Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

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.

Tuesday, 31 July 2012

Strong dollar causing a few headaches again

Who'd be the Reserve Bank governor, eh? While it's been a great time to be an Aussie tourist overseas with the dollar flying so high, the enduring strength of the currency does mean that we aren't seeing much/any appreciation on our asset values - shares or property - as foreign investors stay away. Very difficult balancing act for the RBA with their blunt interest rate tool!

First graph shows the leap in the dollar's value since early June.


Second graph shows how badly the Aussie stock market has fared compared to the Dow in the US.



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Freezing today in Sydney!

Monday, 30 July 2012

Are SMSF's likely to flood the Australian property markets?

Are SMSF’s likely to swamp the property markets?
Is a flood of self-managed super fund (SMSF) capital likely to wash into the property markets over the next few years? Well, the short answer is: yes. With investment results from capital growth in equities so poor (i.e. non-existent) over the past seven years, more Australians than ever are turning to self-managing their superannuation funds in a bid to improve their floundering returns.
Most individual investors in equities - myself included - become transfixed with immediate capital growth returns from shareholdings, rather than what we should be focussing on, which is the growing income or dividend streams over time.
Although intellectually most of us probably know that stockpiling equities while they are cheap will be a fabulous long-term investment, emotionally most of us want to see fast returns forthcoming over the next few years.
At present, the stock market doesn’t seem to be promising that, but with property mortgage rates now so low, the property markets are seemingly offering some mouthwatering opportunities for counter-cyclical investors.
From where I am sitting, using the banks' cheap CAPITAL is currently looking more attractive than buying SHARES in the banks.
Why will SMSF’s dive into real estate?
There are a whole host of reasons why this will happen: the ability of SMSF’s to use leverage, the Australian love of bricks and mortar, excessive superannuation fund management fees, painfully low returns from some super funds over half a decade, a desire to take control…to name but a few.
Below are three quick pointers and screen-grabs which explain exactly why the property markets will be flooded with investment capital from SMSF’s in the next few years.
1 – Funds under self-management spiralling
Firstly, the actual dollars under self-management are spiralling. This is both effect (and in some small part, cause) of the poor returns from equities and thus managed super funds with are heavily exposed thereto.
I don’t have a more up-to-date graph from an official source so I’ve used this one from the Australian Taxation Office. Suffice to say that funds under self-management are now significantly higher than they have ever been before. According to BMG Partners, the figure now exceeds $1 trillion.

2 – Strong Australian dollar
Secondly, every time the strong dollar looks as though it may be weakening, a bout of investment in Australian dollar denominated assets and/or speculation sees it firing upwards again (to more than 105 US cents again today). This hampers investment in equities from overseas and in turn kills the Australian stock market’s momentum.
Although measurement thereof is nigh-on impossible, probably somewhere between one quarter and one third of Australian shares are owned by investors from overseas, with much of that cash coming from Asia.
3 – ASX has performed poorly
Thirdly, the Aussie stock market - the market which most of us focus on rather than venturing elsewhere - is failing to inspire any confidence from investors at all. Today the XAO (All Ordinaries) closed at 4,266 - a number which may look uncannily familiar to investors who started out in their investing quest in mid-2005.


While I've presented three graphs in a linear fashion, it should be fairly obvious that the three trends are inextricably linked!
Affordability dividend: The 'Stevens put'
Personally, I think it is a little harsh when commentators talk of the 'Stevens put' and the Reserve Bank's dovish attitude to inflation. The RBA's remit is to maintain price stability, full employment and wealth and prosperity for the Australian people. By and large they have done a pretty good job.

If you have been listening carefully to governor Glenn Stevens over recent weeks, you would probably have concluded as I have that barring any shocks, the RBA wants to leave interest rates where they are until they have seen at least one more round of inflation data, which means no interest rate movements until around November.

But with fixed mortgage rates now available at well under 6% a welcome affordability dividend is already available to those who invest in property via a SMSF. As mortgages on super funds often won't exceed a loan-to-value ratio of 72%, (i.e they require a substantial 28% deposit or more unless you have very significant capital in your fund) the large deposit is likely to mean that even prime location investment properties can be somewhere close to neutrally geared.

Australian Property Monitors stated today that it is the properties in the middle or median price bracket which are those benefiting most from the interest rate cuts, with much of the activity taking place in that sector of the market.  
That accords with what I have seen in Sydney myself, and I believe it’s a fair assumption that this is reflected elsewhere, though I am less somewhat well-placed to comment. Summary: expect to see more SMSF funds into property over the next couple of years.

