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4 December 2009 Issue 464 HOW TO MAKE IT, HOW TO KEEP IT, HOW TO SPEND IT4 December 2009 Issue 464 HOW TO MAKE IT, HOW TO KEEP IT, HOW TO SPEND IT

“I readMoneyWeekto pick up all

the vital things I’vemissed

elsewhere.”Justin Urquhart-Stewart

Seven AssetManagement

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Strategy:Can AnthonyBolton work hismagic in China? P12

Power to thepeopleProfit from the nuclearrevival, page 24

Power to thepeopleProfit from the nuclearrevival, page 24

Paul Hill:A cheap,safe water stock tobuy now P10

Profile: The sheikhwho built an economyon dreams P33

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from the editor-in-chief

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Editor-in-chief:Merryn Somerset Webb

Editor: John Stepek

Deputy editor: Tim BennettAssociate editor: David StevensonMarkets editor: Andrew Van Sickle

Senior writers: Jody Clarke, Eoin GleesonContributing editor: Emily Hohler

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ISSN: 1472-2062ABC, Jan-Jun 2009: 41,282

4 DECEMBER 2009 ISSUE 464

Information in MoneyWeek is for generalinformation only and is not intended to be relied

upon by individual readers in making (or notmaking) specific investment decisions.

Appropriate independent advice should beobtained before making any such decision.MoneyWeek Ltd and its staff do not acceptliability for any loss suffered by readers as a

result of any such decision.

6 Markets How Dubai rattled globalstockmarkets; China’s craving for garlic.8 Sector Big drug firms are outsourcingtheir research – here’s how to profit.14 Personal view Philip Ehrmann picksthree of his favourite Chinese stocks.16 Briefing The government wants toboost innovation – can a new fund help?18 Matthew Lynn Britain is sleep-

walking into a credit card crunch.28 Funds Why rotten US pipework meansyou should be investing in water.30 Expert view Jody Clarke talks toAndrew Smithers about valuing markets.42 Blowing it Should Lord Mandelsonhave gone shooting with the Rothschilds?46 Last word Bill Bonner on why Dubaiwon’t be the last government in trouble.

A few months agoVince Cable shockedthe richer end ofmiddle-class Britainwith his ‘mansiontax’. This was thesuggestion that eachhouse worth over£1m would, under aLib Dem government,be taxed at 0.5% of

its value every year. Cue mutterings about theunfairness of such policies on the asset richand income poor. And from the bankingcommunity, cue a pile of discounted cashflow spread sheets working out how muchthe new tax would wipe off the value of theirNotting Hill homes (the answer being ‘a lot’).

After all that, theassumption was thatNick Clegg wouldquietly drop thepolicy. He hasn’t.Instead, they’ve just moved up both numbers– now it’s 1% over £2m. And Clegg andCable aren’t the only ones wondering if UKproperty is under taxed. This week, MonetaryPolicy Committee member Adam Posenseemed to suggest imposing capital gains taxon residential homes and then making it,along with stamp duty, variable. So the taxeswould rise or fall with house prices. The ideawould be for the taxes to become an“automatic stabiliser for house prices”.

Just how bad are these ideas? As tax-raisingideas go, neither is truly awful. A mansiontax is bad for all the usual reasons. It’s a hugedouble tax (you pay it with money that’salready been taxed at least once); it’s the kindof tax that is bound to trickle down ifimplemented (even in 20 years’ time, wheninflation has made three-bed semis in

The lesser of two evilsManchester worth £2m, the £2m threshold isunlikely to have budged); like stamp duty, itwill distort the market around its threshold.But it does have the virtue of taxing the veryrich in a pretty unavoidable way: they’ll haveto pay whether they hold their houses viatrusts in the Cayman Islands or not.

Posen’s idea works in theory, but it’s toocomplicated. As David Wighton notes inThe Times, it would be “fiendishly difficult”to implement. The taxes would have to riseand fall pretty sharply to affect behaviourand they’d have to be recalibrated constantly.And it would be politically awkward. Raisingthe cost of house buying when prices arerising won’t make a government popular withfirst-time buyers. As Wighton puts it, it’s an“ivory tower” idea.

But given the state ofgovernment financesand the fact that thedebate has begun, theodds are we’ll soon see

some sort of property tax. The least badoption could be a capital-gains tax on firsthomes. It might have some of the effect of thePosen idea, in that the tax take would risewhen prices were rising, which might dampenspeculation automatically. It would beprogressive, in that it would tax sellers of bighouses more than those of small properties.It wouldn’t be a double tax of any sort; and itwouldn’t be taxing earned income, just gains.There are problems, of course (it would beyet another tax, for starters). Just not asmany as with all the other options.

“Odds are we’ll soon seesome sort of property tax”

Merryn Somerset Webbemail: editor@moneyweek.com

In this issue

www.moneyweek.com 4 December 2009

John Stepek: winner of theNew Business Editor of the Year,

BSME Awards 2009

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Britain is the only G20 country stillofficially shrinking after Canadaannounced growth in the third quarter.And the latest data is discouraging.According to a CBI survey, sales at amajority of service-sector companiesunexpectedly fell in the three months toNovember, while consumer confidencedipped for the first time in a year lastmonth. The Bank of England’s moneysupply and lending data figures forOctober cast further doubt on whetherthe Bank of England’s money-printingprogramme, or quantitative easing (QE),is having any impact.

What the commentators saidIt seems that “QE is working not a jot”,said David Prosser in The Independent.The Bank looks at a measure of the

news

Figures in pencePrivate non-financial companiesHouseholdsM4 growth ( quarterly annualised rate %)

15%

10%

5%

0%

-5%

200220001998 2004 2006 2008Source: Bank of England/ FTSource: Bank of England/ FT

A further boost for the financial systemwas announced by the Japanese centralbank at an unscheduled policy meetingthis week. It will offer up to $114bn ofthree-month loans to banks, in exchangefor a range of collateral, at the overnightinterest rate of 0.1%. The aim is to bringthree-month rates down and bolster theeconomy. While growth has returned, withunemployment falling and consumptionticking up, deflation has worsened: pricesfell by an annual 2.2% in September.

Deflation is being reinforced by a strongyen, which reached a 14-year high of justunder 85 to the dollar. This is loweringimport prices and threatening exportearnings. Speculation over Japaneseintervention in the currency markets ismounting after various officials publiclyworried about yen strength.

What the commentators saidMarkets had expected “somethingmeatier”, said Lex in the FT. This was far

money supply known as M4 to gauge thesuccess of QE, and has said it wants tosee it growing at pre-crunch levels. But inthe three months to November, it shrankat an annualised rate of 5.3%. That’s afar cry from the increases of 6%-9% twoyears ago (see chart). “Nor is banklending to business showing muchimprovement.” It fell by an annualised3% in the same time span.

Part of the story, however, is about scantdemand for credit as well as tight supplyfrom banks. Take consumers, who asHoward Archer of Global Insight pointedout, are anxious to reduce their massivedebt load. That’s why net consumer(unsecured) credit fell by almost £0.6bnin October, the biggest drop since recordsbegan in 1993 and double September’sfigure. In addition, unemployment is notlikely to peak until late next year, whichwill further undermine wage growth.So the outlook for consumption is weak,said Morgan Stanley. The economy willmerely “limp out of recession”.

There could also be a nasty surprise instore next year. If there is a hungparliament next spring, it could dentconfidence in the majority party’s abilityto push through the fiscal tighteningrequired to tackle the towering budgetdeficit. That could lead to a loss of ourtriple-A credit rating, which could triggera sharp sell-off in the pound and risinggilt yields. In response the Bank may raiserates to shore up market confidence –thus choking off the fragile recovery.

In the run-up to next week’s pre-Budgetreport, however, the spotlight is on the

“class war card” rather than sensiblemeasures to plug the deficit, saidAllister Heath in City AM. Measuresbased on taxing the rich “would barelymake a dent”. But because thegovernment senses an improvement inthe polls that even suggest it could yetwin next year, “a populist pre-Budgetreport it will be”.

Economy to‘limp’ out ofrecession

Token gesture fromthe central bank

Britain

Japan

The bottom line€165,000The value of a LamborghiniGallardo (below) belonging to Italy’spolice force that was written off in a crashinvolving two other parked cars.

£7.5mThe amount in bonuses paid toForeign Office staff last year.

£37,250 The cost to the taxpayer ofanswering the 250 parliamentaryquestions asked in a single day byCaroline Spelman,Tory spokeswoman forcommunities and local government.

891,956 The numberof counterfeitcoins that

were removed from circulation this year,up from 97,000 last year.

¥200,000 How muchYang Xu, aChinese former football manager, paid toanother manager as a bribe to ensure awin for his team.

£2.9mWhat Barry McKay sold hishouse for after being tricked by Savills.

The estate agent hasapologised after admitting

that a “rogue

employee” hoodwinked McKay intoselling his £10m home at the knock-down price.

£31,500 How much Leeds University isoffering to pay a new researcher toinvestigate lap-dancing.The candidate willbe required to visit strip clubs andinterview 300 exotic dancers in order toresearch “the rise and regulation of lapdancing and sexual labour”.

£17,000What seven-year-old KieronWilliamson has sold 16 of his paintingsfor.The gallery owner has compared himto Picasso, who started training as anartist when he was Kieron’s age.

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news

� The way we live nowSome secretaries go an extra mile too farfor their bosses.Take Claudia De La Rosa.When she realised she’d made a mistakethat meant her boss might miss his flight,she was quick to act. She called in a bombthreat to American Airlines – andreiterated the threat in an email just tomake sure the flight wouldn’t take offwithout her employer.

Staff at Miami Airport spent four hourschecking the plane. Unfortunately for DeLa Rosa, when the threat was revealed tobe a hoax the police traced the email andshe was charged with making a falsereport of planting a bomb. She now facesup to 15 years in prison.

less aggressive than, say, boostingpurchases of long-term government bondsor promising to keep rates low longerthan markets expected. It’s “pretty tame”,agreed Richard Jerram of MacquarieResearch. Along with the unscheduledmeeting, it suggests that the bank, underheavy pressure from the government, hassecured some peace and quiet from thepoliticians with a “token” gesture.That’s because Governor MasaakiShirakawa has always been “sceptical” ofthe merits of quantitative easing-stylepolicies, said The Economist.

As for yen strength, “there’s no needto panic just yet”, said CapitalEconomics. Japanese goods competemore on quality than price, so themain thing for exports is the globaleconomy, which has provided a tailwindin the past few months. And in euroterms, the yen still remains some waybelow its peaks of late 2008 andearly 2009.

Markets reboundafter Dubai shockMajor markets have bounced back fromtheir Dubai-induced swoon last week,which was prompted by a sudden requestfor a repayment standstill from DubaiWorld (see page 6). As banks andbondholders joined forces in response toDubai World’s plans to restructure $26bnof its debt, Dubai’s ruler SheikhMohammed (see page 33) confirmed thatthe government would not stand behindDubai World. He also accused the mediaof exaggerating Dubai’s problems.

What the commentators saidA key lesson from this episode is that

investors in Dubai clearly made a bigmistake in assuming that companies closeto the state would be backed by it.But you can hardly blame them, as the FTpointed out. Sheikh Mohammed may saythat international investors “do notunderstand anything”, but relationshipsbetween Dubai’s institutions “are keptblurry and ambiguous”. There is no cleardemarcation between the state,“parastatal bodies” and publicly-ownedcompanies. The risk post-Dubai is thatrattled investors “will rethink theirexposure to a wide range of sovereign andquasi-sovereign entities”, said Gillian Tett,also in the FT. They may well demand apremium to compensate for theuncertainty – meaning that borrowingcosts will rise at a time when governmentsand quasi-sovereign companies “can illafford it”.

Dubai

The Japanese yen has hit a 14-year high

www.moneyweek.com 4 December 2009

Weekly change to FTSE 100 stocks. Prices as of xx/xx/07

*Research shows that asset allocation is much more important than share selection. MoneyWeek doesn’t pick shares. But we have some definite ideas about which sectors are likely to go up.

MONEYWEEK’S strategic portfolio: Where to put your money now*

Corp bondsFTSE £ CorpFeb 09–

Gold hit a new record above$1,200 an ounce this week asa recovery in risk appetitefollowing the Dubai jitterssent the dollar down again.It has also reached new peaksin euros, pounds and Swissfrancs.This shows that“people want to get rid” ofpaper money, as Mario Ineccoof MF Global put it, and buy acurrency that can’t bedebased by inflation.

The Nikkei has recoveredfrom four-month lows,thanks to the global reboundearly this week.The yen’sjump to a 14-year highagainst the dollar (see page 4)has fuelled fears overexporters’ earnings.However, on the plus side,unemployment slid again inOctober, and the market’sprice-to-book value ratio isstill half US and UK levels.

We are likely to have “seenthe best of the rally in thecorporate bond market”, saysPatrick Gordon of Killick & Co.But the yield on the FTSEsterling corporate bond indexof investment grade paper isstill 5%.That looks appealingcompared to the rates on cashor historically low gilts.Meanwhile, the InvescoPerpetual corporate bondfund still yields almost 6%.

JapanNikkeiMay 032%/year

SectorBenchmark

Date first tippedPerformance to date

SectorBenchmark

Date first tippedPerformance to date

Inv Perp High IncJul 09–

Concentrating on defensiveshas been a poor strategy thisyear. Cyclical stocks havespearheaded the rally asinvestors have bet on a rapideconomic recovery. But theglobal recovery is likely todisappoint. So firms withstrong balance sheets andsolid dividends, such as waterstocks and pharmaceuticals,which remain good value, arethe place to be.

SectorBenchmark

Date first tippedPerformance to date

SectorBenchmark

Date first tippedPerformance to date

GoldBullionNov 01+20%/year

Defensives

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There is often a correlation betweenfinancial bubbles bursting and attemptsto construct the world’s tallest building,says William Pesek on Bloomberg.com.In 1931, for instance, the Empire Statebuilding, designed in the exuberant1920s, finally opened, “presaging yearsof gloom”.

The SearsTower was the world’s tallestbuilding when it opened in 1973,coinciding with the advent ofstagflation. In the late 1990s, Malaysia’sPetronasTowers, conceived during the

‘go-go’ days of the mid-1990s, openedin 1998 as the Asian crisis struck. Andthe “Skyscraper Curse” has struckagain in Dubai. The Burj Dubai(pictured, right) is the latest tallestbuilding in the world at almost 820metres, constructed by propertygroup Emaar.The $1bn tower is dueto open in January.

The link between all thesebuildings is easy credit, fuellingconfidence, ambition, exuberanceand hubris, says Pesek.

“Architectural overreach” thus tendsto mark the height of the boom.Commenting on the constructionboom in Dubai in 2006, ClaudiaZeisberger of the Asia PacificInstitute of Finance at Insead inSingapore said: “all the buildinggoing on made me feel like I wasexperiencing the last days ofancient Rome”. Skyscrapers, saysMarkThornton of the Ludwigvon Mises Institute, havebecome a “marker of the 20th-century business cycle.”

Dubai is in a ‘nasty mess of its own making’ – but

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The big picture: The ‘Skyscraper Curse’ strikes again

Dubai has already given the world someof its biggest buildings (see below) andbiggest indoor ski slope, says AlistairOsborne in The Daily Telegraph. Now ithas produced “the biggest debt-marketcock-up”. Last Wednesday, the Emirate’sgovernment suddenly asked creditors ofDubai World, a large state-sponsoredconglomerate with $60bn of obligations,to agree to a standstill on debtrepayments until next June at the earliest.This included the $3.5bn Islamic bondissued by the group’s Nakheel propertysubsidiary – the company behind thepalm island land reclamation project –and due to be repaid in mid-December(see pages 32 and 45 for more on Islamicbonds). Then it shut up shop for a four-day Islamic holiday.

Dubai shocks the marketsThe announcement left investors feeling“wronged and wrong-footed”, saysThe Economist. Only three weeks beforethe government had insisted it wouldmeet all current and future obligations onits $80bn or so of debt (although someanalysts reckon about the same sum ishidden off balance sheet). And shortlybefore the announcement it revealed that

it had just raised a further $5bn fromAbu Dhabi, the capital of the UnitedArab Emirates (UAE), which had stumpedup $10bn for Dubai in February. With nofurther details likely to arrive until thisMonday due to the holiday, uncertaintyover Dubai’s finances, Abu Dhabi’ssupport for Dubai and banks’ exposure tothe region spread rapidly.

The cost of insuring sovereign Dubai debtagainst default, as measured by themarket for credit default swaps, rocketedto Icelandic levels, reaching an annual$650,000 for every $10m of debt issuedfor five years (see chart). Risk aversionreturned to world markets, with Europesuffering its worst rout since April latelast week and oil sliding by $3 a barrelon Thursday. Dubai’s “failure tocommunicate decisively and promptlywith the capital markets on which it relieshas left its ambition of becoming acredible financial services hub in tatters”,says Lex in the FT.

On Monday when UAE markets opened,Dubai and Abu Dhabi fell by 7% and8% respectively, but globally calm beganto return. Dubai confirmed that it wouldnot guarantee Dubai World’s debts, butthe latter said it was working onrestructuring $26bn of debt – much lowerthan the $60bn rumoured during thenews blackout.

