Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory & buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Tuesday, 25 October 2011

The FEAR Index!

The concept of the Fear Index was created by one of those clever-bloke types called James Turk.

The basic theory is that when people are euphoric they hold dollars, and when they are morose and fearful, they hold gold i.e. a real commodity (as dollars tend to have a really annoying habit of being printed in a financial crisis and thus the existing ones get devalued).

Turk measures 'fear' through reference to the prevailing gold price and the gold reserve.

Here's the 10 year gold chart as of today.



Gold prices generally increase over time due to inflation, but over the past decade gold has massively outperformed.

The spike at the end of August related to the US debt ceiling debacle.

What's the conclusion of the Fear Index? 

Summarily, the world has not been this fearful since 1987 (Black Monday - when the Dow collapsed by 22.6% in one day).

***

Flying back to Darwin on Monday so my own Fear Index will be 'spiking' at around 7am, October 31 - my nemesis, the short Dili runway, must once again be faced...

Have stuffed up the travel plans a bit as the Knock 'em Down storm season  already started in Darwin last week. Doh, gonna be gettin' wet some!

Itinerary for the next 12 months: Broome (Nov), Perth (Dec), Tassie (Jan), Sydney (Feb) - boat Sydney- London (Mar/Apr) then back to Oz in mid-2012.

Sunday, 23 October 2011

The Economic Clock

The idea of the economic or investment clock first appeared in London’s Evening Standard newspaper in 1937.  It's still relevant today.

Printed on a mock-up clock face was an interpretation of the economic cycle from the peak of the boom (12 o’clock) to the depth of the downturn (6 o’clock) and back to the boom period again:

The Economic or Investment Clock



Time
Economic environment
Explanation
1 o’clock
Rising interest rates
To steady growth and inflation
2 o’clock
Falling share prices
Falling profits and confidence
3 o’clock
Falling commodity prices
Construction decreasing
4 o’clock
Falling overseas reserves
Funds passed between Central Banks
5 o’clock
Tighter money
Debt harder and expensive to source
6 o’clock
Falling property values
Property downturn
7 o’clock
Falling interest rates
To stimulate economy
8 o’clock
Rising share prices
Increasing profits and confidence
9 o’clock
Rising commodity prices
Construction increasing
10 o’clock
Rising overseas reserves
Funds passed between Central Banks
11 o’clock
Easier money
Debt easier and cheaper to source
12 o’clock
Rising property prices
Boom



Naturally as property investors we aim to invest counter-cyclically so that we buy when confidence and prices are low in anticipation of the boom period ahead. 
Over time you will learn that residential investment property is an asset class that is very sensitive to interest rate movements. 
Most property owners in Australia have variable rate mortgages and therefore affordability and confidence are inexorably linked with the Reserve Bank’s interest rate policy.
If the state in which you live has recently experienced a significant property boom it can definitely make sense to invest in another capital city. 
This has the advantages of helping to reduce land tax (if you have a portfolio with a high land value), diversifying the investor’s risk across different regions, and, especially, allowing the investor to take advantage of the cyclical nature of property markets.
***
Heading off to watch the Rugby World Final shortly - and it is absolutely PELTING it down in Dili.  The Big Wet has well and truly arrived! NZ by 18....

Friday, 21 October 2011

Is property a good short term investment?

Under current law in Australia there is no stamp duty associated with purchasing shares, so the acquisition cost of a stock is likely to only have a small brokerage fee tacked on to it.
This is not the case with property which attracts stamp duty, mortgage transfer fees, legal fees and sometimes Lenders Mortgage Insurance and other costs too.
For example, suppose you buy a unit in Sydney for a purchase price of $500,000, your acquisition costs might be something like this:

Property cost
$500,000
NSW Stamp duty*
$17,990
Mortgage registration fee
$100
Transfer fee
$200
Solicitors fees
$2,000
Lenders Mortgage Insurance (est.)**
$7,500
Pest inspection
$300
Total
$528,090