Sunday, 29 July 2012

Strong dollar may apply downward pressure on interest rates

With the likelihood of an interest rate cut in August now appearing to be low, the strong Australian dollar is again threatening to apply some further downward pressure on interest rates over the coming three months.
Twin 25bps (0.25%) interest rate cuts in November and December 2011 had some initial impact in dampening demand, as did further cuts in May (a ‘double’ cut of 50bps or 0.50%) and June 2012, yet the Aussie dollar is still buying nearly 105 US cents again today.
The Reserve Bank will be watching that closely. The currency becoming too strong will make life very tough on certain businesses, particularly those who export and those impacted by tourism.
Trends
The longer term appreciation is reflective of increased demand for Aussie dollar denominated assets. Interest rates are at near-zero levels in other climes and Australia is increasingly being seen as a safe haven given the turmoil and uncertainty in other previously-favoured countries.
The fast appreciation over the nearer term back up to nearly 105 cents implies that currency traders have all but abandoned the likelihood of interest rates being cut on August 7.

***
Heading down to the Australian 18 Footers Club this afternoon at Sydney’s Double Bay.
Always a great spot for a Sunday, and particularly on a glorious day like today!

Saturday, 28 July 2012

Sydney experiencing retail woes?!

Photo from outside my unit, taken 2 minutes ago (Pitt St.)

Property Update's articles of the week

I shouldn't need to redirect you to the Property Update site...you should, of course, already be signed by now, along with 50,000 other subscribers.

Each week, leading property investment adviser Michael Yardney sifts through the good, the bad and the indifferent so you don't have to - and brings you the most interesting property articles of the week, collated together in one easy summary.

You can read the articles of the week here.

(And I'm not only linking because I'm featured! Property Update is the premier website in Australia for wealth creation through property: subscribe for their outstanding regular updates here).

***

One to keep an eye out for the next month or so: with the market rapidement pricing out an August interest rate cut, look at that sneaky little Aussie dollar go - buying 104.564 against the USD again earlier...


Friday, 27 July 2012

Facebook's margins squeezed - share price plummets

I previously covered in a number of posts including here, here, here and here the perils of speculating in a share like Facebook with a very high stock price valuation and no proven track record of earnings.

On a day yesterday when the Dow Jones recorded a huge boost in valuations of nearly 1.7% as the European Central Bank pledged to support the Euro, Facebook reported its quarterly results showing that is operating margins have been squeezed to 43% from 53% in the previous quarter.

The company has been spending in order to lure more customers, and its share price dropped by as much as 12% at one stage yesterday, following a poor share price performance since its $16 billion IPO on May 18.

Facebook's share price trades at a premium (see below) than all but a handful of the S&P 500 companies which makes for a high risk approach. To put that in perspective, Facebook trades at a premium even to the mighty and still-expanding Google.

Here's the NASDAQ chart:



Pouring funds into a company such as Facebook, with its lack of proven track record for generating profits for investors is the antithesis of the Warren Buffett approach to value investing.

Buffett would normally insist on finding companies with decades of strong earnings and a history of returning dividends to shareholders. Despite its many millions of users, Facebook is still expanding at this stage and still records net losses (although using accounting trickery reports like to note a 'profit before certain costs', the bottom line is still a loss).

Investing or speculating?

Of course, many of us take on the risk of buying shares in companies with no track record of generating healthy profit margins and cash. In Australia, mining and resources exploration companies tend to be the favoured vehicle, with punters hoping that their chosen stock will be the one to discover a major untapped resource.

In fact, I have has done exactly this with poor results looking likely over recent months (the only upside to this is tax loss offsets). Why do we do it? The chance of a fast buck! No other reason. There's nothing inherently wrong with that but we should give the practice the correct terminology: speculating or gambling. Not investing. True investing involves a level of certainty around the return of your capital outlay, and a loss-making company by definition cannot offer you that.

The technical term for volatile stocks, is 'high Beta'. Or, in layman's terms: 'You might do your stash'. We need smarter plans in equities for the long term, which I will discuss more over the next week.

***

I discussed a little here why I thought that interest rates will be on hold in August, and why that may be no bad thing. It looks as though that will probably now come to pass, the odds of an interest rate cut paying around $4 today.

***
A glorious day in Sydney - heading to Bondi.

Thursday, 26 July 2012

APM's quarterly housing data

APM released their quarterly property data figures today which you can read about on the Property Observer website here.

Mostly unexciting, although the figure I have circled below which implies a bounce in Melbourne's house prices is causing some heated debate amoung sceptical property bears.

It had been expected by many that prices would drop very sharply after the spectacular boom in prices of around 35% over recent years. For me, I don't pay too much heed to quarterly figures, but year on year the drop of just 2.6% does suggest that any correction to date has been relatively benign.

In my opinion, the most interesting figures seem to be those of Brisbane, which has recorded 24 months of decline now, with prices not having maintained any meaningful growth for some years. While APM suggested that prices may fall a little further yet, Brisbane, as the cheapest capital city on the mainland in which to buy a house, is a market for rational, counter-cyclical investors to put on their watchlist.