Oil-rich Abu Dhabi, which has theworld’s largest sovereign wealth fund,with $630bn of assets, looks set to offerDubai support – albeit on a case-by-casebasis and at the price of establishing moreinfluence over the emirate. The UAE

central bank in Abu Dhabi established anemergency liquidity facility for local andforeign banks, allaying fears thatfrightened investors would pull theirmoney out and leave banks high and dry.The UAE’s move will help avert a“Lehman-style” liquidity squeeze, saysGreg Gibbs of Royal Bank of Scotland.

A new financial crisis?Fears of a new global financial meltdownamid a Dubai default are overblown, saysWalter Molano of BCP Securities. Dubaiisn’t of systemic importance, as LehmanBrothers was. And foreign banks’exposure looks manageable, adds Lex.Credit Suisse estimates that European

Debt repayments on the palm island land reclamation project are

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www.moneyweek.com 4 December 2009 7

the markets

The price of bulbs hasn’t rocketed like thissince the Dutch tulip mania in the 17thcentury. Garlic has become China’s latestbubble, with wholesale prices up fourfoldnationwide. In Shandong province, China’slargest garlic-producing area, they haverisen 40-fold. Garlic is now China’s best-performing asset this year. Part of theexplanation lies in supply and demand.When the global recession hit last year,Chinese farmers reduced cultivation byaround 50%, while the widespread beliefthat garlic can ward off swine flu hasstoked demand. But “there appears to bemuch more demand from speculators thanconsumers”, saysThe Economist.

Speculators, drawing on abundant liquidityin the system stemming from thegovernment-induced lending spree, areplaying the small market by hoardingsupplies and bidding up the price, saysMorgan Stanley’s Jerry Lou. “Wheneveryou have too much bank lending, theliquidity spills everywhere”, he says.Garlic is “just the area of the moment”.This is certainly consistent with newsreports from Shandong, saysRobert Cookson in the FT. Banks and cashmachines have apparently run out ofmoney amid “frenzied trading”.

ut so are we China’s ‘frenzied’garlic trading

FTSE 100NikkeiS&P 500NasdaqCAC40DaxDollar per euroPound per euroDollar per poundGoldBrent Crude Oil

% change

**-0.531.780.080.60-0.51-0.09-0.140.12

-0.19-0.553.17

*02 Dec ** since 25 Nov

*5336.539608.941110.932190.293789.875798.00

1.510.911.66

1179.5079.35

Vital numbers Best and worst-performing shares

Weekly change to FTSE 100 stocks. Prices as of 2/12/09

Losers % change Price

Lloyds Banking Group (LLOY)-15.39% 53pLegal & General (LGEN) -10.68% 76pLondon Stock Exchange (LSE)-8.47% 746pRoyal Bank of Scotland (RBS) -6.19% 34pBarclays (BARC) -5.94% 298pOld Mutual (OML) -5.69% 114pAviva (AV.) -4.43% 377pKingfisher (KGF) -4.41% 236pAB Foods (ABF) -3.98% 797pStandard Chartered (STAN) -3.48% 1,551p

Winners % change Price

Lonmin (LMI) 5.41% 1,911pXstrata (XTA) 4.65% 1,148pRio Tinto (RIO) 4.64% 3,292pCompass Group (CPG) 4.57% 446pAmec (AMEC) 4.15% 829pEurasianNat Resources (ENRC) 3.92% 916pVedanta Resources (VED) 3.73% 2,445pG4S (GFS) 3.39% 256pTullow Oil (TLW) 3.35% 1,294pMarks & Spencer (MKS) 3.08% 398p

banks account for half of Dubai’s debt ofapproximately $80bn. If they lose 50%on this, bad loan provisions will jump by5% next year, implying a e5bn euro hit,a “drop” compared to the near $2trnglobal banks have already written off.British banks are the most exposed to theUAE, with $50bn of the $123bn foreignclaims on it. But “they will not bederailed” by Dubai. Dubai is the “longoverdue consequence of the bursting ofthe global property bubble”, says CapitalEconomics, not “a new financial crisis”.

The spectre of sovereign defaultsThe important point about Dubai is that“it’s a reminder of two unpleasant

realities” that investors have neglected,says Stephanie Flanders on Bbc.co.uk.One is that “there is still plenty of badnews” to come. The IMF recently saidthat global banks are less than halfwaythrough their credit-crunch losses,with up to $1.5trn still to come, saysJeremy Warner in The Daily Telegraph.The latest worry is a “tsunami of redink” forming in the US commercialproperty sector, says Michael Panzner onDailymarkets.com. The losses to come inturn highlight the contrast between therapid market recovery and the still shakyglobal fundamentals.

The second major issue is the worry thatgovernments may have “bankruptedthemselves” by bailing out the worldfinancial system, says David Smith inThe Sunday Times. The potential defaultin Dubai has revived fears of sovereigndebt crises all over the world.

You can see why, says Warner. These are“uncharted waters, quite withoutprecedent in peacetime”. Moody’s reckonsthe total stock of government paper,mostly issued by advanced economies,will have jumped by 50% between thestart of the crisis two years ago and theend of 2010 – and will then climb byanother 50%. The worry is that themarkets could lose patience with all thisdebt and demand higher long-term interestrates before the recovery has taken hold.Moody’s has just warned that Britain mayface a debt crisis next year. So Dubai maybe “in a nasty mess of its own making”,says Tracy Corrigan in The DailyTelegraph, “but so are the rest of us”.

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4 December 2009 www.moneyweek.com8

sector of the week

Big pharma is knackered. Drugmakers have been doing all theycan to keep churning out expensivedrugs. But it’s looking like theirhearts are no longer in it. And whocan blame them? They routinelyspend billions on developingwould-be blockbuster drugs, onlyto see the authorities fail them insafety trials. Even if they do gettheir drug to market, they havejust a few years to recoup theirmoney before their sales aresavaged by cheap generic versions.

So it’s little wonder, says TurnerInvestment analyst HeatherMcMeekin, that the number ofnew applications for approval submittedby drug-makers has fallen by more than20%. Nor that the industry is slashingspending on drug research. The creditcrunch saw small biotechs shutting labsand turfing out scientists. And now thepharma majors are upping sticks andmoving to China to cut costs, says SamCage on Reuters. Novartis plans to spend$1bn on drug research in China, whileGlaxo is to increase its sales in developingmarkets by slashing prices on its drugs bya third. In short, the big playersincreasingly want to make and sell cheapdrugs in bulk, and not have to fret aboutsatisfying the demands of the US Foodand Drug Administration.

So is the era of costly blockbuster drugsending? Not yet. There is a solution tobig pharma’s drug nightmare – offload

the research. Just as the car industry didin the 1970s, it’s possible it can save itselfa fortune by outsourcing costly tasks tospecialists. A whole industry has alreadysprung up to support drug testing, with500 research groups competing forcontracts. There are early-stage developersconducting chemistry and animal testingin their labs before drugs are tested onhumans. These are short contracts,typically bringing in less than $2m.

Then there late-stage developersrecruiting human volunteers andmanaging the demands of the drugauthorities. These contracts can add upto $100m in total and last for years.Altogether, by the end of last year, thesecontract researchers had taken on around$18bn worth (or 26%) of the annual$70bn spent on research in the industry.

This year, there haven’t been asmany contracts to fight for. As therecession bit, big pharma wasquick to call off early-stageprojects and direct spending intothose close to commercialisationinstead, says Morningstar analystLauren Migliore. Pre-clinical workwas hit hardest – early-stagespecialist Kendle International hada 45% cancellation rate in the firstthree months of this year.

But the industry will soon thriveagain. Over the next two years,nearly $70bn in sales will be lostas patents on branded drugsexpire. So the big drug groupsmust step up the drug discoveryprocess next year to refill their

pipelines, which means outsourcing moreresearch. Also, it will be a while beforeemerging markets’ sales and profits canmake up for lost sales at home. Even ifGlaxo slashes the price of its drugs, theystill won’t be that affordable (the averageworker in China still lives off a salary of$2,000 a year). So cutting costs at theresearch end to feed through to consumersis important.

Finally, we’re living in an era of medicalbreakthroughs. We’ve decoded the humangenome and realised the potential of stemcells. These fields alone will keep druggroups and pharma services firms busyfor decades. Pharma outsourcing willexceed $26bn by 2011, says marketresearch firm Kalorama. That’s 8% growtha year. We look at one contract researchgroup set to rebound in the box below.

Making big profits from drug research

Profit as drug giants farm out testingby Eoin Gleeson

Pharmaceutical giants are outsourcing to China to cut costs

Contract research leader Covance (NYSE:CVD) has held up strongly this year, thanksto a surge in late-stage testing contracts,which has more than made up for thedrop-off in early-stage activities. It has nowrisen 53% since we tipped it in March.Given that it is trading on a rich forwardp/e of 17.6, now looks a good time to takeprofits and redeploy them into a recoveryplay in the industry.

Icon (Nasdaq: ICLR) has had a tougher year, with salesdropping 2.3% in the last quarter as both its early- and late-stage contracts took a hit. Research and development spendingby its clients has fallen 7% over the past four quarters, says

Goodbody Stockbrokers. However, thegroup managed to grow its operatingmargins by 13.8%, as it slashed staff andadministration costs. Icon takes ondevelopment work over all clinical trialphases, operating in 68 locations across 38countries. Employing scientists locatedacross the world allows research groups tosource cheap scientific expertise and keepprojects operating around the clock.Roughly 40% of its $880m annual revenues

comes from outside the US, and it has a strong competitiveposition in Japan. It trades on a forward p/e of 13.9, and isexpecting to enjoy earnings growth of 11% next year.The grouphas $173m cash and total debt of $28m.

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4 December 2009 www.moneyweek.com10

who’s tipping what

Tip of the week:Pennon (LSE: PNN), rated a BUY byThe Daily TelegraphWater companies have for years beenviewed as ‘widow and orphan’ stocks intimes of crisis, delivering decent overallreturns for low levels of risk. But over thepast 12 months, that view has been tested.Utilities have underperformed the broaderFTSE 100 by 20% and fared worse thaneven the battered banks. Why?

Firstly, the availability of finance hasshrunk, causing concern over futureborrowing costs. Secondly, profits havebeen trimmed as factories use less waterand households incur bad debts throughbeing unable to pay their bills. Finally,this July industry regulator Ofwat issueda draft proposal to slash prices in realterms for the five-year period endingMarch 2015. That has raised fears ofrights issues and dividend cuts.

That said, the sell-off looks too harsh.Indeed, it presents an opportunity to buyPennon, the owner of South West Water,which supplies water and sewerageservices to 1.65 million homes in Devon,Cornwall, parts of Dorset and Somerset.

Reassuringly, this region contains nomajor manufacturing centres and hencehas been hit less hard by falling demandand defaults. In fact, due to the recession,it has even benefited from risingconsumption as more families havedecided to take holidays in Britain.

For example, in the first half of 2009, theboard reported that, “cash collection wasin line with previous years” and “thedivision continues to operate efficiently,with £13m of cost savings achieved aheadof schedule”. Better still, in a high-profileclimb down last Thursday, Ofwatamended its earlier tough stance andallowed the sector to charge more forits services.

However, Pennon is not just anundervalued water story. The group alsoowns Viridor, one of Britain’s largestwaste treatment (covering landfill andrecycling) and renewable energy (thegeneration of electricity from landfill gas)providers. But it suffers from beingunappreciated by the City. That’s despitethe fact that the division should achieve

strong sustainable returns in light of thetighter regulatory environment, combinedwith a shortage of quality treatmentplants. For instance, in April Viridorbegan work on western Europe’s largest-ever municipal waste contract with atotal value of £3.8bn. It will process 1.3million tonnes of rubbish per year until2034 for Greater Manchester council.

So how much is the group worth? On asum-of-the-parts basis, I would rate SouthWest Water on one times its regulatorycapital base of £2.5bn. This has been setby Ofwat and dictates the level of return

Unloved Pennon offers shelterfor defensive investors

Paul Hill, professional analyst and value investor, picks the best – and worst – tips fromthe press and brokers’ reports, and suggests a share for the brave

The majority of UK civil engineers, such as Balfour Beatty,Carillion and Costain, are in the doldrums – despite hugeorder books and solid balance sheets.This reflects investorconcerns about what will happen to infrastructure spendingafter the next general election. It is certainly likely to be cut,but I don’t think we’ll see the Armageddon-type scenarios thatare currently factored into some lowly share prices. After all,many planned investments in areas such as nuclear power, the2012 Olympics, building for schools, water treatment plantsand high-speed rail links, are key components of Britain’s long-term future.

Although GallifordTry is perhapsmore famous forits social andresidentialhomebuildingactivities, morethan 85% of itsprofits aregenerated from itscivil engineeringdivision, MorrisonConstruction. At the last count it had a whopping £1.75bn orderbook, providing cover for 80% of its targeted revenues for theyear ending June 2010.

Gamble of the week:Galliford Try (LSE: GFRD)

Pennon560540520500480460440420400380360

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shareholders can expect. Taking accountof better-than-expected cost savings, offsetby net debt and pension deficits of £2bn,I arrive at a fair value of about £5.65 pershare. What’s more, the 4.2% dividendyield looks secure due to excellentearnings visibility, and I believe there islittle need for a rights issue.

Overall, I would rate Pennon as a soundbuy for more defensive investors wishingto shelter from the sandstorms caused bythe recent debt default in Dubai.

Recommendation: BUY at 520p

Turkey of the week:Tullow Oil (LSE: TLW), rated a BUYby NomuraThe oil price has been a volatility trader’sdream over the past two years. After risingto $145 per barrel in mid-2008, the pricecrashed to below $40 in December.It has since doubled, leading some gung-ho pundits to claim that it will soon gushthrough the $100 barrier.

This seems unlikely, as the fundamentalsremain poor. Demand from heavypetrochemical users is lacklustre,inventories are at record levels, andOpec has plenty of spare capacity.So I think oil should be trading ataround $50-$60 per barrel. Anythinghigher is pure speculation.

So what about Tullow Oil, which has seenits shares nearly triple over the past 12months? This independent oil and gasexplorer was founded in 1985 by thecurrent CEO, Aidan Heavey, and hascompleted two key deals over the past fiveyears. First it bought the North Seainterests from BP in 2000 and then itpurchased Energy Africa in 2004. Thatdeal gave it a substantial footprint in westAfrica. The firm’s existing production ispumping oil at about 58,000 barrels perday – 66% oil and 34% natural gas.

However, even this output, along with thedevelopment of the associated fields, onlyaccounts for about 25% (or £3) of thecompany’s share price. The other 75% ofTullow’s valuation is built on the bullishestimates being applied to its riskyexploration licenses and its reserveslocated in frontier countries such as SierraLeone, Ghana and Uganda.

Tullow’s business model is built on itbeing a ‘wild-catter’. It explores anddiscovers new hydrocarbon deposits, andthen off-loads the rights on to the oilmajors, who later make money fromthem. For instance, last Tuesday HeritageOil, Tullow’s partner in Uganda, disposedof its entire interests to Eni of Italy for$1.5bn. That works out at about $5 foreach proven, but not yet developed, barrelof oil. Although this might seem low, itreflects the enormous subsequentinfrastructure costs associated withdeveloping such inhospitable fields.These include a £2bn export pipeline tothe coast, along with a new £5bn refinery.

In fact, this deal provides an excellentreference point for estimating the value ofTullow’s future drilling rights in theregion. By combining the $5 per barrelyardstick with an assumed crude price of

$55 per barrel, I would value this FTSE100 wild-catter at about £9 per share.That’s 25% below today’s price.

So, although the firm owns several qualityassets and has of late had a terrific run ofexploration successes, it’s time to takeprofits. Plus there is a danger that if theboard fails to offload some of its licensesthen it may have to tap shareholders forfurther funds – given its net debt(adjusted for cash balances) of £664m andchunky capital expenditure plans.

Worse, there is a chance of politicalinterference in some of its wild-westoperating territories. For example, alocal government may decide torenegotiate Tullow’s contracts afterRussia’s success in bullying BP and Shell.

Recommendation: SELL at £12.94

Paul Hill also writes a weekly share-tipping newsletter, Precision GuidedInvestments. See www.moneyweek.comor phone 020-7633 3634 for more.

www.moneyweek.com 4 December 2009 11

who’s tipping what

Furthermore, this coveted division has won a raft of newcontracts over the past six months, including prestigious workwithin the water, rail, education, prison, healthcare and hotelindustries. Financially, the group is in fine shape too, afterraising £119m in a seven-for-six rights issue at 285p in October.That leaves it with net funds (spare cash after deducting debt)of £153m, equivalent to 186p per share. Additionally, analystsare forecasting 2010 sales and underlying operating profits of£1.4bn and £20m respectively.

After adjusting for the firm’s cash pile, that puts the stock on amiserly enterprise value to earnings before interest andamortisation (EV/ebita) multiple of less than five – far too lowfor a quality firm that also offers a 3.4% dividend yield. As forrisks, one of the biggest is that management will fritter away the

proceeds from the rights issue when buying more land for itshouse-building arm.That’s possible, particularly if we see asecond downturn for the property market.

However, I believe the board is fully aware of this danger andwill instead play a waiting game – patiently picking up real-estate as distressed sellers are forced to bail out at rock-bottomprices.The firm is also exposed to the regulatory risksassociated with managing long-term public sector contracts.For example, it was fined £8.3m (which it has appealed) by theOffice of FairTrading in September following a crackdown onprice-fixing. But given the severity of the recent sell-off,Galliford still rates as a buy for more adventurous investors.