*there may be stamp duty exemptions available if you are a first home buyer and the property is to live in rather than an investment.
**If you put down a deposit of lower than 20% of the purchase price, you will also have to factor in a charge for Lenders Mortgage Insurance (LMI).  Costs vary depending on the lender.
(LMI is insurance that compensates the lender – not you - for the risk associated with your low deposit.  If you took on an 80% or lower Loan to Value Ratio, the LMI charge could be negated).
Most quality property investment stock in Australia will incur holding costs too, as the rental yields of prime location properties tend to be lower than current mortgage lending rates.
Then there are also costs associated with selling property: agent fees and capital gains tax where you sell for a profit.
Therefore, unless you are confident of making a quick 20% capital growth return (in today’s markets, this is perhaps unlikely) the answer is that property is generally not a good short term investment.
I should note here that experienced renovators can and sometimes do make 20% capital growth returns.
***
Property is a great long term investment because of the combined effect of leverage (using the bank’s money) and compound growth.
Consider this table of an asset compounding at 10% growth per annum:

Year
Value
0
$1,000,000
1
$1,100,000
2
$1,210,000
3
$1,331,000
4
$1,464,100
5
$1,610,510
6
$1,771,561
7
$1,948,717


Note how the growth in year 1 is $100,000 but the growth in year 7 is more than $177,000.
Each increase is 100% tax-deferred and is greater than its preceding equivalent, and this is why compound growth makes property such an effective asset class for the long term.
***
So what is a good short term investment?  The long answer would be slightly convoluted – the abridged answer is: the shorter your time horizon for investing in a growth asset class, the greater the risk of capital loss.
We humans like to believe that we can predict the short term future but countless examples have demonstrated that we are generally hopeless at predictions. 
We are better at recognising long term trends and building an investment strategy around the identified trends.
Therefore, if you are investing for the short term, consider assets with a near-guaranteed yield (e.g. investment grade notes (you might get a 7 or 8% return in Australia at present) or at least a decent income return (for example, stocks that pay an attractive dividend yield - such as the major banks). 

Tuesday, 18 October 2011

Monetary policy October 2011

Monetary policy Down Under is the domain of the Reserve Bank of Australia (RBA).
RBA’s responsibilities include: the stability of the currency, the maintenance of full employment and the economic prosperity and welfare of the people.
The principal tool the RBA has for controlling inflation (the stable currency) is the interest rate.  Their second most effective tool is known in industry parlance as the Jawbone – ‘jawboning’ is simply a threat that the RBA might raise rates in the future.  It can be pretty effective in dampening demand too.
Until 1993, Australia had no stated target rate of inflation and we had very high rates on inflation, up above 15% in the 1970's.  Volatile inflation is seen to be a bad thing for our economy.  Why?  Boom and bust (cf. Keating's "recession we had to have” of the 1990's).
The RBA has stated that its target range of inflation is 2-3%. 
Since 1993, although the rate of inflation has exceeded this range at times, inflation has been far more stable as referenced by the RBA below:
Graph 1: Inflation over the Long Run

In the 1st and 2nd Quarter (Q1 and Q2) of 2011, core and headline inflation prints ran high causing certain economists – the so-called Inflation Hawks –to have heart palpitations as they demanded interest rate rises to cool the inflation rate, which had drifted above the target range.
Others (known as Doves) kept a level head and reasoned that the root cause of much of the inflation was the flooding in Queensland (bloody expensive bananas at $12 per kilo, remember them?!).  They felt the cash rate should stay at 4.75%, which is has for around a year now. 
Subsequently, the Australian Bureau of Statistics (ABS) revised downwards their Q2 Consumer Price Index (CPI) figures and the Hawks breathed more easily again. 
Further, the US debt crisis and gloomier global outlook caused caused stocks to tumble by 20%+ which together with the stellar performance of the Aussie dollar silenced all calls for rate hikes.
What next?
In its most recent Meeting Minutes the rhetoric of the RBA implied that they may consider a rate cut on Melbourne Cup Day in early November. 
However, they will only do so if the Q3 inflation prints on October 26 are benign (approximately 0.6% for the quarter or below).  If prints are higher the rates will stay on hold yet again.
The property market in Australia, although performing well in patches (Inner-West Sydney, for example), has generally run out of puff, and will need an interest rate cut to stimulate demand, confidence and activity.
Property in Australia is extremely sensitive to interest rates as most leveraged Aussies have variable rate loans.
Therefore property investors are looking for low CPI figures next week to get some wind back in the property sails. 
The current cash rate is seen by some to be “mildly restrictive”; they think a more neutral rate would be 4.50%.
We should be careful what we wish for though.  After the GFC (if you live outside Oz that means “Global Financial Crisis”) the cash rate in the UK has been 0.5% for seemingly an age now, and the US has a measly rate of 0.25%.  Those are sick economies. 
In Australia we have been tremendously lucky to date and have not yet experienced a recession as a result of the GFC.  The cash rate buffer of 4.75% may yet be a blessing.
***
Phew, after writing all that my own interest rate needs stimulating…coffee time.
Back in Darwin in two weeks – can’t wait to drink some real Aussie coffee again! CafĂ© Timor is very good, but it’s just not quite the same, {sigh}…

Wednesday, 12 October 2011

'The Millionaire Next Door'

In The Millionaire Next Door, Thomas J. Stanley and William D. Danko revealed some surprising details concerning the profiles of US millionaires in the 1990’s. 