Monday, 23 July 2012

Boomtown Barangaroo

Infrastructure
In my book Get a Financial Grip, I talked a little about the merits or otherwise of investing in distant outer suburbs where travel to the city takes one hour or more. Investors in those areas often cite new infrastructure (such as a new hospital or road) or strong council planning as the reasons why the suburb might be a hotspot.
Of course, there are many diverse routes to being a successful investor and different strategies work for different people. All I aim to do here is explain what I have found works for me and what doesn’t. As regular readers will know, being 35 years of age I prefer not to chase high rental yields in the short term and instead look for suburbs which are likely to demonstrate massive capital growth for the next 30, 40 or 50 years into the future (rather than moderately undervalued cheaper suburbs). It is horses for courses.
Some years ago now I bought an apartment on Sydney's harbourside at Pyrmont for $582,500 (it was originally listed at $675,000 but the financial crisis saw some irrational distressed selling) which is a couple of hundred metres away from the amazing construction site that is to be the new suburb of Barangaroo. I was down at Barangaroo at the weekend (I was doing a City2Surf training run – I’m not quite that sad) and construction is well underway there now. From Get a Financial Grip:
“In terms of infrastructure, Pyrmont has had the $780 million development of Star Casino, there is a proposed $50 million redevelopment of the Sydney fish markets and a proposed redevelopment of the Sydney Exhibition Centre.  Across the Pyrmont Bridge, the top end of the CBD has undergone a huge reawakening, the new Westfield Shoppingtown is thriving, and down at Barangaroo there is an amazing transformation due in the coming years.  Having seen the growth in the area in recent years my only regret concerning buying the property there is that I didn’t buy three more of the darned things”
The property I bought is a very spacious 2 bedroom, 2 bathroom, 1 parking space unit, with a great balcony area and some very restricted water views (the property is 100 square metres excluding the parking) and today would sell for $750,000 based upon equivalent recent sales. The recent interest rate cuts have delivered a wonderful affordability dividend for owners so being on a variable rate mortgage, the apartment is currently reasonably close to cash flow neutral. I still haven’t re-decorated it, although I do intend to get around to this…soon, honest!
New construction can sometimes pull prices UP
As reported in this article here, when new developments are announced, local residents can sometimes be fearful that the proposed new supply and the noisy building work can pull prices down. Instead what has happened here is that values in suburbs surrounding Barangaroo such as Millers Point have spiked by some 25% and apartment values in Pyrmont have recently increased in price very sharply too.
In this instance, despite the fears of a negative impact on prices, the exact reverse has happened and is likely to continue to happen. New construction these days is incredibly expensive, which reflects itself in the asking prices of the new apartments. The expensive new property can drag up or underpin the price of established surrounding dwellings.
As noted in this article, the going rate for apartments surrounding the Barangaroo zone is up to $15,000 per square metre for apartments, which implies a price of up to $1.5 million for a 100 square metre property.

Given that the cheapest apartments in the recently completed College Street development on Sydney's Hyde Park were priced at $1.3 million (the penthouses at Hyde Park as we know from the newspapers are priced in the tens of millions of dollars), that seems to be perhaps a little high for an average, though not completely unreasonable for a quality apartment in such an incredible location – some of the world’s most sought after real estate. But I do expect that by the time Barangaroo ‘goes live’, prices in that surrounding pocket will be significantly higher still (as do estate agents in this article).
Much depends on what happens between now and the completion of Barangaroo with market sentiment, but with interest rates at historic lows, I envisage property values in Pyrmont and Millers Point eventually converging some way toward those expected in Barangaroo, which is a happy result for existing owners in those suburbs and those who managed to buy in before the boom.
Arbitrage and the imperfect market
In the share markets it is extremely difficult to practice this kind of arbitrage in prices (although there are untold millions who try) because modern share markets operate a near perfect capital market environment – most publicly available information is processed and factored into share prices immediately by rational profiteers.
Short-term stock speculating can see you make very exciting returns, but this is kind of dangerous. Weighing up the odds of a likely company takeover or merger involves a high level of skill and a lot of nerve, which is kind of stressful. Engaging in currency, stock or commodity price arbitrage by buying and selling in different markets involves understanding probabilistic or temporal states to protect your downside, which is kind of complicated. Of course, insider trading can definitely see you get ahead, but this is kind of illegal.
The property market is imperfect
The property market is far more imperfect. This is partly because the property market is more illiquid: transactions can take months to be finalised and involve substantial transaction costs - such as stamp duty and legal fees - which tends to dissuade rapid turnover of stock.
The property market is also imperfect because, unlike the stock market, it is not a pure investment class. In Australia, around 10% of buyers tend to be emotional first home buyers and significantly more than half of buyers are acquiring property as a place or residence rather than as an out-and-out investment.
There are many ways to create wealth, but for my money the easiest method for the average investor is buying and holding properties in prime locations close to the city where huge demand is likely to come to the market. It might not sound as exciting as exploiting temporary discrepancies in purchasing power parity or practising sports betting arbitrage through running a ‘Dutch book’. But the buy-and-hold-quality-property approach retains one major advantage: it works.

Friday, 20 July 2012

Residex: Sydney rents are spiralling

Something that regular readers will appreciate that I have been harping on about for the past year: the undersupply of quality apartments in Sydney is forcing unit rents north very sharply - by some 10% over the last 12 months (although in certain areas such as pockets of the inner-west the rate of increase has been significantly higher than this).