Recommendation: Speculative BUY at 306p

Tullow Oil

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4 December 2009 www.moneyweek.com12

investment strategy

Anthony Bolton is back. “I’ve decided togive up sitting on the beach,” says the59-year old fund management veteran,who is off to Hong Kong to launch a newChina fund in early 2010. He’s convincedthat “China is the investment opportunityof the next decade”. Given hisphenomenal track record, few are bettingagainst him. But we think Bolton’s newfund may not be the best bet for investors.

Bolton’s big track recordThere’s no disputing Bolton’s CV. Duringa 28-year spell in charge of the SpecialSituations fund at Fidelity, he achieved anaverage annual return of 19.5%,compared to 13.5% for the FTSE All-Share. So a £1,000 lump sum investedwhen he set up the fund in 1979 wouldhave grown to £148,200 by now.He’s also made some impressive calls sincestepping down, such as urging investors tobuy shares as the market came off its lowsin March. But his approach to investingmay face big headwinds in China.

Finding value will be toughBolton is a turnaround specialist. “Thishas been my biggest area over the years,”he once said to the FT. At Fidelity he hada knack of finding stocks that had beenabandoned by the rest of the market.To help him, he likes value ratios.

As he told the FT, he initially hunts for alow price-to-earnings (p/e) ratio, measuredagainst the average for the last 20 yearsand a firm’s peers. His also likes a lowtarget p/e looking ahead two years. But inChina, this looks like a big ask. Beijing’s

Don’t follow Bolton into China

Bolton’s track record may fail him in China

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rampant stockmarket has rallied over70% since the start of the year, liftingaverage p/e ratios from 10.4 to just shy of17. Even Bolton admits that “the bargainphase is over”. And although he believesthat it is too early to say China is in abubble (even as the economy grows at aneye-popping 8.9% per annum), hisconfidence isn’t matched by China’scentral bank, which said on 18 Novemberthat the country faces simultaneousproperty and commodity bubbles.

Bolton uses a number of other key valueratios too, such as price-to-book value.The trouble is the accounts of manymainland Chinese firms can be prettyopaque, even if an outside investor withBolton’s clout can get full access. Thatmakes crunching even basic ratios tough,let alone some of the more complex oneshe uses. Meanwhile, many of the firms hemight buy that have Chinese operationsbut are listed in Hong Kong or Singapore(subject to stricter disclosure andaccounting rules) are expensive.

And thanks to the recent measures takenby the Chinese government, findingturnaround plays will be nigh onimpossible. Almost every share has beenpumped up on a wave of interest-rate cuts(five since September 2008), government

spending and enforced lending (of up to$1.3trn). Little wonder that four ofChina’s banks were ordered this week toseek new capital in a bid to shore up theirsolvency ratios.

It’s not a great time to buy ChinaAnother plank of Bolton’s technique isgreat timing. For example, when otherinvestors were dumping them, Boltonbought shares in the likes of Next,Provident Financial and, more recently,troubled media player ITV. He is also afan of charting – he uses it to avoid stocksthat have the momentum of the marketbehind them and are therefore alreadypopular with investors. So if Mr Marketis buying, Bolton often wouldn’t be.

Yet China presents problems here too.First, it is already popular. So much hotmoney is flooding in – $141bn inSeptember alone – that Beijing is said tobe mulling over currency restrictions. Andjoining that rush looks unwise. ProfessorElroy Dimson of London Business Schoolhas analysed 100 years of data to 2009and concludes that “if you buy intocountries that are classified as being highergrowth, you will probably overpay”.

The best in China too?As Adrian Lowcock of Bestinvest puts it,“Anthony Bolton’s fund is going toattract a lot of attention and money but itis unlikely to be suitable as an investorcore portfolio”. Bolton has “anoutstanding track record in the UK, butnot purely in China, and they are verydifferent”. Sure, his previous spells inspecial situations investing occasionallytook him into China, but this time he willbe up against “a number of highly-experienced fund managers, includingMartin Lau, who has been running theFirst State Greater China fund (up 180%over five years) for eleven years”.

Finally, a lot of Bolton’s edge comes fromgetting close to local management at thefirms he buys. That takes time, yetBolton’s minimum new term is just twoyears. And while China looks a greatplace to invest in for the long term, thenext two years look to be a dangerousentry point. Martin Bamford of InformedChoice notes that, “investors will followBolton blindly into any fund hemanages”. But this time round, even ifyou can (the fund will be heavilysubscribed), you probably shouldn’t.

“Finding Chineseturnaround plays will

be nigh on impossible”

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4 December 2009 www.moneyweek.com14

personal view

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2009

The Chinese economy has roared back into life.GDP growth accelerated to 8.9% year-on-yearin the third quarter of 2009, thanks to thequick action taken by the Chinese governmentand the central bank relatively early on in theglobal financial crisis. Swift cuts in interestrates, a government-induced surge in banklending and fiscal measures worth US$586bnwere all aimed at keeping the country on trackfor several more years of strong growth.

The Chinese authorities have taken three keysteps to change the economy in a remarkablyshort period of time. Firstly, they have boosteddomestic demand for electronics and carsthrough government subsidies. Secondly, theyhave brought forward planned capital spendingprojects. Finally, they planned more reformsacross diverse sectors, such as healthcare,education and the environment. Following itsinitial success, the government may now beginto step back and reduce the economic adrenalinit has been pumping into the system. However,I believe China will continue to improve itsinfrastructure and enhance its economic andenvironmental performance. That will be goodnews for my three stock picks.

China’s emergence as an economic power hasproduced some undesirable side effects. Rapidindustrialisation prompted hundreds of millionsof people to move from rural areas to cities.This created energy and water shortages, aswell as pollution. Indeed, more than 400 citiesare reported to be suffering from watershortages, exacerbated by pollution andinefficient water use. So Beijing EnterprisesHoldings (HK:392) is busy expanding its watersupply and sewage-treatment capacity byacquiring underperforming assets and turningthem around. In addition, the companyrecently persuaded a local government in

Hainan Province to let it operate its waterproject. If this goes well, the firm may winfurther similar projects.

One of my long-held beliefs is that China willimprove its energy efficiency and reduce itsadverse environmental impact by investingin new technology as it dismantles oldinfrastructure. This process is being driven bynational and provincial governments as well asthe market. China’s industrialisation andinfrastructure development have in the pastrelied on systems developed by foreignmultinationals. However, this is changing andinternal solutions are increasingly being usedfor key industries such as nuclear-powergeneration and transportation, whereexpenditure is set to balloon. HollysysAutomation Technologies (NASDAQ:HOLI) iswell placed to benefit from this trend.It provides industrial control systems, railwaysafety and signalling systems, and automationequipment for nuclear power stations.

Lastly, China Taiping Insurance (HK:966) is awell-managed, rapidly-growing multi-lineinsurer. Its life assurance subsidiary, TaipingLife, is seeing the strongest premium growthwithin the industry, helped by its focus onhigher-margin policies. The firm’s non-lifeinsurance business has recently merged withMing An, the fifth-largest non-life insurer inHong Kong, and some synergy effects areexpected from this acquisition. The insuranceindustry in China is at a very early stage ofdevelopment, and with its strong managementteam I expect China Taiping Insurance to enjoyrobust business growth in the long term.

A professional investor

tells MoneyWeek where

he’d put his money

now. This week:

Philip Ehrmann,

manager of the

Jupiter China Fund.

Three plays on China’s growthWhat I would invest in now

The stocks Philip Ehrmann likes12mth high 12mth low Now

Beijing Enterprises HK$52.50 HK$25.11 HK$48.95Hollysys Automation Tech $13.48 $2.00 $12.90China Taiping Insurance HK$30.20 HK$8.30 HK$30.15

464_MW_P14_Personal View:Layout 1 2/12/09 14:41 Page 1

091127_297x210_GOLD_MW.indd 1 20/11/2009 10:13:03

the government is waking up to the factthat manufacturing is crucially importantto the economy and plays a key part inregional regeneration. Yet Britain justdoesn’t invest in manufacturing as othercountries, such as the US and Germany, do.

Is this a new problem?No. The UK has quite a track record infailing to back its world-leading scientistsand innovators with capital investment.And there have been no shortage ofgovernment initiatives to tackle theproblem. For example, Britain’s best-known private-equity giant, 3i, has itsroots in a corporation set up by theBank of England in 1945 to providefinance to smaller firms. At that time, thegovernment’s aim was to plug the so-called“Macmillan gap” (named after aneponymous report in 1931) in theprovision of capital to new businesses.

That gap still exists. However, last week’s report from theNational Endowment for Science, Technology and the Arts(Nesta) confirms that we are still great innovators.

We’re good at inventing?Very. Indeed, innovation is vital to British business – Nestareckons it is responsible for two-thirds of private-sectorproductivity growth between 2000 and 2007. But what is“innovation?”. If you simply take spending on research anddevelopment as a proxy, then Britain doesn’t score that well.But Nesta includes several other factors in its nascent InnovationIndex, including spending on software, design, the development,organisational skills and brand equity. Nesta reckons that bringsa total investment in innovation of £133bn in 2007, or 14% ofprivate sector Gross Value Added. On this measure, Britaincomes second only to Finland in a group of eight rich countries.And in a separate EU study, Britain was ranked fifth out of the27 member states as an “innovation leader”.

So what’s the problem?We only rank seventh out of nine economies when it comes

to ease of access to funds.In short, we generate plenty ofgood ideas, but often don’tback them. Sure, Britainappears to have a thrivingventure capital sector (theconcept has even spawned thetelevision series Dragons’ Den),but it is tiny compared to, say,the United States or Germany.So, outside capital-light sectors,such as financial services, manyof our best ideas (eg, thecomputer and the iPod) end upin overseas hands.

4 December 2009 www.moneyweek.com16

investment briefing

Can a new government fund to boost investment in innovative start-ups actually helpBritain’s beleaguered economy, asks Simon Wilson?

What’s the new fund all about?The UK Innovation Investment Fund(UKIIF) “will be “bigger than otherEuropean venture capital funds”, claimsthe science and innovation minister,Lord Drayson. The aim is to make it easierfor start-ups in key sectors, such as lifesciences, low-carbon technologies anddigital and advanced manufacturing, to getaccess to equity funding. The new fund willhelp British scientists and entrepreneursconvert their ideas into flourishingbusinesses. Once a management team is inplace (the government is currentlyconsidering tenders) UKIIF will operate asa ‘fund of funds’, channelling money intoother venture capital funds and thus, ithopes, fostering “a climate of innovationand enterprise in the UK and Europe”.

Why launch the fund now?Lord Drayson – himself a successfulbiotech entrepreneur turned politician – says he wants to clearthe “capital blockage” that makes it hard for high-techentrepreneurs to get their hands on capital. After a global creditcrisis and recession, that problem is more acute than ever –especially for small and medium-sized enterprises looking forfinancing of up to around £2m. The British biotechnologysector, for example, has had a terrible year. The roll call ofinnovative firms now in administration as banks rein in lendingis growing daily. It includes the likes of Renovo, Intercytex,Alizyme and York Pharma, all until recently considered brightprospects. Meanwhile, as the UK languishes at the bottom of theG20 after a record six successive quarters of recession, the CBI’sRichard Lambert has called for a “rebalancing” of the Britisheconomy away from financial services, consumption and creditand towards investment, innovation and exports. In short,Britain needs to revive manufacturing.

Don’t we already do manufacturing?Not like we used to. These days, the sector only accounts for15% of Britain’s GDP (adding £150bn to the economy eachyear). However, it makes a hefty contribution to overseas trade,accounting for half of all UKexports. Moreover, as thesector has slimmed down insuccessive recessions over thepast several decades, its outputhas become increasingly high-tech. Productivity has shot up50% since 1997, outdoing therest of the economy. Jobs in thesector are increasingly high-skilled and well-paid and arespread throughout the country,rather than clustered in onecorner of it. So, having been inhock to the banks for a decade,

Lord Drayson: helping high-tech entrepreneurs

Can Britain revive manufacturing?

Will the new fund solve the problem?It’s unlikely. The government has put in just £150m, but ithopes to attract private-sector income and build the fund to£1bn over ten years.That could be a big ask.The new UKIIFlooks similar to the English regional venture funds launched in2002. So far, those have accessed only £74m of public money,says RichardTyler inThe DailyTelegraph. And there’s already a£75m Capital for Enterprise Fund that lets small and mediumenterprises exchange debt for equity stakes, and the enterprisefinance guarantee scheme providing loans of up to £1m.So this fund looks more like a headline grabber than a cure all.

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NW000119 11_09 MONEYWEEK:NW000119 11_09 MONEYWEEK 30/10/09 11:26 Page 1

18 4 December 2009 www.moneyweek.com

opinion

Stand in themiddle of anyhigh street inBritain thisweekend andyou’ll seehundreds ofpeople handingover smallstrips of plastic.In exchange,they’ll be takinghome bags full

of toys, clothes, books, games, and all theother things they plan to give to theirfamilies on Christmas Day. But one inevery £10 spent on all those credit cardswon’t ever be paid back.

Britain, in common with many othercountries, is sleep-walking into a credit-card crunch. Much of the country is stillspending wildly on credit cards, livingway beyond its means, and indulging ina fantasy prosperity, wilfully encouragedby irresponsible bankers. Sometimesoon, there will be a Dubai moment – apoint where everyone realises that thewhole edifice is built on sand. Whenthat happens, there will be a nasty hit toconsumer spending and a lot of red inkfor the banks. And the flimsiness of theeconomic boom in the UK during thepast decade will be painfully exposed.

Credit-card debt is now a huge part ofthe British economy. In 1992, accordingto the Bank of England, the Britishwere borrowing around £2.8bn a monthon credit cards. Now it is above £10bna month (£1 today equates to 64p in1992). It peaked last December –one final festive splurge before thecredit crunch hit, perhaps – when wespent £12.1bn of plastic money wedidn’t have.

Sure, credit cards are a way of paying forthings as well as a way of borrowingmoney. And at least some of us pay offthe balance every month. But thebalance of credit-card debt is still rising.The latest monthly statistics, published onMonday, showed a slight decline inoverall consumer debt. Yet despite thatfact, outstanding credit-card debt stillrose by £134m. Overall, the amount ofdebt owed on British credit cards is nowclose to £60bn.

We don’t know precisely how that willplay out in a recession. In the lastdownturn, in the early 1990s, only about£10bn was outstanding on credit cardsand defaults peaked at 4%, beforedropping back to 2%. But so far the signsaren’t good. According to the ratingsagency Moody’s, the charge-off index (thetechnical term for spending on your cardand not paying the money back) hit anall-time high of 11.8% in September,having doubled since the first quarter of2008. Nor does the agency reckon theoutlook is very encouraging – it haswarned that a second splurge inChristmas spending may well triggeranother spike in bad debts in the earlypart of the new year.

Unemployment – forecast to rise steadilythrough next year – will push even morepeople to the point where they can nolonger meet the payments on their cards.Don’t be surprised if the rate at whichpeople are reneging on their debts tickssteadily up to 13% or 14% as 2010progresses. The conclusion is simple. Asignificant minority are clearly spendingmoney they don’t have, and have noserious prospect of earning either. Sadly,the law makes it easy to rack up debtsthen walk away from them. When yourcredit-card debts become unaffordable,

simply declare yourself insolvent.Figures for the latest quarter showpersonal insolvencies up year-on-year by28%, and now running at the highestlevel since records began in 1960.

So far, the banks have just aboutmanaged to get away with it – by passingthe costs on to responsible customers.As interest rates have tumbled, those forcredit cards have barely changed, pushingthe margins up to 15% or more betweenwhat it costs banks to access money andwhat they charge people for borrowing it.That has allowed them to maintain theirprofits despite the hammering they aretaking on bad loans. Barclaycard, forexample, managed to increase its profitsslightly this year, despite a doubling ofbad-debt charges.

The trouble is, that was a one off.Sooner or later, the banks are going to bedrowning in a sea of unpaid loans.They can’t keep passing the cost on to therest of their customers in higher interestrates and higher charges. And thewholesale markets are going to takefright. Just like sub-prime mortgages,credit-card debts are bundled up and soldaround the world. But who will want toown British credit-card debt when one in£10 doesn’t get repaid and you have nolegal sanction against the borrower, norany kind of asset you can call upon?

At some point, this bubble is going toburst. Many credit-card lenders will haveto withdraw from the market – in muchthe same way as most of the self-certificate, buy-to-let mortgage lendershave done. The rest will have to curtailtheir lending, insisting on better creditrecords, and perhaps even demandingsecurity for their loans. That will triggera big hit for the British economy.Right now, at least £1bn a month ofconsumer spending is plastic money thatis simply magicked out of thin air.

Add to that the fact that one in every £4spent by the government is money that issimilarly magicked from inside acomputer at the Bank of England and theextent to which the British economyexists in a twilight zone of pretend moneybecomes painfully clear. At some point itwill disappear – and when it does, theresults won’t be pretty.