What they discovered was that the majority of millionaire households did not have extravagant lifestyles people tend to associate with millionaires. 

They found that most millionaires rarely spend large sums of money on expensive cars, consumer goods, depreciating assets and luxury items.  Instead, crucially, most millionaires live below their means.   

Many people today are pre-occupied with the appearance of wealth and too little concerned with building a sound financial plan. 

The classic scenario is where an expensive sports car is bought using debt for the purpose of impressing peers with a conspicuous sign of wealth. 

Beneath the surface, the finances are taking a battering.  The opportunity cost of this choice – the potential great investments that are not made - is huge.

The challenge is to dare to take the different path.  Instead of “spending tomorrow’s cash today” and being a slave to your possessions, why not live frugally today and invest sensibly in appreciating assets? 

Tomorrow you will have an abundance of cash instead of a poor retirement.

Monday, 10 October 2011

Choose your weapons: Asset Allocation – Building a Portfolio

If you were starting out with $1 million and were to ask me to recommend you an investment portfolio to help you retire wealthy at 65 it would probably looks something like this:
Asset Class
Target %
ASX 200 Large Cap Index Fund
10
Small Ordinaries Index Fund
10
Vanguard Emerging Markets Shares Index
10
FTSE SET Large Cap Index (UK’s largest 30 Companies)
10
High-Yield Corporate Bonds
10
Investment Grade Corporate Bonds
10
Capital Indexed Bonds (inflation hedged)
10
A-REIT Index
10
ASX All Ordinaries Gold Index Fund
10
Cash
10
Total
100

If this looks like double-Dutch to you, don’t worry, I simply use it as an example.  Financial jargon has a tendency to make investing sound a lot more complicated than it actually is. 
History has shown us that a portfolio such as this would return at least 10% per annum over the long term.
It is diversified through funds, but also diversified in that the individual components of the portfolio do not act in a correlated manner.
In other words, while, for example, when stocks are not performing well other assets (such as bonds) may well be. 
The portfolio includes assets that are traditionally used to hedge against deflation (gold mining companies, bonds) and also those that thrive in more inflationary economies, such as equities and A-REITS (what used to be called Listed Property Trusts).
The clever thing with a portfolio like this is that you can re-balance it each year by adding dollars to the underperforming asset classes.
The problem with this approach is that diversification necessitates that return will be average. 
The portfolio lacks FOCUS and it also lacks LEVERAGE – it doesn’t use any of Other People’s Money (i.e. the banks) and most of us don’t have a lot of capital when we start out.
If we want to get rich it is a lot easier to do so investing with millions of dollars than it is with a few dollars.  That is why I believe residential investment property needs to play a bigger part in a wealth creation strategy.
My target portfolio looks like this:
Asset Class
Target %
Australian Residential Property
30
UK Residential Property
30
Direct investments in Australian shares
15
Ethical FTSE Tracker Fund (UK)
15
Cash/Fixed Interest Investments
10
Total
100


I wouldn’t necessarily advocate investing overseas for everyone, but it works for me as a dual nationality Anglo-Aussie.
With a portfolio like this you have some diversification – all your eggs aren’t in one basket – and you can use millions of dollars of the banks’ money to create wealth.
A 10% return on your savings may not return you too much, but a 10% return on a portfolio of several million: that can create financial freedom.
You need to think about 3 things: what your favourite asset classes are, your financial goals and your appetite for risk. The permutations are endless...
Moderate
Aggressive
Very aggressive
Australian Property
40
50
60
Australian Shares
20
30
40
International Shares
10
10
-
Diversified Funds
10
5
-
Fixed Interest
10
-
-
Cash
10
5
-
Total
100
100
100

***
Back from Bali today to Dili (Timor Leste).  Another hairy landing at Dili...they really must build a longer runway!
Sanur was great; the rugby mixed...awesome to see the Wallabies despatching the Springboks!