While I tend to place little emphasis on monthly figures, Residex's annual data also shows that, despite all the talk of a major asset class correction being well underway, apartments in Sydney have not fallen in value at all over the two years since the last boom in prices.

This is due to a dynamic of strong population growth, a significant affordability dividend having been delivered by the series of interest rate cuts and a lack of quality new stock coming on the market. Indeed, since 2008, Sydney unit values have increased markedly.

If you look at the 10 year capital growth per annum of Sydney's apartments, it is the lowest of any capital city or region in Australia, which is just one of the reasons I believe that this category of dwelling will be the strongest performer over the next 10 years on a counter-cyclical basis (while recognising that median growth figures are very much a 'broad brush' measure - it's still important to pick the right suburbs and properties).

I feel that houses in Sydney, on a median value basis, will show less capital growth due to a lack of affordability.

Figure 1: Apartment rents in Sydney up 10% in the last 12 months


Figure 2: Sydney apartment prices haven't fallen over 2 years since last boom period


Source: Residex via Property Observer

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As global markets shift back into risk-on mode, just look at the Aussie battler go: one of our humble dollars buying 104.324 US cents before easing slightly. And that's in spite of 125bps (1.25%) being lopped off the cash rate. Reserve Bank will be glancing at that with ever-so-slightly twitchy fingers...

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Going to take a stroll down to Darling Harbour in a few hours to the Sydney Home Buyer and Property Investor Show. Will be interesting to hear a few expert thoughts on the markets.

Wednesday, 18 July 2012

Tough times in Brokerville

It has been reported that plummeting share market trading volumes have caused stockbrokers to fall upon hard times of late. A number of broking firms have collapsed in the period since the global financial crisis, reflecting the tough days share markets have experienced over a number of years now.
A large number of self-managed super funds (SMSFs) – my own included – have parked much of their money in cash rather than equities given the uncertain climate ahead, which has impacted upon share trading volumes.
Perhaps more significantly, more traders than ever prefer to do their own online trading using internet brokerage firms, thus bypassing the need for stockbroking firms.
In days gone by, punters may have traded less frenetically in part due to the embarrassment of phoning a broker several times a day. And many would have held on to losing stocks for far longer than is the case these days for the same reason.
The markets of today are now all about what is known as ‘HFT’ – High Frequency Trading.
Computerised trading
The electronic execution of orders (such as automated sell stops) and electronic trading systems were blamed by many for the incredible crash in share prices on ‘Black Monday’ in October 1987, when the Dow Jones in the US dropped in value by an amazing 22% or $500 billion in one day.
Program trading was still a new tool and thus was largely untested in the real world of the markets. After Black Monday the SEC introduced a number of new rules for computerised trading, ensuring that, among other defensive measures, computer systems could handle larger volumes.
The concept of the Circuit Breaker was also introduced, allowing trading to be halted if the market fell by more than a prescribed number of points in one day (although the circuit breaker rules were later changed).
The accusations that computer trading had been to blame for the crash seemed partly vindicated by the remarkably quick recovery from the crash. By 1989, the market was breaking through record highs.
It’s entirely possible  that I’m not supposed to take photos of the shiny new stock exchange foyer at Bridge Street in Sydney (and subsequently post them on my blog page), but nevertheless here it is…

Tuesday, 17 July 2012

Ethics in investing

I sometimes wonder whether people still have ethics these days!
When I put my car up for sale last week, I had at least three enquiries that started along the lines of: “I’m currently overseas, but if you can just transfer me $1,250, mate, then I will gladly pay you well over the odds for your vehicle in due course…” – seriously, that is very sad as some poor undeserving sod will fall for it.
I also sometimes wonder whether if these scammers applied their (not inconsiderable talents) to more worthwhile pursuits they would be the new Bransons and Trumps?
Still, there are some good people out there. In all fields, including investment, we should look for a win-win outcome. I’m not sure I believe in instant karma, but over time I do believe that karma tends to level itself out. A great motto is: “Always aim to add more value than your receive”.
Ethics in share investing
My wife and I invest in an ethical index fund. I can’t claim too much credit for that as the missus set it up about a decade before we met! But we still do contribute to it every month even today, 15 years on.
An ethical fund will generally avoid investing in companies which operate in, for example, munitions, alcohol, tobacco or gambling (some of which, admittedly, are industries I have contributed to handsomely as a consumer over the years).
Funds which exclude companies operating in these industries will naturally perform differently to those which, for example, hold the top 200 companies in the index by market capitalisation and liquidity.
Sometimes, ethical funds have outperformed straight index funds, but this may not always be the case, particularly as ‘unethical’ industries are sometimes shielded from new competitors and industry entrants due to their operating in heavily regulated sectors.