When the credit-card crunch hits, we’ll findthat Britain is built on monopoly money

Matthew Lynn

One in every £10 spent on a credit card isn’t repaid

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www.moneyweek.com 4 December 2009 19

best of the financial columnists

“It keeps me awake atnight. I find myselflooking at the bricks,touching them, countingthem – even thinking,‘Are there enough?’”Comedian MichaelMcIntyre (above) on

buying his first home for£3m, quoted in

The Mail On Sunday

“My husband now ownsfour banks and that incursa lot of paperwork.”

Maggie Darling speakingabout her husband,

Alistair Darling, quoted inThe SundayTimes

“If you want to open asupermarket chain and putyour face all around theglobe, selling your babyand your dog, who am I to

disagree?”Singer Annie Lennox on

the celebrity world, quotedinThe Sunday Express

“I realise money can’t buyyou happiness, but it canbuy you things you enjoy.”Author Mark Billingham,

quoted inThe SundayTelegraph

“I’m all for taxing the richto help the poor.”

Comedienne Helen Lederer,quoted in

The SundayTimes

“I consider my entiremovie career a complete

failure.”Actor Alec Baldwin, quoted

on Bbc.co.uk

Money talk‘Tar barons’have capturedCanada

George Monbiot

The Guardian

Beautiful, cultured Canada is becoming a “corrupt petro-state” that“threatens the well-being of the world”, says George Monbiot.The government has dumped Kyoto and will try to wreck the talks inCopenhagen next week. Why? Canada is developing the world’ssecond largest reserve of oil or tar sands, a “filthy mix of bitumen,sand, heavy metals and toxic organic chemicals”. To mine the sands,an area of pristine wilderness the size of England will be dug up.To extract oil, the sand needs to be heated and washed, producingtoxic lakes that poison wildlife and people. So energy-intensive is therefining process that Alberta’s operation is the world’s biggest singleindustrial source of carbon emissions. But “Canada hasn’t acted alone”.The biggest leaseholder is Shell. BP has also invested in processingplants. Meanwhile, Royal Bank of Scotland, 70% of which we own,has lent or underwritten £8bn. The “tar barons of Alberta” havecaptured Canada and are holding it to ransom. They must be stopped.

UK chocolatelovers won’tturn to BNP

Dominic Lawson

The Independent

Fears that British jobs will be lost, or that we will all have to eatinferior American chocolate should Kraft take over Cadbury are“ridiculous”, says Dominic Lawson. Economists at NottinghamUniversity argue that British workers actually benefit from foreigntakeovers. Their survey of 336 foreign acquisitions found that thewages of skilled and unskilled workers rose in the year after atakeover. Indeed, had our government blocked foreign ownership,there would be no Ford, GM, Nissan, Toyota or Honda plants inBritain and instead, “one vast loss-making British Leyland”. As forthe taste issue, we have little to “boast about”. Cadbury’s chocolatehas so vague a relation to cocoa that it was tough to persuade the EUto let us call it chocolate. Doubtless the same “sugary-oily mess”would be churned out under Kraft. Nor would the takeover prompt amass defection to the BNP. “However many Cadbury’s bars” theBritish public has ingested, “they can’t be that stupid”.

EU ignoresthe mood ofausterity

Editorial

The Wall Street Journal

The European Central Bank has been “wagging its finger at memberstates”, demanding they slash their spending, says The Wall StreetJournal. But the European Parliament is “eschewing” the new moodof austerity – every area of its budget is to be increased in 2010.That’s partly to award inflation-busting 3.7% pay rises to its 40,000staff. And although it “makes great play of the need to stimulateeconomic recovery”, in 2009, “when economic recovery was certainlyrequired, 45% of the EU’s spending went on agriculture”. There willbe “few hands raised in dissent” over the pay increases: “most ofthose inside the European Parliament want the EU to be bigger andmore powerful, not less”. The notable exception is Marta Andreassen,the EU’s former chief accountant, who was removed from her post in2004 for daring to highlight the EU’s lax spending controls. So whereto start? Perhaps by asking whether the European Parliament’s hugelyexpensive monthly decampments to Strasbourg are really necessary.

Gold’smodernmoment

Justin Fox

Time

That “barbarous relic” gold is having a thoroughly modern moment,says Justin Fox. For the first time since 1971, “when President Nixonunilaterally yanked the world off the gold standard”, gold is properlyon the radar of the world’s central bankers. Indeed, it is “showing signsof a more sustained run at respectability”. In part that’s because it hasbecome easier to invest in since 2004 (thanks to exchange tradedfunds); but it’s also because central banks are losing faith in the dollar.The dollar has been blamed for everything from China’s huge dollarreserves to the crisis of 2007-2008, to the “rampant inflation” thatmany doomsayers insist is on the way. But gold is the “one currency acentral bank can’t print”. Nor is it “beholden to national politics”.Sure, because “supply increases fitfully, with no regard for the state ofthe world economy”, a full return to the gold standard is unlikely.However, expect to see central banks hold more gold as a hedge againstfinancial turmoil and gold beginning to play a role in key tasks such aspricing oil. Gold looks “less barbarous than the alternatives”.

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politics & economics

Given the “exquisite politeness andeven deference” with whichSir John Chilcot is interviewing thecivil service mandarins in the Iraqinquiry, it is “remarkable” howmuch has “quietly emerged”, saysRod Liddle in The Sunday Times.

We now know, for example, thatthe government knew that therewas no evidence to suggest SaddamHussein had any links withAl-Qaeda or Islamic terrorism.We also know that Libya, Iran andNorth Korea were all believed topose more of a threat than Iraq,and that the intelligence services neverproduced any hard evidence that Husseinpossessed weapons of mass destruction.

Indeed, it turns out that Britain was seton course for war after a private meetingwith George Bush in 2002, despitegovernment assurances all along that warcould be averted. No doubt, over thecoming months, these “politeinterlocutors” will hopefully continue toexpose government “chicanery”. But doesany of it really matter any more?

Of course it matters, says Peter Oborne inthe Daily Mail. These testimonies – whichreveal Blair “lied to the public and toParliament ahead of the war” – have“dealt a knock-out blow” to the formerPM’s reputation. But Blair didn’t actalone, and the “biggest question” relates

to Gordon Brown, who was “by far themost powerful member of Blair’s cabinet”at the time. Unfortunately, the weakinquiry team (chosen by Brown to avoidany “properly forensic examination”) is“patently not up to the job”.

It has been suggested Brown appointed so“biased” a panel (key documents are stillbeing withheld) to protect Blair. But eventhat may be “too generous” a view. Witha general election barely six months away,might not Brown be “trying to conceal hisown shoddy role in the greatest politicalscandal of modern times”?

This inquiry isn’t just about Iraq and whois to blame, says Rachel Sylvester inThe Times. The “carefully worded”criticisms of the mandarins aren’t justtheir attempt to distance themselves from

a war now widely seen as amistake, but an attack on Labour’s‘sofa’ style of government. And asignal to a future Tory governmentthat they want to be included. Theymay wish in vain. David Cameronis “at least as cliquey as Mr Blair,and equally reluctant to listen todissenting voices, or the public”.

Well, he should, says Crispin Black,a former intelligence analyst andplatoon commander of the WelshGuards, in The Independent onSunday. As ministers and generalsare rapidly discovering, and as SirJeremy Greenstock, former UN

ambassador, pointed out to the inquiry,public support is necessary for a war’slegitimacy. Although wars already requirethe consent of Parliament, it “rarely actsas a check on the executive because theexecutive controls Parliament”.

But away from the insulated politicalelite, the British people collectively appearto have a sensible attitude to war.They supported the Falklands campaignand, albeit restrainedly, the first Gulf war.They were “rightly suspicious” of Iraqfrom the start and oppose the Afghanwar. Their track record puts Parliament’sto shame.

So in future, let the people decide in areferendum. “We might go to war a littleless than in recent years, but when we didwe would be more likely to win.”

The latest inquiry into the 2003 invasion is weak

Minaret ban smacks of towering bigotry“Disgraceful,” saysThe NewYorkTimes, referring to the SwissPeople’s Party (SVP) initiative to ban the building of minarets inSwitzerland – 57% of voters supported this “bigoted and mean-spirited measure”. Europeans have been growing increasinglyfearful of Muslim minorities, but banning minarets does notaddress any of the problems and is “certain to anger andalienate them”.

The SVP certainly preyed on people’s anxieties, saysTariqRamadan inThe Guardian.Their campaign posters featured awoman in a burka with minarets drawn as bristling weapons ona colonised Swiss flag. But the SVP is not wholly to blame.Over the past two decades Islam has become connected to “somany controversial debates” – violence, extremism, genderdiscrimination – that it is hard for ordinary citizens to “embracethis new presence as a positive factor”. Muslims should be more“positively visible” in their respectiveWestern societies, and

political parties should be more courageous about adoptingpluralist policies. As for the minarets, the ban is “needlesslyxenophobic”, but it doesn’t infringe the religious liberty of SwissMuslims. Minarets were originally designed to relay the prayercall with the unamplified voice; this is no longer necessary.Such “cultural baggage” must be relinquished.

Accept the ban or not (it is likely to be challenged in law), thevote will still have an effect, says Charles Bremner inTheTimes.“’Swiss Made’, the most trusted brand in the world, is at stake”.Gerold Bührer, president of the Swiss Business Federation,reminded the country that it earned £10bn a year from Muslimnations.There are potentially “heavy “consequences, agreesLe Matin.Tourists may be put off and Arab banking clients, uponwhom the Swiss banking sector is increasingly dependent, maywithdraw their money. Egemen Bagis,Turkey’s chief EUnegotiator, has already urged Muslims to do exactly that.

by Emily Hohler

Is the truth about Iraq too little, too late?

4 December 2009 www.moneyweek.com

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politics & economics

At least the temperature in Iran has justdropped a few degrees. Tehran’s releaseof five British sailors who had strayedinto Iranian waters has put paid to fearsthat they would be used “as propagandatools at best, or hostages at worst”, saysRichard Spencer in The Daily Telegraph.That’s lucky, as “Iran’s leadership is inhostile mood, weakened by internaldissent and facing an internationalcommunity unified in its determination tocurtail its nuclear programme”. Newsanctions could be drawn up this monthafter Iran said that it planned to build tenmore uranium-enrichment plants.

This is a mistake, says Simon Jenkins inThe Guardian. Iran clearly plans to builda “nuclear capability beyond what’sacceptable”. But if it decides to “buildand test a bomb, nothing will stop it”.The West, “covered in blood andexpense”, is trying to get out of Iraq andAfghanistan, but this “sabre-rattling”

could lead it to a similar confrontationwith Iran. Yet Iran “doesn’t threatenBritain... no British interest lies inthreatening sanctions and, when theydon’t work, being trapped into ‘moreserious measures’”.

“A policy of calm” remains best, agreesThe Independent. The West wants itsco-operation on a range of problems inthe region, despite its profound distrustof the country. “Empty threats will onlyserve the purposes of the more oppressiveelements in the regime”. Nonsense, saysRoss Clark in the Daily Express. “Iranhas been playing cat and mouse over itsnuclear programme for years,” while “theWest, partly as a result of embarrassmentover intelligence failures” in Iraq “hasconsistently downplayed the threat”.

But “the discredited war in Iraq mustn’tbe used as an excuse for failing to taketough measures against its even moremalignant neighbour”. Con Coughlin inThe Daily Telegraph agrees. “If Iranwishes to persist with its defiant attitude,”we must impose the “crippling” sanctionsurged by Hilary Clinton. If Tehran isn’tbrought to its senses, “the consequencesare too dreadful to contemplate”.

Tensions over Iran have eased – for now

President Ahmadinejad: building more nuclear plants

In 1989 Société Générale gaveyou its first Covered Warrant...

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Watch out – your water bill could beabout to rise. Ofwat, the water industryregulator, announced the results of itsfive-yearly price review last week and leftmany consumers disappointed. It insistedthat the average annual water bill mustfall by a mere £3 (before inflation istaken into account) to £340 by 2015.That total may sound all right, but bearin mind that water prices are setseparately by each regional company.

So, for example, warns the ConsumerCouncil for Water, “South West Watercustomers without a meter could see a29% rise in bills”. Ofwat says it didn’tcap prices more severely because it wantsthe water firms to invest more than£22bn in the water and sewageinfrastructure over the next five years.

But you can do something about this;reducing your water bill isn’t impossible.“People can shop around for the best dealon many things, but not water. Our job isto do this for them,” says Regina Finn,Ofwat’s CEO, in The Daily Telegraph.In light of the above ruling, such wordsare hardly reassuring for customers offirms likely to impose the biggest rises.

But there are a few waysyou can cut your watercosts. The obvious one isto switch to a water meterand cut the amount youuse. But this can backfireand big families who use alot of water could findtheir bills rise. The rule ofthumb is that if there aremore bedrooms thanpeople in your house, thena water meter will saveyou money. In Englandand Wales they’re free tofit, and if after 12 monthsyour bills are more expensive, you canswitch back to standard billing.

If you’re a water guzzler, or live inScotland where meters are expensiveto fit, then you’re best off stickingwith normal billing. Being frugal withyour water will then make no differenceto your bills – but at least it’senvironmentally friendly.

There is one other way you can cut yourbills given they work on the principle of‘what goes in, must come out,’ saysMoneySavingExpert.com’s Martin Lewis.A big chunk of your bill pays for your

use of the sewer system. But if you arenot using it heavily you may be able toget some money back. If you have a‘soakaway’ – a large underground pit ofgravel that collects water from your roofor drive – you can get a rebate of around£20-£40 from your water firm. Checkyour property deeds, or visit your localauthority to see if you have one.

If you have your own septic tank orcesspit, you don’t have to pay seweragecharges. That’s worth anywhere between£110 and £220 back from your watersupplier. Which will be some consolationthe next time you have to empty it.

personal finance

Stop pouring moneyaway on water bills

As water firms raise prices, you can act to cut your costs

There are four months to go until the new tax year, but if youearn £150,000 or more and will be hit by the 50% income tax,it is worth taking a few simple steps to save money now, saysJennifer Hill inThe SundayTimes.

First, if your deposit accounts pay interest only once a yearand the due date falls after 5 April, it may be worth closing theaccount “so that interest accrued will be taxed in the currenttax year”. Also consider cashing investment bonds and giltsbefore then. Next, if your spouse doesn’t work, transferincome-producing assets to them in order to take advantageof their personal allowance. A £500,000 portfolio producing5% (or £25,000 a year) would create a tax bill of £12,500 ayear from 2010-2011. But gift it to your spouse and the first£6,475 would be tax-free and the remainder taxed at 20% (ie,produce a tax bill of £3,705). Lastly, if you have a holiday let(as defined by HMRC), this is the last year in which you canoffset expenses against income, so get any repairs donebefore 6 April.

Tax dodge of the week

Happy new (tax) year!

School County Fees per year1The Purcell School Hertfordshire £29,5772Tonbridge School Kent £28,1403 Eton College Berkshire £28,0804 Harrow School Middlesex £28,0054Wycliffe College Gloucestershire £28,0055Winchester College (above) Hampshire £27,8706 Marlborough College Wiltshire £27,6907 Malvern College Worcestershire £27,6338 King’s School Canterbury £27,6309 Benenden School Kent £27,540

by Ruth Jackson

The costliest public schools

4 December 2009 www.moneyweek.com22

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personal finance

If you have children, Christmas can be anexpensive time. Cut down the costs ofone part of it by ignoring firms that offerto send you letters from Father Christmasfor a fee. Instead, you can get a free letter,or even a free video, from the big manhimself. For a free letter from FatherChristmas, get your child to write a letterto Santa, Santa’s Grotto, Reindeerland,SAN TA1. All you have to pay for is thestamp. Make sure you post it before nextFriday (11 December) and Royal Mailwill send a personally addressed replybefore Christmas Eve.

For a more high-tech Christmas message,visit http://portablenorthpole.tv/home.There you can create a personalised videomessage from Santa by entering a fewsimple pieces of information.

� Stock up on alcohol at M&S, saysMoneySavingExpert’s Martin Lewis. Until6 December, M&S is offering 25% off

wine and champagne when you buy sixbottles. Sainsbury’s also has a 25%discount until 8 December when you buysix bottles of wine and champagne.

� The government has announced that itwants to have 47 million ‘smart’ meters

fitted in homes by 2020, at a cost of£7bn. They haven’t clarified who’ll footthe bill yet, but there’s a good chance it’llbe us – either through an upfront charge(£340 per household), or via even higherenergy bills. Smart meters are a good ideain that they allow you to see exactly howmuch energy you are using at a giventime. But the meters shave just £28 a yearoff the average household’s typical bill,meaning it would take around 12 yearsto recoup the initial installation costs,says The Daily Telegraph.

� First Direct has launched a new offsetlifetime tracker mortgage. At 2.08%above the Bank of England base rate,the overall rate comes in below 3%,meaning this tracker mortgage shouldappeal to those who can afford the 35%deposit. The mortgage, which isavailable to both new and existingborrowers, comes with a £999arrangement fee.

