afford. And the financialindustry could earn huge fees by sellingdebt to people who couldn’t pay it back.

Never before had so many people been sohappily engaged in acts of larceny andlegerdemain. But as the system aged, itspromises grew. From the 1930s, thegovernment took upon itself to guaranteelife’s essentials – retirement, employment,and, to some extent, health care. Over theyears this grew to include minimumwages, unemployment compensation,disability payments, free drugs, food

stamps and so on. Households no longerneeded to save. They could live up totheir means… and then, beyond them.

As time wore on, more and more peoplelived at someone else’s expense. Lobbyingand lawyering became lucrativeprofessions. Bucket shops and banksneared respectability. Every imperfectionwas a call for legislation. Every trafficaccident an opportunity for wealthredistribution. And every trend was fullyleveraged. If there was anyone stillsolvent in America or Britain in the 21st century, it was not the fault of thebanks. They invented subprime loansand securitisations to profit from areas of

the market that had previouslybeen spared. By 2005 evenjobless people could get intodebt. Then, the bankers foundways to hide debt, and ways toallow the public sector toborrow more heavily. GoldmanSachs did for Greece essentiallywhat it had done for thesubprime borrowers in theprivate sector – it helped themto go broke. As long as peoplethought they were gettingsomething for nothing, thismodel enjoyed wide support.But now they’re getting nothingfor something, the masses are

unhappy. Half the US states areinsolvent. Nearly all are preparing to raisetaxes. In Europe too, taxes are going up.Services are going down. Taxpayers arebeing asked to pay for banks’ losses, andpay interest on money spent years ago.

Several countries are already past thepoint of no return. Even if America taxed100% of all household wealth, itwouldn’t be enough to put its balancesheet in the black. Professors Rogoff andReinhart show that when external debtpasses 73% of GDP or 239% of exports,the result is default, hyperinflation, orboth. IMF data show the US already toofar gone on both scores, with externaldebt at 96% of GDP and 748% ofexports. And now the patsies are inrevolt. They needn’t bother; the systemwill collapse on its own.

To read Bill’s thoughts, sign up toMoney Morning’s free email atwww.moneymorning.co.za.

Insurrection is in the air – but the system will collapse all on its own

The patsy revolt of 2010Nothing for something is not a good deal.

Bill Bonner

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