A tougher call is to be made on resources stocks: buying shares in mining and drilling companies that are depleting the earth's natural resources. I've owned shares in many of them over the years (and still do hold some, though I have pledged to not buy any more in the future). You have to make your own decisions on this one. If you are struggling with the dilemma - and to be frank, most people don't really care - it is perhaps worth remembering that industrial stocks generally pay higher dividends!
Ethics in property investing
I’m not blithely unaware of the ethical issues involved in property investment. Sure, there are those who argue that investors push up prices unfairly, but I’m not entirely sure about that. Some people will always prefer to rent and investors fulfil that demand by providing rental properties.
It suddenly really hit home to me back in 2005 where Australia’s population growth was headed, and sure enough we have since heard talk of the ‘Big Australia’ policy and the headcount continues to grow apace.
With an ever-ageing population and the government needing to shore up the tax-paying workforce, we are likely to see somewhere between another 10 million and 16 million people in Australia by 2050, and at the slow rates at which new dwellings are being built, I plan to be owning as many existing properties in the capital cities as possible over that time period.
Sadly, the effect of the undersupply of dwellings is that rents in, for example, Perth and inner-Sydney are soaring, which is very tough on renters. Tenants should always be treated with the utmost respect – tenants are your business partners as a property investor. What they are not are commodities to be exploited through mercilesssly jacking up rents at every available opportunity.
I have heard theories of never viewing your investment properties in case you become emotionally involved and tempted to spend money on making the dwelling habitable up to your own supposedly higher standards. I understand the theory, but that ain't the way I roll.
I have a rule which I abide by: I never, ever let a property which I wouldn’t be prepared to live in myself. Indeed, we have lived in several of our own properties over the years before later letting them to tenants.

This has worked for us as we like to live in 100sqm+ units in exciting suburbs with great transport access and proximity to the city and, broadly speaking, we hail from a similar socio-demographic background to our targeted tenants, who are young professional couples.

Recently my property manager (from Metropole) has contacted me with a couple of emails detailing proposed repairs to a few of my apartments in Sydney. My answer, as always: “Yes, of course”.
How does the old saying go? "Do unto others as you would have them do to you". That's absolutely spot on.

***
The Reserve Bank of Australia released the Minutes from its July meeting today.
The RBA perceives economic growth to be pretty good: the fastest in the developed world in the first quarter of 2012, no less. It seems unlikely to me at this stage that the cash rate will be cut again very soon, unless there is a major surprise in the inflation numbers (or something else unexpected).

The Aussie dollar jumped back up by half a cent to 103 cents versus the greenback on the upbeat-sounding news.

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What a cracking sunset in Sydney over the Blue Mountains...just watching from my balcony in Market St. Love this city (most of the time!)...

Monday, 16 July 2012

Direction of Aussie property values - battle lines drawn

Who to believe?

Well, the property bears have been particularly quick to pour scorn on recent data which suggested that the slashing of the cash rate from 4.75% in November 2011 to 3.50% in June 2012 has led to a jump in Australian dwelling prices in June and July.

And now witness this withering response from a more upbeat RP Data-Rismark's Christopher Joye today (always well worth a read on his excellent blogspot page).

So the battle lines are well and truly drawn...they can't all be right!

Growth or stabilisation?

For what it's worth, I personally find it difficult envisage any significant house price growth in the major capital cities over the next 12 months, perhaps moreover a stabilisation in prices is more likely. With soaring rents and low fixed-rate mortgage rates now available, though, there is a case for arguing that apartment prices in some supply-constrained areas might jump, particularly in inner-Sydney - with perhaps certain parts of Brisbane and Perth to follow.

Clearance rates

As ever, commentators scoured the auction clearance rates on Saturday, which seem to be hovering around 60% in Sydney and Melbourne (although every last decimal point seems to be contentious these days). What is often overlooked is the tremendous variances even within cities.

Sydney's inner-west for example, has on occasion seen auction clearance rates of above 75% which I have seen reflected in some very strong growth in unit values. Some outer areas are close to one third of this clearance rate, albeit normally from far fewer auctions. It's the age-old story of there not being any one 'property market', rather there are trends within trends.

Key date - 25 July

With most mortgage holders in Australia on variable rate loans, the property market is known to be a highly interest rate sensitive sector.

On 25 July, the Australian Bureau of Statistics (ABS) will release the next round of inflation (CPI) data for the quarter to June 2012. In the quarter to March, the reported 'trimmed mean' inflation figure was particularly low at just 0.3%, sending the annualised figure down to the bottom end of the targeted inflation range of 2-3%.

At present, the Reserve Bank would appear to have no cause to cut interest rates still further (though the odds of a cut versus the odds of rates staying on hold are in perfect equilibrium, both paying $1.83 today). Perhaps another exceptionally low inflation print (or something else unexpected) might tip the scales towards yet another easing of rates, but rates remaining on hold at 3.50% seems the most likely, at least for a little while yet.
Some sources have suggested that the next inflation figure won't be quite so low. We'll see in a week or so's time.