Cut down on your Christmas bills

Plan ahead and Christmas costs won’t add up

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It’s 20 years since we issued our first ever Covered Warrant. That’s 20 years of innovation in providing the right products to meet

investors’ needs, including the first FTSE Covered Warrant on the LSE in 2002 and the first LSE-listed Covered Warrant on Gold

in 2004. Today, we issue the greatest number of Covered Warrants in the UK – all part of the Société Générale Listed

Products range. So why not party like it’s 1989 and enter our prize draw to win one of 20 bottles of Taittinger 1989

vintage champagne. To enter, email your first and last name to 20years@sgcib.com or visit www.sg20th.co.uk

Terms & Conditions 1. The Opening Date for the draw is 16 November 2009 at 9am Greenwich Mean Time (GMT) and the Closing Date is 7th December 2009 at 4pm GMT. Entries received after theClosing Date will not be eligible for the free prize draw (the Draw). 2. Winners will be selected at random. The first twenty randomly selected people will each win one bottle of 1989 Taittinger Champagne(a Prize). 3. No cash alternative is available. 4. One entry per person only is allowed. This Draw is open to UK residents over the age of 18 years only. This offer is not transferable and only people thatenter their contact details are eligible to enter the Draw. 5. By entering into this Draw, you agree that your name may be published as a lucky winner on the SG Listed Products web-site and in otherSG publications. 6. Winners will be notified to the e-mail address they provide by 11th December 2009 and agree to provide a delivery address for delivery within 30 days and to supply proof of ageat or before delivery. 7. This Draw is not open to employees of Société Générale Group (SG), their families or anyone associated with this Draw. 8. No purchase or quotation necessary. Entry into thisDraw can be requested by completing the online form. 9. SG’s decision is final and no correspondence will be entered into. 10. If a Prize is unclaimed after reasonable efforts have been made to contacta winner SG shall be entitled to dispose of such Prize as it sees fit without any liability to any person for having done so. 11. If SG is unable to verify essential details of a winner (including age andaddress) SG will be entitled to dispose of a Prize as it sees fit without any liability to a winner for having done so. 12. SG accepts no responsibility for any damage to a Prize or for delay caused by anythird party. 13. These rules are governed by English law. Statutory rights are unaffected.*Source Société Générale: in the UK market, as of October 2009. Please be aware that Covered Warrants are not suitable for all investors. They can be volatile and your capital is at risk. If you arein any doubt you should consult an appropriately qualified financial adviser. Issued by Société Générale, authorised by Banque de France and regulated by the Financial Services Authority forconduct of investment business in the UK.

464_MW_P22_23_Personal Finance:Layout 1 2/12/09 17:15 Page 2

4 December 2009 www.moneyweek.com24

cover story

“I believe theclimate crisis is sogreat, we must doall we can to try to

control it. Nuclear is part of the answer,and new nuclear power stations are alsoneeded.” The words of the boss of BritishNuclear Fuels perhaps? Or a spokesmanfor the UK’s Atomic Energy Authority?

Not at all. It’s the view of a former headof Greenpeace UK. Stephen Tindale, nowan energy and climate consultant, used tooppose atomic energy vehemently. In fact,he once led a group of activists into aBritish nuclear power plant to inscribethe word “danger” on its reactor casing,while explaining on national TV “whynuclear power was evil”.

Tindale’s change of heart earlier thisyear typifies a global shift in theperception of nuclear energy. “I began torealise we don’t have the luxuryanymore of excluding nuclear energy –it isn’t zero carbon, but it is lowcarbon”, says Tindale. “It’s a questionabout the greater evil – nuclear waste orclimate change, but there’s no contest.The climate crisis is now so great, wemust do everything we can – whateverthe economic cost – to try to control it.We need all the help we can get”.

Indeed, “nuclear power – long consideredenvironmentally hazardous – is emergingas perhaps the world’s most unlikelyweapon against climate change”, saysAnthony Faiola in the Washington Post.

Governments, under pressure to cutgrowth in emissions of greenhouse gases(of which carbon dioxide is the bestknown) are now turning to low-emissionnuclear energy on an unprecedented scale.Right now, from China to Brazil, 53nuclear plants are being built worldwide,twice the total of five years ago. Poland,the United Arab Emirates and Indonesiaare seeking to build their first reactors.

What’s more, so far at least, this ‘newnuclear age’ is developing with onlylimited opposition. We’ve seen nothing onthe scale of the protests and power plantinvasions that helped to characterise thegreen movement in America and Europeduring the 1960s and 1970s.

There again, critics of nuclear power havefar less ammunition these days. Nucleartechnology has improved vastly since thepartial meltdown of the reactor core atthe US Three Mile Island power stationin 1979 and the 1986 Chernobyldisaster in the ex-Soviet Union.Industrial accidents at the world’s

436 nuclear plants have fallen by 80%since the late 1980s, says the WorldAssociation of Nuclear Operators.

Even in the US, where the most recentnuclear power plant opening was 13 yearsago, times are changing. Leadingenvironmental groups are backing climatechange bills going through Congress thatinclude new nuclear plants. PresidentObama and leading Democrats are

Why nuclear power is on tNuclear power was once the enfant terrible ofthe energy world, so why’s it back on theagenda? ask David Stevenson and Jody Clarke.

You’ve heard of peak oil. But what about peak uranium?Since hitting a high of $138 per pound in the summer of 2007, theuranium price has steadily slid after falling electricity demandturned investors off the ‘other yellow metal’. But at today’s priceof around $43/lb, it is no longer economically feasible for minersto produce the metal.That means there’s a shortage of readilyavailable uranium on the market, at a time when countries arestepping up construction of nuclear power plants.With financingalso tight for new projects, prices must go higher, say analysts.Salida Capital, a Canadian wealth management firm, reckons thatminers need a minimum $60–$65/lb price to justify investment ina typical new project. Companies are signing deals at theseprices, says Nik Stanojevic at Brewin Dolphin.

That’s good news for existing producers. However, given thefundamentals, the price should move even higher.Taking only the

new reactors being built or planned, Salida reckons the nuclearindustry will have to source an extra 59 million pounds ofuranium per year every year.That represents “a staggering 55%increase in mine output from today’s levels”.

And looking at China’s plans for new reactors alone, it could evenunderestimate the growth in uranium demand.The world’ssecond-largest power market, China had nuclear capacity of onlynine gigawatts (GW) between 11 reactors at the end of 2008.However, it plans to raise this to between 70GW and 86GW by2020. “Assuming 77GW of incremental Chinese reactor capacity(from today’s levels) suggests initial demand of 154 millionpounds of uranium for reactor start-up, followed by ongoingneeds of 39 million pounds per year.These figures represent astaggering 135% and 34%, respectively, of 2008 global mineproduction of 114 million pounds.”

Profit from the rebound in uranium prices

The fight against global warming means that even many Gr

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www.moneyweek.com 4 December 2009 25

considering federal tax incentives and loanguarantees to help fund a new wave ofnuclear power stations across the States.

The American Clean Energy and SecurityAct (ACES) 2009, otherwise known asthe Waxman-Markey Bill, will set a capon the amount of carbon emissionsallowed in the US in any given year. IfACES becomes law, the EnvironmentalProtection Agency reckons that US

nuclear energy generation will more thandouble by 2050. Already the US NuclearRegulatory Commission is reviewingapplications for 22 new nuclear plantsfrom coast to coast.

Countries such as Sweden, Belgium andItaly, which once determined never tobuild another nuclear plant, have alsochanged tack. They are now prepared todeal with the problems of radioactivewaste disposal if in return they can obtainnear-zero emission energy generation.

So what about here in Britain? The UKwas home to the world’s first commercialnuclear power station, Calder Hall inSellafield, which opened in 1956.Construction of nuclear plants was haltedafter the Chernobyl disaster – but nowit’s right back on the agenda.

Last month, UK Energy and ClimateChange Secretary Ed Miliband told MPsthat ten sites had been approved inBritain for extra British nuclear powerstations. They will cost at least £5bnapiece to build, and will mainly be placedon the sites of old nuclear plants or thosesoon to be decommissioned. Each shouldbe capable of churning out enoughelectricity to power a city the size ofManchester for 60 years.

What’s more, Miliband has swept awayprevious planning rules that held upearlier building plans for up to six years.In the future the government hopes

cover story

the comeback trail

That is the kind of apocalyptic figure thatgets some analysts rolling their eyes. Butlooking at even the most conservativeestimates, production has to risesignificantly. Macquarie Bank estimates thatthe supply of uranium will have to rise bymore than 30% over the next five years justto meet demand.That’s a lot lower than themore drastic estimates, but to put it intocontext, it’s still equivalent to two newproducers the size of Cameco coming on line, says Stanojevic(Cameco is the £8bn Canadian firm that produces just under asixth of the world’s mined uranium supply).

That is good news for uranium producers such as PaladinResources and Energy Resources of Australia (ERA), according toRoyal Bank of Scotland. RBS reckons the price of uranium willdouble to a peak of $95 a pound in late 2011, from an average ofabout $47 a pound this year.When prices move higher,

production will gear up again andexploration will restart, resulting in thediscovery of new reserves that willeventually pull the price back down. Forexample, theWorld Nuclear Associationreckons that if uranium prices double,recoverable reserves will rise tenfold.

But because of start-up problems at mines,principally to do with getting hold of

financing, Stanojevic recommends sticking with large diversifiedminers that already have mines in production.These includeCameco, Paladin and ERA. Cameco Corp (NYSE: CCJ), whichplans to double annual uranium output from its existingoperations by 2018, is one of the best pure plays on the market.The Canadian giant produces 15% of the world’s mined uranium,just behind RioTinto on 18%. It runs the Cigar Lake mine project

ny Greenpeace activists are now supporting nuclear energy

Continued overleaf

decisions will take no more than one yearfrom proposal to getting the green light.

The move is partly aimed at helpingBritain to meet its climate change targets.But “change is also needed for energysecurity”, says Miliband. “In a worldwhere our North Sea reserves aredeclining, a more diverse, low-carbonenergy mix is a more secure energy mix,less vulnerable to fluctuations in theavailability of any one fuel.”

The aim is for the first new plant to beoperational by 2018. That may be onlyjust in time. With old plants coming tothe end of their shelf life, Britain is set torun low on energy-generating capacity ifwe don’t find new sources and open newplants. By 2017 we could be seeing powercuts, according to a government reportreleased in July. So the aim is to get theseplants built as rapidly as possible, so thatby 2025 nuclear will generate a quarterof the country’s energy – compared to13% now.

However, as we’ve noted, Britain is hardlythe only country to have fallen back inlove with nuclear. And the experience ofothers suggests that this big capacityexpansion won’t come easily. “A numberof roadblocks may yet stall nuclear’scomeback – in particular, its expense,”says Faiola. “Two next-generation plantsunder construction in Finland and France

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cover story

and Areva have until June 2011 toproduce a design which will satisfy theBritish regulators.

But while putting together a nuclearpower station isn’t plain sailing orwithout considerable risk for the firmsinvolved, such hazards are hardly uniqueto nuclear power. Large infrastructureprojects are never straightforward andthere are bound to be hiccups. The vitalthing for investors is that there’s no doubtthat a large number of new nuclear plantswill be built worldwide – and that meansthere are some firms and sectors that willdo very well out of it.

One attractive play, for example, is US-based construction business Shaw Group(NYSE: SHAW). Shaw is the leadcontractor to build new reactors here inBritain, says Tim Webb in The Guardian.

cover story

are billions of dollars over budget andseriously behind schedule, raising longer-term questions about the feasibility ofnew plants without major governmentsupport. Costs may be so high that energycompanies find financing hard to secure –even with government backing.”

Technical problems at Finland’s Olkiluotoplant are a concern, as this is the first‘third generation’ evolutionary powerreactor (EPR), which was supposedly safe,affordable, and made for massproduction. It’s being put together byFrench firm Areva. But 3,000 builders’mistakes have delayed the programme bythree years. The Finnish nuclear regulatorhas also halted construction on at least adozen occasions due to safety concerns.

So it’s not encouraging that the first ofBritain’s new generation of reactors, atHinkley Point in Somerset, will be areplica of the Finnish EPR. Small wonderthat BBC’s Newsnight recently suggestedthe government’s plans to fill the energygap by 2020 via nuclear power are“wildly optimistic”, given the industry’strack record. The UK atomic regulator,Nuclear Installations Inspectorate, saidthat no British nuclear power station hadever been built on time. In addition, theysaid they would be every bit as tough astheir Finnish equivalent, and wouldn’thesitate to halt construction if problemsemerged. Hinkley Point operator EDF

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Continued from previous page The company bought 20% of nuclearspecialist Westinghouse from thegovernment three years ago. It now looksset to cash in on its investment as the UKconstruction programme moves ahead.

Importantly, Shaw isn’t dependent on theUK by any means. It already has sizeablenuclear business in the US and China.And within the past month the firm haspicked up contracts at a Chinese oilrefinery, and also from the USDepartment of Defence for naval baseconstruction services. It also doesefficiency retrofits – ie, to cut carbonemissions – on conventional coal powerplants. As Toby Shute of Motley Foolsays, the drive to ‘green up’ our energysupply means that “Shaw Group aregoing to be awfully busy, and making anawful lot of money”.

Down from more than $75 per share twoyears ago to $29 now, Shaw has a marketvalue of $2.4bn. But after record newbusiness inflows of $14.4bn, it has anorder backlog of almost $23bn. Yet thestock only stands on a current-year p/e ofjust over 13, which analysts forecast willdrop to 10.8 for the year to August 2011.Maybe the strongest signal about thegroup’s future is how the boss is backingit big – with his own cash. Last month,Shaw chief executive James M Bernhardbought 250,000 shares, a $7m personalinvestment. That’s confidence in a nuclearfuture for you. We look at other stocksset to profit in the box on page 24.

in Saskatchewan, thought to be home tothe world’s largest undeveloped high-grade uranium deposit. However, it alsohas a significant stake in Kazakhstan’suranium industry.The country produces20% of the world’s uranium supply. InNovember, Cameco reported third-quarterearnings of C$172m, up C$37m on thesame quarter last year. It trades on aforward p/e of 20.5. Salman Partners has aUSD$38 price target for it from $30 now.

On a forward p/e of 53, Australianuranium miner Paladin Resources (ASX:PDN) is more expensive. But it has somesignificant projects coming on-stream,which should fuel growth, including theLanger Heinrich uranium mine inNamibia. It is on track to expand annualproduction capacity this year to 3.7million pounds, from 2.6 million.This

should expand to 5.2 million by the endof next year.The trouble is that theNamibian government is talking ofpushing up the level of royalties itdemands from the producer. So this isone to watch and buy on dips or badnews, but not now.

If you are interested in broader exposure,theWNA Global Nuclear Energy Fund(LSE: NUKE) is an exchange-traded fund(ETF) tracking the performance of 65shares engaged in everything fromreactor construction to fuel services. Itstop holding is French group Areva (7.9%)but it has exposure to more diversifiedstocks too, such as science services groupThermo Fisher.The ETF is up 39% over 12months against a 32% rise in the S&P500. Its total expense ratio is 0.65%.A more concentrated alternative is theMarketVectors Nuclear Energy ETF(NYSE: NLR), which holds 25 stocks, 35%

of them in mining. Power generation andequipment manufacturers make up therest. Up 37%, its top holdings include EDF,Cameco, Uranium One and Paladin.

Another potentially profitable area is inthe nuclear clean-up area.The NuclearDecommissioning Authority (NDA)spends about £1bn a year cleaning upsites such as Sellafield. But a report inTheTimes this week suggests thegovernment is planning big spendingcuts at contaminated sites.This wouldhurt firms such as Areva andWashingtonGroup (which won the £1.3bn budget toclean up Sellafield). A more diversifiedoption is engineering group BabcockInternational (LSE: BAB). It recentlybought UKAEA, the commercial arm ofthe UK Atomic Energy Authority, and hasdeals to oversee the closure of part ofDounreay in the north of Scotland as wellas nuclear units at Harwell andWinfrith.

Continued from previous page

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Exhausted and ageing, London’sVictorian sewage and water system isone of the capital’s biggest headaches.But it could be worse. New York’ssewers regularly overflow withwastewater, while diarrhoea amongchildren is a recurrent problem inMilwaukee. The trouble is, investmentin US water infrastructure has beenfalling for years. Yet water usage hastripled over the last 30 years, even asthe population has grown by just 50%,says Goldman Sachs. Texas, forexample, where the population is setto double by 2060, faces the prospectof water rationing unless there is anincrease in government investment.

This is one reason why $6.4bn of the $787bn Obama stimuluspackage has been promised for clean water and drinking waterprojects, as the administration looks to boost the economy andrepair damage caused by underinvestment. That’s creating bigopportunities for some American firms. Take Nalco Holdings(NYSE: NLC), which engages in water treatment and is up107% so far this year, or Flowserve Corp (NYSE: FLS), which

has risen 94.5%. It makes vitalpumps and valves for severalindustries, including water firms.

Investors looking for easy exposure toboth, plus a range of other waterstocks, can get it via the PowersharesWater Resources Fund (NYSE: PHO).It tracks the Palisades Water Indexand invests in firms providingportable water, water recycling, andtechnology and services directlyrelated to water consumption.

Long term, the Palisades Water Indexhas stormed away. It’s up 109%since 2000, against an 18% drop inthe S&P 500. It has also managed a25.45% return since 2004 versus the

S&P’s rather damp 4%. However, the one-year performance ofthe Powershares fund is less spectacular. Up 36%, it has onlyjust mirrored the S&P 500’s 37% return. But given that thefull impact of federal spending won’t be felt until 2010 and, asMotley Fool puts it, “this is a problem that is not goingaway”, we agree with analysts at investment firm JanneyMontgomery Scott (JMS), who point out that this water fundis set to keep on rising.

