Mafia Buzz Issue 3

Finance Week

Vic De Klerk (I met him in Brits the other day and was impressed by his depth of knowledge of the JSE) quotes Gerhard Loots (whom I have known for years) of the auditing firm GKL. Gerhard points out that if you split your interest generating investments between you and your wife, you will not pay tax (assuming that you are over 65) on the first R120 000 interest received. (12^th, page 34)

Sello Mabotja has written an interesting article on whether or not trusts serve any purpose in this day an age. The original purpose of trusts was to preserve wealth and attend to the wellbeing of widows and orphans. However, trusts became the vehicle for avoiding transfer duty and taxes and, as a result, have been targeted by the tax authorities. He concludes that they still, despite the tax disadvantages, have a role to fill, e.g. when the farmer dies there will be no capital gains tax and estate duty payable as the trust is still alive. The capital gain on the farm will only be subjected to CGT when the trust sells the farm. Trusts should be used for the purpose they were designed for, i.e. succession planning and providing for beneficiaries. Most of the tax loopholes have been closed. (19^th, page 33)

The Australian stock exchange has launched listed securitised gold bullion for investors who would like to hold gold but not have the inconvenience of insuring, storing and handling it. (Great idea provided the gold is there! In RSA?) (31^st, page 12)

The Saccawu National Provident Fund with 60 000 members has been placed in provisional curatorship due to a number of irregularities that have allegedly taken place. (Keep control of your own wealth, I tell you!) (31^st, page 54)

Fortune

The US is considering abolishing the (double) tax on dividends, which has been in operation since 1913. This will change the way managers and investors will view their investments. (We have been through this process in RSA) (3^rd, page 13)

Since October 2000 companies in the US may not divulge information to analysts without making a press release. This is in terms of SEC’s regulation on fair disclosure. (Taking some of the power away from analysts.) (3^rd, page 60)

A federal judge in the US has declined to excuse eight investment banks from a class action in which they are charged with enabling and encouraging fraud at Enron. The feeling is that these actions could run into billions of dollars.(17^th, page 15)

Individual investors have an astounding record of buying high and selling low. Investors piled money into stocks three years ago when they were at all-time highs. It is suggested that one should compare the total market capitalisation with the GNP. It usually ranges between 40% and 80%. Just before the great crash in 1929 it was 109%. Three years ago it was 190%! Right now it is 100%. Another overall measure is that at present the S&P 500 PE ratio based on forecast results is 17. Based on actual results it is 30. Wall Street analysts are, therefore, projecting growth in earnings of US companies to be 76% next year! (They have to be bullish to encourage you to part with your cash.) (17^th, page 20)

The stock market of the next two decades will not get you to the retirement promised land. Returns in the past 20 years came from increased price earnings ratios and fast growing (real and imaginary) earnings. Market historians are predicting returns of only 10,0% p.a. (or 6,5% p.a. after inflation) for the next 20 years.) Attitudes at present are not to even think of retirement. People are in survival mode – “stay alive, stay healthy and hang onto your job” is all that counts at present. Americans, for the first time in ages, have to choose between golf memberships, the flashy car, overseas trips and education for their children. (17^th, page 48)

Pressure to perform is making management reconsider their commitments to their employees to provide for post-retirement benefits. With the fall in interest rates and stock prices, a massive shortfall has accumulated in post-retirement benefit funds. The share prices of companies such as General Motors, Ford, Delta and American Airlines, who are particularly hard hit, have taken major knocks. The various choices facing companies are to:

1. 
   Dump their obligations completely.
   
2. 
   Change the method of calculating the obligations (increase the discount rate – don’t you love it!).
   
3. 
   Slash retirement benefits.
   
4. 
   Convert to defined contribution plans.
   
5. 
   Retrench staff and pay them out only their contributions.
   
6. 
   Do not offer new staff the benefits. (17^th, page 53)
   

Warren Buffett says that derivatives are financial weapons of mass destruction. The dangers are now latent but they could be lethal. Unless derivative contracts are collateralised or guaranteed, their ultimate value depends on the creditworthiness of the counter parties to them. Before a penny changes hands, the counter parties record profits and losses – often huge in amount – in their current earnings. Bonuses are often paid based on these earnings, which are a sham. Large amounts of risk are concentrated in the hands of a few derivative dealers. If one goes, it could trigger a serious systematic problem. He says that after reading the footnotes detailing derivative activities of banks, the only thing that he understands is that he does not understand how much risk the institution is running. (17^th, page 58)

The average worker now spends more than two hours a day reading, responding to or disposing of e-mail. I sometimes wonder whether I am really being effective in my job spending half the time in e-mail, half the time on the phone and the other half doing real work. (Note that he spends half his non-working time working to make up the other half!) (17^th, page 78)

JSE Circular

A letter from the JSE dated 27 March clarifies that it does not endorse the results from a GAAP perspective by reviewing the financial statements prior to publication in SENS and the press.