***

Difficult times in East Timor as reported by Sydney Morning Herald today, with the complex election process leading to violence in Dili and Baucau overnight. Can only hope for better news over forthcoming days and some kind of a resolution to the disagreements over the potential coalition. Stay safe everyone, hope to be back in Dili and Baucau sometime later in the year myself.

***

Stock market looking up today following positive GDP data from China on Friday and a corresponding big 200+ point positive trade on the Dow Jones. Called in down at the ASX (Aussie securities exchange) myself today to be mesmerised by the screens and tickers for a while, on my way down to Customs House library. I think perhaps I do need to get out a little more.

Sunday, 15 July 2012

Differing risk appetites

Different strokes for different folks
Having different attitudes to money and different appetites for risk can be a major cause of stress in relationships. If you think about it, this is somewhat unsurprising. Every person has their own personality and perceptions and we are all different.
There is no easy remedy for disagreements over finances, only open and frank discussion of your longer-term goals and how best to reach them.
Case study: me, myself and…
This is a subject rather dear to my heart as my wife and I are currently having ‘heated’ discussions on a near-daily basis about our different viewpoints on investment.
By nature, although I am at times drawn to risk and enjoy risk-taking, my preferred investment style is that of an accumulator. I don’t respond at all well to volatility and my favoured approach is to acquire appreciating assets and hold on to them for as long as possible: preferably forever.
By my own frank admission, I'm an utterly dreadful person to be around when I am share trading. I respond far too emotionally to losses (and gains), and ride every upward and downward tick with my heart on my sleeve.
The best share traders instead view trading in a more detached manner, preferring to view taking  positions as assuming a businessman’s risk and accepting that, at least some of the time, poor selections will be made (for this is inevitable).
In contrast to me, my wife has a seemingly inexhaustible tolerance for risk. She doesn’t bat an eyelid at using leverage to trade highly speculative resources stocks, and is forever imploring me to agree to risky trades which cause me heart palpitations, rapidly greying hairs and sleepless nights.
I suppose these same character traits also explain why when back in 2007 my wife was voluntarily leaping off Auckland Sky Tower – I think they call this ‘controlled base-jumping’ - I was flatly refusing to ascend any higher than my bar stool. Some of us have a higher tolerance for risk than others.
For now, we have simply agreed to disagree: you do your thing; I’ll do mine. While this is fine in theory, it’s not usually a great strategy in practice. UItimately, a relationship should be working towards a common goal. ‘Doing your own thing’ eventually tends to lead to I-told-you-so’s or resentment.
In property, too, I tend to prefer a fairly conservative outlook whereas my wife has no qualms about investing at any stage of the property cycle. I suspect her views are reinforced by her own experience, having bought her first property some 15 years ago for what, in today’s dollars, seems like a pittance. At the time, people told her she was “crazy” to pay so much for a terraced house, and yet it more than tripled in value in just a eight years.
Therefore, not unreasonably, she has developed a view that over the long-term, property is an appreciating asset and, for her, time in the market is more important than timing the market.
Random reinforcement
As investors, what we must be wary of is being swayed by random reinforcement: that is, if something works once, then it must indubitably be the best approach for us in the future.
Take the example of a problem gambler - he may regularly receive random reinforcement. Occasionally, though sadly not often enough, the compulsive gambler will be rewarded by the thrill of a winning bet which keeps him coming back to the tables, often leading to devastating consequences.
Anthony Robbins refers to this as us creating neuro-associations:
“Every time we experience pain or pleasure our brains search for the cause to enable us to make better decisions in the future.”
We tend to look around us when experiencing pleasure (or pain) at what is happening simultaneously, and can sometimes create false neuro-associations. We mistakenly associate pain or pleasure to the wrong causes.
Loss aversion
It’s well known that humans will strive harder to avoid losses than they will to secure gains. This is very easily demonstrated via a simple game where a person is offered the option of (1) a guaranteed win, or (2) a significantly greater gain but with the chance of winning nothing at all.
Most of us take the guaranteed win, thanks very much. Nothing too unusual there.
Interestingly, however, when the game’s rules are reversed – with a guaranteed loss instead of a win at stake – we are far more inclined to “let it ride”, being prepared to risk significantly greater losses for an outside chance of losing no money at all. This human character trait is known as loss aversion.
This is why successful traders need attitudes and behaviours that are exactly opposite to human nature. They need to hold on to the winners and cut losses short very quickly. Most of us do the precise opposite.
Mindfulness
Investing takes all sorts, but we do need to be mindful of our behaviours and limit our potential for self-sabotage. As with success in most fields, a winner will tend to choose a long-term goal and then act in a manner today that facilitates progress towards the long-term target.
What separates the winners from the losers? It’s a difficult question to answer comprehensively.
The Japanese have a word: kaizen. There is no direct English equivalent, but it might be described as: “A firm commitment to constant and never-ending improvement.”