Why you should stock up on water250%

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funds

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Most income funds have struggled thisyear, but not the Schroder Income Fund.It’s up 46.2% year-to-date after managersIan Lance and Nick Purves (pictured, left toright) took some gutsy decisions andbought into the financial sector.

Looking for stocks trading at significantdiscounts to their perceived intrinsic value,the duo have a contrarian bent.Theybought Barclays, Lloyds and Prudentialearlier in the year, helping them to a hugeoutperformance in April when Barclaysand Lloyds rose 90% and 58% respectively.

Hunting for out-of-favour stocks is a riskybusiness though, as an investor can fall

into a value trap (buying something thatlooks cheap, only to find it’s cheap for areason). So before investing, they analysethe balance sheet to gauge a firm’s abilityto service its debts.They will not invest ina firm where debt is twice as much asearnings before interest, tax, depreciationand amortisation.

The pair have “done a good job ofnavigating this fund through choppymarkets”, says Chetan Modi, an analyst atMorningstar. During 2008, they preservedinvestors’ capital better than the averagefund in their sector “and have also keptwell ahead of the pack during 2009”.As with any contrarian fund, there will betimes when the fund underperforms in theshort term. But Modi likes “the convictionLance and Purves show in their processand their adroitness in executing it to goodeffect”.Yielding 4.72%, the fund has a totalexpense ratio of 1.65%.

Contact: 0800 718 777

Fund of the week

Schroder Income Fund top ten holdings

Vodafone Group 4.90

GlaxoSmithKline 4.60

Barclays 4.60

AstraZeneca Plc 4.10

Rentokil Initial 4.10

Lloyds Banking Group Plc 3.60

Logica Plc 3.50

Pfizer Inc 3.40

Merck & Co Inc 3.40

Old Mutual 3.10

Name of holding % of assets

Gutsy duo pulls ahead of the pack

funds

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Can you makemoney from buyand hold?No. This is not asensible idea.Markets are not‘random walks’.

They revert to around a level of fairvalue. So, as you’d expect from that fact,when markets are high, they give poorreturns. When they are low, they givegood returns. Obviously, that means youshouldn’t be investing when they’re high,because you’ll get battered.

So we should all be value investors?Well, most value methods are thrown upby investment banks and brokers, whosepurpose isn’t to find value but to sellshares. The pursuit of commission andthe pursuit of truth often conflict. I onceread a large report from an investmentbank that said there were 18 ways youcould measure the value of a market.In a world that can write that sort ofnonsense and be paid well for it, you’rein danger of upsetting people if you takea more robust approach to these things.

So are fund managers worth themoney we pay them?You’ve hit on a point where my businessand intellectual interests do run againstone another. My clients are fund

managers. Fortunately, they don’tseem to mind the honesty of my viewstoo much.

Back in 2000 the stockmarket was,according to our calculations, moreexpensive than at any other time inhistory. Of course, we got a great deal ofabuse for saying so. We pointed out thatthere was a 70% chance of the marketsfalling at some point over the next12 months. A fund manager whounderstood this would then, if he wasentirely self-interested, probably sell theshares in his own account and keep hisclients’ on the grounds that there was a30% chance of losing business.

These conflicts that fund managers facemean that clients should stand back andlearn themselves. That isn’t an easy thingto ask anybody to do. I think there is agood case for buying index-trackerfunds rather than managed funds.The problem isn’t that some fundmanagers will do better than others.The trouble is identifying before the eventwhich one will do better than the others:this seems to me to be extraordinarilyhard to do. And you invariably pay for it.I really think that on the whole, thechances of success, compared with theexpense you engage in while trying tosucceed, make it scarcely worth while.

How do you value a market?We came up with two, and only two,methods that were valid under testing.These were the ‘q ratio’ [defined on page44] and the cyclically adjusted p/e(CAPE), which uses average inflation-adjusted earnings over ten-year periods.By those measures, the US market is now40% overvalued. The long-term averageCAPE is just over 15. It’s about 21 today.UK house prices look expensive too.Fuelled by liquidity, everything has goneup. But there is a relationship betweenhouse prices and peoples’ incomes,though people have been prepared tospend more of their income over time.But even allowing for this trend, houseprices are still well above theirequilibrium level and you’d expect themto undershoot in current conditions atsome stage.

You’re bullish on Japan.The reason I’m positive on Japan (not inthe short term, I should say) is thatprofits look a lot more depressed than inAmerica. Adjust for depreciation (a hit toprofits reflecting asset wear and tear) andUS profits are high while Japanese profitsare low. Over the last 12 months,Japanese depreciation charges have eatenup more than two-thirds of Japanesenon-financials’ profits. The equivalentfigure for US firms is 50%. But that’sbecause Japanese companies have over-invested in the past (higher assets = moredepreciation). As investment now falls,so in turn will depreciation charges. Soeven if profit margins stay still on bothsides of the Pacific, you’d expect Japanto do better. Over time, I think we’ll seeJapanese profits go up, which in turnwill be good for stockmarket valuations.

expert view

Who is Andrew Smithers?

Follow your own hunchesJody Clarke talks to Andrew Smithers about which marketsare overvalued, and which look best for the long run.

The son of an oncologist andcancer specialist at the RoyalMarsden, Andrew Smithers,72, was born in south-eastLondon. “My father said I wasa cockney – it was within theearshot of Bow Bells. But itwould have to be a pretty clearday.” His great-grandfather,Alfred, founded stockjobbersAckroyd and Smithers, and hisgrandfather was an MP for 30 years.

Smithers studied economics atCambridge. He doesn’t go into detail,except to say: “My mother onceremarked that university was the onlyholiday a boy got between his mother

and his wife. So I enjoyedmyself.” He turned down anoffer to do a PhD at Stanfordand joined SGWarburg when“there were only 120 people inthe place”. He foundedeconomics consultancySmithers & Co in 1989.His book, Valuing Wall Street,with co-writer StephenWright,predicted the bursting of the

tech bubble. His latest book, Wall StreetRevalued, claims markets can beobjectively valued and that centralbankers should try to prevent bubbles.

Andrew Smithers’ new book, Wall StreetRevalued, is published by Wiley.

Japan is a good place to invest long-term

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entrepreneurs

The number of boarded-up shops on theaverage British high street has tripled inthe last year. So it’s not the best time toown a department store, you might think.But Holly Tucker, 32, isn’t worried –her department store is online.Notonthehighstreet.com, whichTucker co-founded with her friendSophie Cornish in 2006, is seeing salesdouble each year. And she has achieved itby creating a place where smallbusinesses that have been pushed off thehigh street can sell their wares.

The daughter of a financial director withGeneral Electric, Tucker first startedearning her keep at the age of 12. At 5ameach day, she’d force her father to driveher to their local pub in Berkshire, whereshe worked as a cleaner. “It was probablyillegal. But I made £3.50 an hour,” shesays. She ran a tuck shop in her teens andby the time she was 25 was running afirm organising fairs for small businessesto sell their goods. That’s when she hit onthe idea of an online marketplace.

“We were doing these events in churchhalls around west London, but companieswere travelling from all over the countrywithout knowing what the return on theirinvestment would be.” Meanwhile, with“25 mobile-phone shops on every highstreet”, consumers were struggling to findthe sorts of unique products or gift ideasthey would once have found in

independent stores. The internet offereda solution.

Tucker and Cornish raised £70,000 eachvia loans, savings, friends and family.Opening their first office – which“backed on to a building site” – inSheen in south-west London, theylaunched in April 2006, signing up 94small businesses that Tucker knewfrom her days running fairs. Thesecompanies, which made everything fromjewellery to homeware, paid a joining

fee, plus a percentage of any salesmade.

In its first year, Notonthehighstreet turnedover £100,000, helped in part by thepair’s imaginative public relations tricks.In 2006, they hand-delivered Christmasstockings, stuffed with products from thewebsite’s small businesses, to 100journalists. By the end of the year, that ledto £2m worth of press coverage (in termsof what it would have cost to fill theequivalent column inches withadvertisements). “With no marketingbudget, we had to be creative.”

In 2007, they launched a catalogue witha circulation of 100,000. That figuredoubled last year, when the business hit£1m in turnover in October. They alsoraised money from venture capitalists:£400,000 at the end of 2007 and £1.2mlast year through Ventrax. But the pairstill own the majority share in thebusiness. This year, Notonthehighstreet isset to exceed its £6.5m turnover target asit produces three catalogues with acirculation of one million, filled withproducts from 2,000 small businesses.

Tucker is certainly optimistic – the firm’s2010 sales target is £13m. “We are stillon this growth trajectory and looking tolaunch in Ireland next year.” Of course,she’s not immune to the pain consumersare feeling. “We have suffered from therecession. But I think people will neverstop wanting to give a gift.”

� Where did she come from?Cheryl Cole, then CherylTweedy,auditioned for Popstars:TheRivals in 2002, through which theband Girls Aloud were created.Girls Aloud broke the mould forreality-TV stars by realising andmaintaining chart success.Over the course of seven years,they’ve had 20 top-ten singles,including four No.1 hits, earningan estimated £25m, or £5m each.

� How much has Cole earned on her own?Girls Aloud now accounts for only a small amount of Cole’searnings. In 2006, she signed a £200,000-a-year deal withCoca-Cola Zero. It is a measure of her celebrity status that twoyears later she was able to demand half a million to front

L’Oreal’s autumn hair collection. Meanwhile, being an X Factorjudge nets her £1.2m (£400,000 more than last year), with areported £1m ‘golden handcuffs’ deal with ITV to host othershows. Cole was also paid £1.5m by OK! magazine for picturesof her 2006 wedding to footballer Ashley Cole, which wouldhave covered the cost of her £110,000 dress.Then there’s theas-yet unknown earnings from her new solo career: with anumber-one album and her debut single being the fastest-sellingsingle of 2009, these will be considerable.

� What does the money go on?Being Cheryl Cole is a costly business. Since becoming famous,she’s spent around £10,000 on her teeth alone, including payingfor whitening and a £3,000 night brace. Her hair stylist is paid£40,000 a year; £45,000 goes on two clothes stylists.The clothescost another £100,000 a year, mostly being purchased fromdesigners such as Versace and Cavalli. Cheryl lives with husbandAshley in a £4m mansion in Surrey.

The MoneyWeek audit: Cheryl Cole

Firms flock to my virtual high-street store

MY FIRST MILLIONHolly Tucker,Notonthehighstreet.com

by Jody Clarke

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www.bloomberg.comSenior Goldman Sachs staff are apparentlybuying guns to defend against “a populistuprising against the bank”, says Alice Schroederon Bloomberg. But why? Henry Paulson,ex-Goldman boss, let the truth slip when hewas Treasury Secretary during the crisis lastyear. People put up with the huge US wealthgap, he said, as they believe in “market-drivencapitalism”. If the system had collapsed, theymay have questioned its entire basis.

So the bank bailout was meant to conceal thefact that the rich make money “not from the free market, but from the lack of one”.But recent record profits at Goldman “blew its cover”, showing that taxpayer capitalwas funding “employee bonuses”. But don’t expect bankers to change – theyprobably relish the threat of a proles’ uprising. Even those bailed out “believe theyare tough, macho Clint Eastwoods of the financial frontier”. The last thing they wantis to be “so reasonably paid that the peasants have no interest in lynching them”.

32 4 December 2009 www.moneyweek.com

the best blogs

What the bloggers are saying

www.stumblingandmumbling.typepad.comWe have no real understanding of what will make us happy.That’s what three recent research studies suggest, saysChris Dillow.The first finds that people are much gloomier onSundays than other days.That’s not down to the dread of goingback to work on Monday – it holds even among the unemployed.No, it’s all down to family. Sunday depression hits marriedpeople worse than singletons. So spending time with yourspouse and children doesn’t raise happiness levels.

A second report confirms that happiness bottoms out in your40s.This is the decade when we learn we’ll never fulfill ourdreams: fortysomethings are more likely to be divorced, suffermore when unemployed and may not be as far up the career

ladder as they’d hoped. Another study found that countries thatsee big falls in voluntary organisation membership see broaderhappiness fall too. In short, “having children and investing incareers, rather than in social networks, doesn’t make us happy”.

Taxpayers bail out25 million Britons

http://ftalphaville.ft.com“When is a sukuk not a sukuk?” asksIzabella Kaminska. “When it fails to beShariah compliant.” But what does thatmean? If there’s one concept that appliesto sukuk bonds more than any other, it’s“no risk, no reward”. So the idea ofprincipal protection (where a bondholderis guaranteed to receive either a return ortheir original capital) “goes completelyagainst the ethos of Islamic finance”.

But for many years sukuks have tried tomirror Western instruments to attractforeign investors. “Clauses, trusts and

guarantees” were all built in to give thesebonds conventional features, such aspar-value protection. But even by 2008the Middle East North Africa FinancialNetwork was saying that “80% ofcurrent sukuk structures are not Islamic”.In the eyes of the Islamic accounting andaudit body AAOIFI, Dubai World’sNakheel sukuk may be one of the“non-compliant” ones. In a worst-casescenario, the UAE could side withAAOIFI and declare Nakheel’s certificates“unlawful”. The whole standstill over theNakheel sukuk could be the “tip of theiceberg” (see also page 45).

www.burningourmoney.blogspot.com“How many people work for theGovernment?” asks Wat Tyler. Theanswer is pretty scary. Let’s start withthe Office for National Statistics figurefor the second quarter of 2009: 6.039million. That’s already well up (by 17%)on the 5.182 million that Labourinherited in 1997. But that excludesseveral “groups who are not counted asbeing employed in the public sector butstill depend on it for their earnings”.These include 530,000 higher- andfurther-education staff, 40,000 GPs(classed as “private contractors”) andNetwork Rail’s 33,000 staff. Workerssuch as cleaners and dustmen, “whosejobs have been privatised over the yearsbut still work pretty well exclusively forthe public sector”, make up another250,000. That gives a grand total ofabout seven million – a quarter of the28.9 million working people in Britain.

And what about all those others who aredependent on the taxpayer for theirincome? Another 5.8 million people onwelfare, plus 12.5 million folk drawing astate pension. Now our total is over 25million. That is “alarming” – it suggeststhat there are only 22 million peoplegenerating income from sources otherthan the taxpayer (the total number ofemployed people less those seven millionpublic-sector workers). So each of theseindividuals has to earn enough income tofund him or herself, plus another 1.2people. “Does that sound sustainable?”

Sukuks fall foul of Sharia law

Happiness is hard to find

Bankers are happy to close ranks and fight

Bankers get readyto shoot the proles

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Outwardly, Sheikh Mohammed, 62,continued to go about his business.Last week he took tea with the Queen atWindsor. And over at Newmarket, hisbloodstock manager was snapping upthoroughbred foals at the Tattersall’ssales, says The Times. Yet Mohammed, a“beacon of modernity in the Arabworld”, knew that his dream of turning adesert backwater into a financial hub wasfast becoming “a nightmare”.

For all its apparent liberalism (the seven-star hotels, overt prostitution and teemingbars), Dubai remains a “buttoned-downsociety” in which “criticism of those inpower is taboo”, says the FT. But thesudden revelation of the debt crisis on theeve of the four-day Eid holiday, despitethe sheikh’s constant reassurances allwould be fine, has prompted many tostart asking questions.

“Was he lying, or did he simply notknow. I don’t know what’s worse,” onelocal businessman told The Sunday Times.Anger has focused particularly on the toplieutenants who executed the sheikh’svision of creating a phantasmogoricaldesert megalopolis and global investingmachine – especially Sultan bin Sulayem,chairman of Dubai World. All werefired days before the “standstill”announcement was made. Yet it had longbeen the sheik’s strategy to make these“four horsemen” compete by topping one

another with headline-grabbing deals,says The New York Times. Dubai’sfinancial authorities were gripped by aclassic case of ‘group-think’. “Few inSheikh Mohammed’s advisory pool werewilling to preach caution, even as realestate and asset values fell.”

Sheikh Mohammed always rejectedsuggestions that he was a “superman”who ran the freewheeling emirate alone.Yet he was certainly both the brains andthe spirit behind Dubai’s big-leaguemakeover, says The Guardian. Althoughhe took over the reins as ruler less thanfour years ago, he has long been theemirate’s de facto business chief, realisingearly on that a replacement needed to befound for Dubai’s dwindling oil income.“If you build it they will come”, was thesheik’s retort to the cynics who mockedhis plan to make Dubai the number-oneport of call for everything from financialservices to tourism. Seemingly limitlessbudgets and ballooning property valuesspawned some of the most extravagantdevelopment projects ever dreamed of(see box below), mostly financed by debt.

The sheikh’s own charisma helped pull inthe punters. Cambridge- and Sandhurst-educated, he appeared the epitome of themodern Renaissance prince. He combineda love of the traditional (Arabic poetryand his horse- and camel-racing interests)with a pronounced dynamism. One

minute he was whizzing about the city inhis white Mercedes SUV, the nextcheerleading sightseeing trips around theislands on jet skis, or updating his Twitterposts. The sheikh, notes The SydneyMorning Herald, “has a manicured fingerfirmly on the pulse”.