That’s an important concept for investors to grasp. We can never know it all and we can always learn more and improve. Small improvements seem believable to us and are therefore achievable.
John D. Rockefeller was one of the wealthiest individuals in history. When asked the key to his success, he said simply: “I turn every disaster into an opportunity.”
How can you do the same?
***
After five years of ownership, we are finally selling our beloved RV. She (“Poppy Pop-Top”) did us proud on our dream trip (the ‘Big Lap’ of Australia) giving us virtually no trouble over 26,500km until a bit of gearbox trouble on the final leg from Melbourne back to Sydney.
So, after five years and some truly amazing travels, it’s time to pass her on to her third owner.


Saturday, 14 July 2012

Keynes' General Theory - what can we learn from it?

Why bother reading economic theories of decades gone by? “Those who fail to learn from history are doomed to repeat it.”
Keynes - The General Theory of Employment, Interest and Money (1936)
My light reading for this week has been to re-visit John Maynard Keynes’ 1936 work, The General Theory of Employment, Interest and Money.
Prior to this revolutionary text, neo-classical economic theories had simply suggested that supply creates its own demand and that all income must be spent on goods and services (known as Say’s Law) – this is clearly wrong, as Keynes identified – we can also save income.

Classical economics had also argued that interest rates were purely a function of supply and demand, which Keynes also believed to be false. Indeed, we do now know that central banks can and do affect interest rates by adjusting the money supply.
Whereas elsewhere others argued in great detail over what caused business cycles to occur, Keynes preferred to argue that a depression was not necessary suffering to pay for the excesses of the past, instead choosing to focus on the causes of unemployment and how the unemployment problem could be solved.
Keynes refuted the conventional viewpoint that wage cuts lead to full employment. Workers are not always prepared to accept lower wages. He argued instead that the Great Depression was a solvable problem:
Keynes believed that mass unemployment was a result of inadequate demand with a simple solution: expansionary fiscal policy.
Considering the context and time in which it was written, Keynes’ General Theory is a work of such consumate and breathtaking brilliance that it is clearly impossible to summarise it in 50 words. Regardless, here’s my stab:
·         Economies can suffer from a lack of demand which leads to unemployment
·         Free markets can be very slow to correct the imbalance
·         Governments can and should speed up the correction process and reduce unemployment
·         Government spending can be the answer (simply increasing the money supply may not be enough)
A glib summary of Keynes’ work might argue that it is simply an argument in favour of deficit spending and that it plays down the influence of monetary policy. But we do need to remember that in 1936, interest rates were already near zero, so there was limited potential to reduce interest rates by printing more money.
What did Keynes miss?
Keynes wrote at a time when interest rates were low and were so for an extended period. He expected this to continue for the long term. Sceptics say that he “mistook an episode for a trend”.
He felt that the failures of the Federal Reserve and the Bank of England to revive employment through increasing the money supply would persist well into the future. Instead, war intervened and technological progress and employment returned. In fact, Keynes had believed that due to the marginal efficiency of capital, profitable projects would become ever harder to find and investment and growth would stagnate.
Keynes also didn’t foresee the high inflation of the 1970s and 1980s, but then, nor did anyone else in the 1930s. Ironically, it was Keynes-influenced governments and their expansionary policies (cf. Heath, Nixon) which caused the high inflation in the 1970s to ignite.
Keynes also believed that the rate of saving would increase with per capita income. Now that was definitely wrong! Consumerism has instead reigned supreme.
Deflation in Japan – will it be repeated elsewhere?
We no longer need to hypothesise over what might happen if interest rates hit near-zero and printing money fails to ignite growth. Why? Because we have now seen it happen in Japan over an extended period from around 20 years ago.
Japan had falling population growth, then around the turn of the century a falling population, and the Japanese government was notably slow to act. When Japan tried to print more money this led only to the hoarding of ever more cash, leading the government to its last resort of huge public spending projects. Widespread deflation eventuated with catastrophic outcomes for the economy.
Where we are now (and what should we do?)
With central banks targeting lower inflation since the mid-1990s and the return of near-zero interest rates over the past 3 years in the USA and the UK, Keynes’ ideas seem to me to be worth another look.
In Australia we have remained relatively unscathed to date, and we still have a cash rate of 3.50%, though many would say it appears likely that interest rates have further to fall yet.
Will expansionary policy save the US and the UK? Might we be in for an extended period of low growth and unemployment?
I don’t have a crystal ball, but my own world-view is that following the desperate outcome of slow intervention in Japan, governments will do anything within their power to prevent deflation and re-ignite growth.
They will print money (witness the massive quantitative easing programmes taking place in the UK and US), they will spend very heavily, and if the situation demands it, governments will even give us cash to stimulate private spending (recall the Australian stimulus package of 2009).
You have to form your own view on this. Warren Buffett, for example, has formed a long-term inflation bias. As is evident from virtually all of my writing, so have I. Australia’s Reserve Bank is frequently criticised for its supposed ‘dovish’ attitude to inflation and I simply feel that governments and central banks will attempt to avert deflation at all costs.
For me, the best approach for individual investors over the long term is simply to continue to acquire inflation-busting assets - such as blue chip industrial stocks, well-diversified index funds and prime-location investment properties - and hold on to them for the long haul.

Quality assets should increase in value over time with inflation and should provide an acceptable rate of return in excess of the inflation rate.
***
Anyone who is continuing to argue that we are in for desperately poor retail sales over the next couple of years: please come to my front door in Sydney, turn to your left and take a look down Pitt Street Mall.
You can’t even see as far as Westfield/Mid-City because of the several thousand eager shoppers blocking the precinct!
This is only my local experience, of course, but I believe the stats will soon tell us that Aussies are spending again. In fact, I will tag this post as a reminder!

Friday, 13 July 2012

Unit/house values converging; unemployment up slightly

As regular readers will know, I have long argued that units (apartments) could be the outperforming property assets over the next few decades (houses having long been the best performers in the past).

Median figures can be a little misleading, for a greater percentage of units are centrally located and therefore command premium rental values and prices.

But the trend has been emerging that apartment rents are growing very strongly indeed in some landlocked city areas due to an undersupply of available units. Houses are still perceived by many to be unaffordable and therefore values have fallen.

From Sydney Morning Herald yesterday:

MORE evidence is emerging that Sydneysiders are embracing apartment living, with just $30 difference between the rent for an apartment over a house, when you consider median rents on a city-wide level.

''Rents for units have surged as demand continues to increase for apartment-style living,'' the senior economist for Australian Property Monitors, Andrew Wilson, said. APM's June Rental Report, released today, shows the median weekly asking rent for Sydney apartments rose by 4.4 per cent over the June quarter to $470. House rents were stagnant at $500.

***

Unemployment figures announced by the Australian Bureau of Statistics yesterday showed an increase in the unemployment rate from 5.1% in May to 5.2% in June, which marginally increases the likelihood of another interest rate cut soon. Inflation data will be a key factor in this too.

Graph: Unemployment Rate

***
I will be on ABC radio's Barry Nicholls Show today in WA today, talking about property, shares, personal finance...and England's dominance in the cricket, hopefully.

Thursday, 12 July 2012

Averaging down

Down, down, deeper and...
Averaging down is a subject I have talked about briefly before, but it is worth a quick recap given that we have just witnessed more than half a decade of underperformance in equities.
What is averaging down?
Averaging down in a strategy to reduce the average cost of your shares when stock prices fall, by buying more at a lower price. If the price then bounces back you look very smart. But a sceptic would say you could be “throwing good money after bad”.
Here’s an example with some numbers. We buy 100 shares in XYZ Company for $10 a share. The share price drops by 20% to $8.00 per share. So, we have 2 choices. Sell the shares and crystallise a loss. Or buy more shares at $8.00 per share.

No. of shares bought
Price per share of XYZ
Total cost
Average cost per share
100
$10
$1,000
$10
100
$8
$800
$8
200
-
$1,800
$9

By electing to buy more shares, in this example, the investor has brought the average cost per share down from $10 per share to $9 per share.
When is averaging good?
Averaging works particularly well if you are paying a chunk of your salary every quarter into an index of shares or a diversified fund of stocks that you have confidence in for the long term.
While stock markets go up and experience crashes, over the long term the trend is definitely upwards. The longer your time horizon, the less significant the crashes become.
 
Here the crash in the All Ords experienced during the global financial crisis looks very dramatic over a 25 year chart. Spread the chart out to 50 years and it becomes seemingly far less important.
When averaging is risky
If you adopt the approach shown in the numerical example shown above (averaging down into an individual stock), the strategy entails more risk.
This is because you need the confidence in the individual company that one day in the future its share price will rise. With individual companies this does not always happen.
Two risks
1)      You run out of cash – averaging down can work as a long-term strategy but if a share price continues to fall over a period of years, many of us will not have the funds to keep averaging down!

2)      The company fails to recover – the company fails completely (Enron), defaults on its debts and needs to be re-capitalised (Centro) or loses all hope of ever returning to its former glory (Bluescope)
Summary
Averaging down can be a sensible strategy, but is usually more sensibly applied to an index or a well-diversified fund of shares than to an individual company.
Strangely, property investors use a similar strategy at times too, aiming to buy property counter-cyclically when sentiment is low with confidence that in the future prices will once again move higher.
***
Back to real life
Meeting a fellow shareholder at the QVB today for coffee, to discuss whether to...erm...average down into a company that has announced a capital raising at a significant discount to its prevailing share price.
What are you thinking? You should be thinking: "Don't do it, Pete!". Why average down into an individual company whose share price has fallen? This is a whole other blog post in itself: the psychology of wealth creation and limiting the potential for self-sabotage.
Upon consideration, I'm fully aware that my best strategy for my wealth creation is (1) pay dollars regularly into index funds/diversified funds, and (2) buy investment properties and hold on to them for decades into the future. And I do exactly these two things.

This third element of trading and investing in individual companies is by far the most risky of the three strands of my wealth creation. The truth be told, I am by nature a risk taker. I like the excitement of trading stocks. What you should have just heard there were two very loud alarm bells. A post for another day, I think.
Now, back to that coffee...