So public humiliation must be bitterindeed, says The Guardian. “Great menrise to great challenges,” reads one of thepoems on the sheikh’s website. If he is torecover his own, and Dubai’s, tarnishedreputation, he’ll need to prove it now.

profile

This week: Sheikh Mohammed

Shamed Bedouin prince whobuilt an economy on dreams

The Palm Jumeirah development – the extraordinary man-made,palm-shaped island where building lots were once fought overin a frenzy of excitement by Brad Pitt, David Beckham andcountless other celebrities – is “now home to a good deal ofknotweed, peeling paint and negative equity“, says the DailyMail. More than $300bn worth of development projects havebeen cancelled or put on hold. Half-finished sky-scrapers castforlorn figures in Dubai, as do the many ‘For Sale’ signs thatpepper the yachts at the Marina.

So, should we spare a thought for the celebrities who may alsohave been burned? Hardly, saysThe Guardian. Despite aprecipitous plunge in real-estate prices, many will still be quidsin, thanks to the generous discounts they received from

property companies looking for a glitzy endorsement. On theirway to the 2002World Cup, half the England football squadstopped off in Dubai to sign up for apartments at discountedrates, later selling the dream of “luxurious living in the man-made oasis” to the masses. Boris Becker, Michael Schumacherand Niki Lauda have all had business towers in Dubai namedafter them in return for fat cheques.

At the recent opening party for the Atlantis Hotel, “A-list famewas ordered by the metric tonne... like the dredger-loads ofdesert sand on which this behemoth of bling has been built,”says JaniceTurner inTheTimes. Dubai and celebrity go hand inhand. Indeed, if “Dubai was a person, it would be Katie Price...all fakery and chutzpah, ruthlessness and greed”.

Don’t pity the celebrities who invested in Dubai

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The EmpireTeddy comescomplete with anembroidered Union Jackwaistcoat. He is

available from the vintagegifts and toys supplierDotcomgiftshop.com,

£15.95.

Rubik’sTouchCube is an update of theworld’s No.1 puzzle.Touch-sensortechnology allows a slide of the lights totransform the colours of the blocks.Available from Amazon.co.uk, £71.33.

The retro Hamburger Phone comes with aredial, quick flash and pause function andis available from Urbanoutfitters.co.uk, £25.

The sturdy VTech Kidizoom MultimediaDigital Camera and video is easy to use,comes with in-built games and has acolour LCD screen that links toTVs andPCs. Available from Amazon.co.uk, £59.99.

4 December 2009 35

Spending itA Christmas selection: toys for children

Guitar Hero 5 – Guitar Bundle is madeto be used with X-Box and otherplatforms and comes with amulti-player party mode.Available from Amazon.co.uk£63.97.

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Fender have been making musicalinstruments since 1946 andcontinue to make guitars,such as this FenderStratocaster, for acclaimedartists worldwide.www.fender.co.uk.Prices vary.

Tabitha StardustHandbag.This softleather handbag hasproved popular withcelebrities such asDannii Minogue.Tabitha.uk.com,£240.

A SuitThat Fits brings individuallymade-to-measure suits within

reach of everyone.Suits start from £150 (theThree-Piece Suit picturedon the left costs £468).The firm has threebranches in London and

13 shops nationwide.Asuitthatfits.com.

Boodles Vintage brilliant cut diamondearrings are available from

Boodles.com; 020-7437 5050.£10,500.

Paul Smith’s Luxury Shoe Care Kit offers aselection of shoe paints and beeswaxpolishes, wood-handled brushes and ashoe horn – all presented in a blackwashed-wood box with classic multi-stripe trim. Paulsmith.co.uk, £350.

36

spending it

4 December 2009

A Christmas selection:presents with a difference

464_MW_P35_37_Toys Special:Layout 1 2/12/09 15:47 Page 2

This Jaeger-LeCoultre ReversoSquadra World Chronograph GMThas a reversible titanium case witha classic front, and a back dial thatshows 24 time zones. It is availablefrom Jaeger-lecoultre.com;0800 587 3420. £6,600.

Agent Provocateur’sGardinia Corset is aclassic design, withpulled-in waistand metallic goldthread detailingthat adds sparkle.Agentprovocateur.com;0844 499 5202. £750.

Sony Reader TouchEdition Digital Bookis slim, easy to use,compatible withmultiple formats,and can store upto 350 books.Amazon.co.uk,£325.25.

Charles Tyrwhitt‘s Fleur-de-Lys Cuff Links aremade from hallmarkedsterling silver and areavailable in a number ofdesigns from Ctshirts.co.uk;0845 337 3337. £49.95.

DeLonghi EspressoIcona’s high-performance pressurepump ensures perfectespresso andcappuccino and frothymilk every time.Available fromJohnlewis.com; 0845604 9049. £134.95.

374 December 2009

Liberty of London’s Pink JewelledBug Necklace is also available in black.Liberty.co.uk; 020-7734 1234. £175.

Cruden F1 Simulator is aprofessional racingsimulator used by FormulaOne teams. It comes withnear-100% steering and itsfull-motion effect creates arealistic G-force experience.It has wrap-around screenswith state-of-the-artgraphics. Cruden.com,from £120,000.

464_MW_P35_37_Toys Special:Layout 1 2/12/09 15:12 Page 3

Get more from theMoneyWeek experts

Tim Price, a genuine City insider – and defensiveinvestment specialist - reveals the investments that willbest insure you against the financial crisis.

Renowned economist James Ferguson brings you his uniqueviews on where the markets are heading and what that meansfor your money.

Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Forecasts are not a reliable indicator of future results.Events Trader, The Price Report, Precision Guided Investments, Model Investor and The Dividend Letter are issued by Fleet Street Publications Ltd. Registered of-fice 7th Floor, Sea Containers House, Upper Ground, London SE1 9JD. Customer services: 020 7633 3600. Registered in England andWales No 1937374. VAT NoGB629 7287 94. FSA No 115234. www.fsa.gov.uk/register/home.do. © 2009 Fleet Street Publications Ltd. Fleet Street Publications is authorised and regulated by theFinancial Services Authority.

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Paul Hill, one of the UK’s most successful private investors,selects little-known shares with the potentialto make triple-figure gains.

Combo ad BG:Combo Ad 18/11/09 10:41 Page 1

The island of Ischia is located in the Bay of Naplesopposite Capri and Sorrento, offering wonderful

views back towards Mount Vesuvius. The island’s volcanicnature provides it with rugged terrain, secluded beaches and,best of all, medicinal thermal waters. L’Albergo della ReginaIsabella is built into the hillside and has a thermal seawaterJacuzzi. Elizabeth Taylor, Richard Burton and Clark Gable haveall been guests. Indeed, Taylor reportedly threw Burton’s clothesoff a balcony here during a row.

“Ischia is the bigger but less flashy sister ofCapri,” says James Hughes-Onslow in the Daily

Mail. The views of the town of Lacco Ameno beneath thehotel are “breathtaking”. The hotel also provides a range oftreatments that draw upon the island’s natural thermal springs.But don’t have too many: “we were warned not to overdo it.The minerals are potentand bad for you if youoverindulge”.

This hotel isbetter known for its spatreatments than its food –although the food isexcellent. Treatmentsavailable include mudwraps, thermal springbaths and facials involvingboth the thermal mud andspring water.

Double roomscost from e190 per night.See www.reginaisabella.it,or call 00 39 08 1994 322to find out more.

Situated inthe centre of

Sorrento, the Excelsior isideally located for the town,yet maintains a peacefulatmosphere. This is due toits location: perched on a300ft cliff, it offers ashow-stopping view of theBay of Naples. The hotelhas been owned by thesame family since 1834 andcomes with a rich history –there are pre-Roman tombsby the entrance and theruins of a Roman pool inthe grounds. Thanks to

its luxurious sophistication, the Excelsior has counted SophiaLoren, Pavarotti and British royalty among its guests.

This “flamboyant” hotel is located in a “near-perfect spot”, says Casilda Grigg in The Daily

Telegraph. The best things about it are the “lovely avenue oftrees leading up to the entrance” and the infinity pool, which is“large enough for a proper workout, but also perfect for apoolside snooze”. The rooms aren’t bad either. There are 96 intotal, with antique iron beds, marble bathrooms and “handsomevaulted ceilings and mouldings”.

“This is a kitchen that sadly doesn’t live up to itsfive-star billing,” says Grigg. But don’t despair. Sorrento is hometo Il Buco – a local favourite, this one-starred Michelinrestaurant is housed in a former dungeon.

A double room costs from e240. See www.exvitt.it,or call 00 39 08 1877 7111 for more information.

www.moneyweek.com 4 December 2009 39

travel

Excelsior Vittoria, Sorrento

What’s sospecial?

How theyrate it

The spa

The cost

What’s sospecial?

How theyrate it

The menu

The cost

Where to stay – the Bay of NaplesA cliff-top palace versus a volcanic island retreat

L’Albergo della Regina Isabella, Ischia

NV Prosecco, Extra Dry, Conegliano,Vettori, Veneto, Italy (£15.75, reduced to£14.75 for a single bottle, or £13.95 per sixif you mention MoneyWeek at Philglas &Swiggot – 020-7924 4494 – in Battersea,Richmond and Marylebone).

I will, of course, drop a champagne onyou in a few weeks’ time, but I cameacross this beauty recently and feltcompelled to tell you about it. If you are

looking to do some lavish entertaining this season, why not avoidthe damage an expensive champers can inflict and look to thejoys of this stunning prosecco? Philglas is also kindly offeringMoneyWeek a deal to whet your appetite – I’d heartily recommendthat you take it and stock up on the stuff as soon as possible.

Vettori’s beautifully-packaged proseccomakes the finest Bellini imaginable (just addpeach purée). I can also recommend it in aKir Royale cocktail (just add crème de cassis).However, it is so delicious on its own thatI actually suggest you simply drink itunadulterated. Many proseccos have alick of sugary fruitiness on the finish toattract the less discerning drinker, butthis grown-up wine is tart and refreshing.And that just makes it all the morethirst-quenching.

� Matthew Jukes is a winner of theInternationalWine & Spirit Competition’sCommunicator of theYear.

Wine of the week: A sweet deal for fans of prosecco

by Matthew Jukes

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4 December 2009 www.moneyweek.com40

properties on the market

This week: houses for around £700,000 – from a harbour-front home overlooking

Chester Harbour, Lunenburg County, Nova Scotia, Canada. This harbour-frontperiod home is built over four levels and has spectacular ocean views. It retains its

original stone fireplace and bread oven and has its own jetty. 4 beds, 3 baths, 3 receps,porch, balcony, garden, 0.3 acres. £725,000 Tradewinds Realty 020-7467 5330.

Quorn House, Hingham, Norfolk. A Grade II-listed Georgian house with6 beds, 4 baths, 2 cloakrooms, 3 receps, study, games room, cellars, coach house

with stables, garaging, garden room, part-walled gardens, 0.38 acres. £750,000Jackson-Stops & Staff 01603-612333.

Coalheughead, Harburn,West Calder, West Lothian. An

impressive conversion of a range of stoneand slate outbuildings. There are woodfloors, open fireplaces with wood-burningstoves, and a drawing room in the roundhouse with exposed timber beams risingup to a glass cupola. 5 beds, 5 baths,2 receps, Japanese garden, wood,paddocks bordered by a river, 5.21 acres.£700,000 Knight Frank 0131-222 9600.

464_MW_P40_41_Property:Layout 1 2/12/09 14:40 Page 1

www.moneyweek.com 4 December 2009 41

White Highlands,Gare Hill, Frome,

Somerset. This 19th-century former parsonageis in need of someupdating. It is situated inan Area of OutstandingNatural Beauty and issurrounded by large,mature gardens. 4 beds,2 baths, 3 receps,conservatory, outbuildingwith garage, workshop,store, 5.3 acres. £725,000Savills 01225-474550.

properties on the market

king the ocean in Canada to a former parsonage in Somerset

Beaufort Cottage, Bath.A restored, Grade II-

listed Georgian-frontedcottage in a quiet location inthe city. The house has periodfireplaces, sash windows andwood floors. 3 beds, 2 baths,2 receps, office, 2 roomworkshop, large, attractivegarden. £695,000 Pritchard &Partners 01225-466225.

Cluain Meala,Harrogate, North

Yorkshire. This 19th-centuryhouse is a clever conversionof two adjoining barns.It has exposed beams, oakfloors and doors and openfireplaces. 4 beds, 4 baths,recep, cellar, triplegarage/workshop, gardens.£675,000. Carter Jonas01423-523423.

Field House,Longhoughton,

Alnwick, Northumberland.A modern house built in atraditional style with a slateroof and sash windows. It hasa large kitchen and a gardenroom with hand-built ceilingtrusses. 6 beds, 6 baths, 3receps, study, laundry, garden,0.21 acres. £700,000 Strutt &Parker 01670-516123.

Cedar Lodge, Middleton Park,Middleton Stoney, Oxfordshire.

This Grade II-listed lodge, one of the lasthouses designed by Edwin Lutyens, is setin communal grounds with its ownprivate walled garden. 5 beds, 2 baths,recep, 3-room cellar, garage, communaltennis court and swimming pool.£645,000 Savills 01865-339700.

464_MW_P40_41_Property:Layout 1 2/12/09 14:40 Page 2

4 December 2009 www.moneyweek.com42

What are we to make ofLord Mandelson’s recent trip tostay with the Rothschilds atWaddesdon Manor inBuckinghamshire? It was ashooting weekend, althoughneither the First Secretary ofState, nor Cherie Blair, anotherguest, actually picked up a gun.

According to Charles Moore inThe Spectator, the guns were“various young friends ofNat [Rothschild] with double-barrelled or European princelynames”. The keenest shotamong them was Saif Al-IslamGaddafi, son of the Libyandictator, and the man whoescorted the Lockerbie bomber,Abdelbaset Al Megrahi, home toa hero’s welcome in Libya in August.

Gaddafi has so taken to shooting, saysMoore, that he has laid down 40,000partridges near Tripoli. Half have beenkilled by raptors, but the others havebeen keeping him and his friends busy:one day a few weeks ago, whenFlavio Briatore of Formula 1 fame wasamong the guns, the bag was about 300.

But back to Mandelson: what was hedoing rubbing shoulders with Gaddafi ata grand shoot? (The two had met, ofcourse, at Lord Rothschild’s villa inCorfu days before the release of Megrahi,so the Rothschilds are clearly fond ofboth of them.)

To Peter Oborne in the Daily Mail, theevent was symbolic of “the decadence,corruption and moral collapse of modernBritish socialism”. Far from beingrepelled by the opulence of Waddesdon,as you might expect of a former YoungCommunist and activist of the far left,Mandelson is captivated by it. “The drablives of the hard-working men andwomen who placed their faith in Labourat three consecutive general elections holdno appeal to him.”

But you can see the appeal of this greathouse for a chap like Mandelson, saysMoore, who feels a “twinge ofsympathy” for him: for one thing, it’svery comfortable. (Before the Great War,

guests could ask for coffee, teaor chocolate when they wokeup, with milk, cream or lemon.If they chose cream, “they wereoffered the choice of Alderney,Jersey or Guernsey”.) And theRothschilds like people who arepowerful or rich, among themRussian tycoon Oleg Deripaska,whom they also entertained –with Mandy – in Corfu.

But should Mandy really beperforming these daring featsof social mountaineering?He might argue, as Mooresuggests in The Daily Telegraph,that he was “doing the statesome service” by watchingyoung Gaddafi “blast pheasantsout of the sky”. Libya is an

unpleasant place but it’s no longermaking weapons of mass destruction,mainly thanks to British intelligence, sothere’s a case for being nice to Gaddafiand his clown of a father.

In considering Lord Mandelson, the bigquestion, as Moore says, is this: has hedriven forward the desperately neededtask of modernising and moderating theLabour Party, thus making it electable?Or has he “pushed our public life into aculture of chicanery, political lies and thecircumvention of parliamentarydemocracy?” The answer, as Moore says,is both.

blowing it

Mandy and Gaddafi lord it up at the manor

� “In keeping with Health and Safety’s increasingly bizarredemands, the good people of Poole have a revolutionary newChristmas tree,” says Sue Carroll in the Daily Mirror. It’s madeof artificial turf and is “stretched over a 33ft cone-shapedaluminium frame.” It’s symmetrical and “has no branches toscratch anyone” or pine needles that can drop and “causepeople to slip”.The only problem is it looks like a “giantupturned lamp” not a Christmas tree. And it cost £14,000.

�Who can blame Somalian-born NasraWarsame, her husbandBashir Aden and their eight British-born children for “enjoyingto the fullest extent the largesse” of Britain’s welfare state?asks Patrick O’Flynn in the Daily Express.The per capita annualincome of Somalia is estimated at $600 (about £400). It’s nowonder people born in “one of the poorest and most violentcountries in the world” should want to live in one that’s peacefuland relatively rich.The couple and their children receive an

“astonishing” £1,600 a week in housing benefit. MrsWarsameand seven of the children live in a £1.8m London townhouse;unemployed Mr Aden and another child live in an adjoiningflat. Given their “desperate circumstances, it is perhaps rathercallous to call them ‘welfare tourists’”. But Britain is now“buckling under the strain” as “hopelessly lax benefit rules”draw “a tidal wave of humanity” towards us.

�Tony Blair has done very nicely out of Iraq, saysTony Parsonsin the Daily Mirror. He has made £15m so far, “largely theresult of putting British servicemen in harm’s way.Without Iraq,Tony Blair would mean little in America.” He would just be“another John Major”. His “money-grabbing cynicism” and thatof his “gurning, rhino-reared missus, has coloured politics inthis country”.They “created the greedy culture that made theexpenses scandal possible… After Blair, there is no more leftand right.There is only self-centred.”

Tabloid money… Blair’s coffers overflow as more troops return in coffins

Waddesdon Manor in Buckinghamshire, home to the Rothschilds

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464_MW_P42_Blowing It:Layout 1 2/12/09 17:48 Page 1

www.moneyweek.com 4 December 2009 43

crossword & bridge

Tim Moorey’s Quick Crossword No. 464

ACROSS1 Sham (4)3 Stands (8)9 File (7)10Tibet’s capital (5)11 Delay (3)13 Like a gift needing packaging (9)14 Chase (4)15 No score in cricket; a drop of thickliquid (4)18 Bust (9)20 Old French coin (3)21 Neighbour of Israel (5)22Tarts seen in the front row? (7)24 Small tree used in hedges (8)25 A high mass of land (4)

DOWN1 Cheat with violin (6)2 19 down’s 1969 film (3)4 Bring into contact by chance; makea meal hastily (5, 8)5Mediterranean island (5)6 (9)7Mixture of beer and lemonade (6)8Trick-taking card game with 32cards (6)12Tiny fastener without an externalhead (4, 5)15 Small round piece of chocolate (6)16 A cherry liqueur (6)17 Edible mollusc (6)19 Ken ____, film director (5)23 Samuel’s teacher (3)

Solutions to 462ACROSS 1 V-shape 4 JPEG 9Tinfoil10 Arise 11 Grill 12 Scratch 13 Etna15 Dog 16 Frau 19Tuscany 20 Ebbed22 Arena 23 Upgrade 25 Englishsetter DOWN 1Vet 2 Hanoi 3 Poodle5 Pointer 6 Greyhound 7 Flush ofyouth 8 Cairo 11 Great Dane 14 Nestegg 17 Hawaii 18 Beagle 21 Beast24 EarDogs with the costliest vet bills(MoneyWeek 455)

The winner of MoneyWeek

Quick Crossword No. 462 is:

David De Burgh of Kingstone

Bridge by Andrew RobsonA bottle of Taylor’s 10 Year Old Tawny will be givento the sender of the first correct solution opened onTuesday 15 December 2009. Answers to MoneyWeek’sQuick Crossword No. 464, Sea Containers House,7th Floor, 20 Upper Ground, London SE1 9JD

SET

BY

TIM

MO

OR

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Greed and hungerGreed got the better of declarer on this week’s deal. And when your right-hand opponent is one Geir Helgemo, Norwegian superstar, that greed islikely to leave you hungry.

Dealer South East-West vulnerableK10QJ1095J94852

98754 AJ63232 K8762 K105Q73 K106

QA764AQ83AJ94

The biddingSouth West North East1 pass 3 (1) pass4 pass pass pass

(1) Two Hearts on values, but tactically North wishes to keep East-West out.

West led the seven of diamonds to dummy’s nine, East’s ten, and declarer’squeen. Greedily unwilling to lead trumps from his hand and almost certainlylose to the king, declarer tried the effect of leading his singleton queen ofspades at trick two. East, Helgemo, won the ace and quickly tabled the kingof clubs. Declarer won the ace and belatedly played the ace of trumps and atrump to East’s king. East led the six of clubs and declarer, expecting him tohave the queen to have led the king, tried his knave. Wrong – West won thequeen and led a third club to East’s ten. Down one.

It was an excellent deceptive king of clubs from East but if declarer leadstrumps at trick two, he is a tempo ahead. He leads the ace of hearts and asecond heart to East's king, winning his king of clubs switch with the ace.He crosses to a trump in dummy, runs the knave of diamonds, plays adiamond to the king and ace, and discards a club from dummy on hiswinning fourth diamond. He just loses a spade, a heart and a club.

Andrew Robson runs the Andrew Robson Bridge Club in south-west London.Andrew’s new book is What Should Have Happened. Order via his website,www.arobson.co.uk.

MoneyWeek is available on cassette forthe blind and partially sighted throughTalking Newspapers on01435-866102.

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Sudoku 464To complete MoneyWeek’sSudoku, fill in the squares in thegrid so that every row andcolumn and each of the nine3x3 squares contain all thedigits from one to nine.

5 9 1 3 2 4 6 8 78 6 2 1 5 7 3 4 93 4 7 8 9 6 2 5 17 3 4 9 1 8 5 2 61 2 5 4 6 3 7 9 89 8 6 5 7 2 4 1 32 1 9 6 3 5 8 7 46 7 8 2 4 1 9 3 54 5 3 7 8 9 1 6 2

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Last week’s solution

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Five solutions are members of a group of sporting 6 down (unclued).The sport in question is briefly indicated in a single square, which should beshaded.

1 2 3 3 4 5 6 7

8

9 10

11 12 13

14 14 17 15 18

16 16 X X 17

18 19 20

21 22 23

24 25

Tim Moorey is author of How to Master theTimes Crossword published byHarperCollins and runs crossword workshops (see www.timmoorey.info)

Taylor’s, a family firm forover 300 years, is dedicatedto the production of thehighest quality ports.The company has ownedQuinta de Vargellas forover a century. The bestwines of the quinta arebottled as “Single Quinta”Vintage Port. Normallyreleased when ready todrink, this 1996 vintagehas the power andconcentration to maturefor many years to come.

464_MW_P43_Crossword:Layout 1 2/12/09 14:34 Page 1

Banco Santander (Madrid: SAN) Shares Growing exposure to Brazil will help this Spanish bank weather tough domestic €10.51

Banks conditions.The bank is well capitalised and has a 6.1% yield. €11.88/€3.92*

British American Tobacco (BATS) Shares This tobacco firm has been “remarkably effective” in increasing sales of its four 1,965p

Tobacco global brands. A commitment to emerging markets is also benefiting the firm. 2,012p/1,481p

Britvic (BVIC) The DailyTelegraph A solid performance in a challenging market has allowed this beverage firm 370p

Beverages to increase its dividend by 24%. Full-year pre-tax profits rose 23.4% to £86.5m. 402p/204p

Chime Communications (CHW) Investors Chronicle This PR and marketing firm is well ahead of its competitors. Operating income 226p

Media is growing quickly, due in part to some smart acquisitions and strong trading. 232p/38p

Compass Group (CPG) The DailyTelegraph The world’s largest catering group has proved to be pretty resilient. Pre-tax profits 427p

Travel & leisure rose 35.5% to £773m in the year to 30 September. “The stance remains buy.” 443p/275p

Dana Petroleum (DNX) The DailyTelegraph This oil and gas firm is hitting production targets and has a range of drilling 1,206p

Oil & gas producers projects in the pipeline. Its p/e of 32 is expected to fall to 14.4 next year. 1,549p/714p

Drax (DRX) The DailyTelegraph Having sold forward 90% of its capacity for 2010, this power generator has strong 410p

Electricity earnings visibility.The dividend yield of 10.3% should be secure. 645p/394p

Fuller Smith and Turner (FSTA) Investors Chronicle This pub operator’s revenues are up 10%, aided by the acquisition of 11 London pubs 513p

Travel & leisure at knock-down prices. It’s an “extremely solid company” with a p/e of 17. 542p/310p

GTL Resources (GTL) Investors Chronicle Last year’s record US corn crop, coupled with an improved balance between supply 61p

Aim and demand, has helped this ethanol firm enjoy a “rapid turnaround in fortunes”. 64p/8p

Hansard Global (HSD) Investors Chronicle This life insurer continues to weather the economic storm, with assets under 169p

Life insurance management up 13% to £1.1bn in the first four months of the year. It’s a solid firm. 182p/108p

Hardy Underwriting (HDU) Investors Chronicle Insurers such as Hardy have pushed up rates to cover losses sustained in 2008, with 285p

Non-life insurance long-term benefits. Premium renewal rates have also grown. 324p/242p

HMV (HMV) Shares The owner of Waterstones bookshop is set to benefit from the demise of rival 112p

General retailers Borders, as this leaves 6%-7% of the book market “up for grabs”. 160p/86p

HSBC Infrastructure (HICL) The DailyTelegraph With new infrastructure deals taking place and plans to increase the full-year 112p

Equity investment instruments dividend to 7p by 2013 – implying a future yield of 6.2% – “the stance remains buy”. 125p/102p

Modern Water (MWG) Shares A stock of the moment, this desalinisation specialist has made inroads to the 89p

Aim Middle East and should announce more good news on contracts. 91p/26p

the share tipsters at a glance

MoneyWeek’s comprehensive guide to the week’s share tips

BUY

Company Publication Reason Price tipped

* 52-week high/low

The Q ratio, or ‘Tobin’s Q’ (named after

theYale professor JamesTobin) measures

whether or not a share is cheap or

expensive. It is the total market value of a

firm divided by its total asset value at

replacement cost. So if a firm’s market

capitalisation is £1m and you would have

to spend £0.8m to replace its assets, the

Q ratio is 1.25 (1/0.8). A firm’s Q ratio

should normally be about one. If it is well

above this figure, the firm’s shares are

overvalued – so new competitors will

seize the chance to set up more cheaply,

which will drag down its share price.

Conversely, if the Q ratio is below one the

firm is cheap.That makes it a takeover tar-

get, which will tend to drive its share price

up, pushing the ratio back towards one.

I wish I knew what the Q ratiowas, but I’m too embarrassed to ask

4 December 2009 www.moneyweek.com44

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CRH (CRH) Investors Chronicle This building materials firm is generating cash, but profits are set to halve in 2009, €17.32

Construction/materials and with no recovery in sight the shares on a 2010 p/e of 18 “look expensive”. €20.69/€12.53

Hampson Industries (HAMP) TheTimes News that the Boeing 787 is taking to the skies could boost this firm, which makes 71p

Aerospace & defence moulds for aircraft parts, but on a p/e of less than six “it feels too soon to buy”. 128p/62p

Kiwara (KIW) Shares A surprise takeover offer for this miner is now a “done deal”, so take profits 71p

Aim now as the acquirer’s stock is currently high risk due to political interference. 74p/12p

Xstrata (XTA) Investors Chronicle Strong metal prices are sustaining this miner’s share price. But it is time to sell, 1,088p

Mining because when the bubble in metal prices pops, these shares will plummet. 1,128p/289p

Numis (NUM) The SundayTimes This broking group has weathered the crunch reasonably well. It has almost 175p

Aim doubled its FTSE 250 clients to 15. A p/e of 72 is “ludicrous”, but “worth a punt”. 181p/99p

Pennon (PNN) The DailyTelegraph Ofwat’s decision to defend the water companies and not force them substantially to 501p

Gas, water & multi-utilities cut bills will benefit this firm.The shares are currently yielding 4.4%. 567p/372p

Petra Diamonds (PDL) The SundayTelegraph This diamond miner is expected to be loss-making this year as the luxury goods 64p

Aim industry has suffered in the recession, but the quality of its mines means it will recover. 90p/23p

Reckitt Benckiser (RB) Shares This is a “textbook case of successful marketing and creating shareholder value”. 3,197p

Household goods/ The firm owns 17 ‘power brands’, including Vanish, Dettol and Nurofen. 3,230p/2,390phome construction

Rightmove (RMV) Shares The rally in this property website’s share price “still has plenty of legs”, with a 538p

Media recovery in the housing market due in 2010 and beyond.The p/e is 22.2. 611p/156p

SeaEnergy (SEA) Investors Chronicle The former oil and gas explorer is using its deep-sea expertise to provide services 43p

Aim to the offshore wind industry, with huge potential growth. It’s a long-term bet. 86p/30p

Standard Chartered (STAN) The SundayTelegraph The fall in this bank’s shares due to fears that Dubai could affect all of Asia is a 1,520p

Banks buying opportunity in the long-term, because the market reaction has been overdone. 1,696p/554p

Tesco (TSCO) Shares Few companies have been more successful in developing a brand than this 426p

Food & drug retailers supermarket. Overseas expansion should ensure it offers “robust long-term growth”. 436p/286p

the share tipsters at a glance

MoneyWeek’s comprehensive guide to the week’s share tips

BUY

SELL

A sukuk is the Islamic equivalent of a

bond, created to comply with the princi-

ples of Shariah law, which bans paying or

receiving interest. Also, no speculation is

allowed: all profits must be shared by

way of partnership and the bond must be

asset-backed. So, for example, since

manyWestern investors expect to earn

interest, it has to be paid as a share of

profit rather than as a conventional

coupon. A potential bond default in Dubai

has also raised the problem of enforce-

ability. Many of these bonds were issued

quickly to satisfy investor demand and

may not have complied with all Shariah

conditions. In the worst case, that means

a bondholder may not have a valid claim

against a sukuk’s underlying assets.

I wish I knew what a sukuk was, butI’m too embarrassed to ask

Company Publication Reason Price tipped

Company Publication Reason Price tipped

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4 December 2009 www.moneyweek.com46

last word

Early this week,the world’s largestcentral bank, theFederal Reserve,announced plansto exit itsmonetary stimulusefforts. It unveileda new tool –reverse repos – tohasten the work.

The term “unintended consequences”was probably invented to describe suchtools. Give the Feds a saw and they willcut off their fingers. Give them a pistoland they will blow off their toes.Give them quantitative easing and therewill soon be nothing left of them.

The private-sector debt crisis of 2008-2009 will almost certainly lead to apublic-sector debt crisis sometimebetween now and eternity, if not sooner.In the standard narrative, governmentscreate more money to stimulate theireconomies out of the slump. Leadingeconomists propose it, then defend it...and then, when it doesn’t work, they callfor more of it.

Now those economists are claimingvictory – many are calling on the Fed towithdraw its monetary stimulus beforethe money shows up as consumer priceinflation. Increases in the supply ofmoney, beyond increases in output,usually lead to inflation. They’re hopingthe Fed can head it off by sopping up thesurplus liquidity before it is too late.

Optimists expect mild inflation in adecent recovery. Pessimists fear the Fedsmay have waited too long and think theysee higher rates of inflation coming.Here on the back page we see nothing atall – no recovery, nor any inflation.At least, not yet. But we wouldn’t ruleout a collapse of the public-debt market.

There is always a wide gap between theFeds’ reach into the economy and theirgrasp of what they are really doing.When the Federal Reserve increasedreserves in the banking system, the ideawas simple enough: more reserves wouldallow the banks to lend more; in turn,more credit would allow consumers tospend more. Ergo, the recession wouldsoon be over.

But the more reserves the Fed pumpedinto the banking system, the morereserves the bankers didn’t lend out.In two years, excess reserves (beyondwhat was needed for loans) expanded500 times from the level they had been atfor the previous three decades.

If the banks chose to lend these reservesthey could multiply them into another$10trn to add to the money supply.Instead, in the third quarter, the USsuffered a record contraction of bank

lending, according to the Federal DepositInsurance Corporation. Lending tohouseholds and business is in a steepdecline. Nothing like it has happenedsince World War II. Total creditoutstanding is falling too. The banks arebarely even lending to the US government– from which they got the money in thefirst place.

“Banks, in aggregate, just absorbed theadditional reserves by allowing their ratioof reserves-to-deposits to balloon,”reports Charles Goodhart in the FinancialTimes, “so the multiplier collapsed tozero.” Why?

The feds can’t use a screwdriver withoutendangering a vital limb. Quantitativeeasing turned out to be a chainsaw.

In effect, bankers competed for yield withthe deepest pockets in the monetaryuniverse – the central bank itself.When the Feds bought Treasury bills theydrove yields down to such skimpy levelsthat the incentive for risky private loanswas nearly lost altogether. Better to leavethe money on deposit at the Fed.

No loans, no multiplier. No multiplier, norecovery. Instead, the Feds take $1 worthof supposedly ‘idle’ resources (actually,savings that people hoped to spend orinvest later) out of the private economy,squander it on bribes, bailouts orboondoggles, and get 90 cents’ worth of‘recovery’. Then, when a real recoverydoesn’t come, they spend $2.

Where will this end up? Most observersexpect rising rates of inflation – this iswhat is driving the bull market in gold,which hit the $1,200-an-ounce mark thisweek. But the multiplier is out of actionand consumer price inflation seems faraway. And the Feds can’t do anythingabout it.

What? What about more governmentspending? Or dropping hundred-dollarbills from airplanes? But those tools haveself-mutilating effects too – theyjeopardise governments’ access todeficit financing.

“Britain risks becoming the first countryin the G10 bloc of major economies torisk capital flight and a full-blown debtcrisis over coming months,” says anarticle in Tuesday’s Daily Telegraph.

First, lenders grow worried about excessspending, inflation and the risk ofdefault. They demand higher interestrates. Treasury bond yields rise, in realterms, even in a deflationary world.These higher rates affect public financeslike a cold draft on a pneumonia patient.

As governments pay more to borrow,their condition deteriorates. The odds ofdefault increase. Some, like Dubai World,are forced to postpone payments.Others just shake and shiver. The slow-motion depression continues. If we arelucky – and nothing else goes wrong.

To read Bill’s daily thoughts, sign up forThe Daily Reckoning free email atMorefrombill.co.uk.

Quantitative easing simply hasn’t worked

How long before we fall victim too?Dubai World has defaulted on its debts – the rest of the world may well follow suit

Bill Bonner

©B

LOO

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