Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, 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

Thursday, 28 February 2013

When the tide goes out...

Super-cat

One of the industries which has captured Warren Buffett’s interest over the years is that of super-cat (i.e. super catastrophe) insurance, which is the most volatile form of insurance there is. Insurance companies themselves need to take out insurance in order to contain losses in the event of a catastrophe, and so must turn to a cash-rich venture in order to seek this assurance.

Naturally Buffett’s Berkshire Hathaway is one such company with the ability to mop up large liabilities and it underwrites super-cat policies.

The principal behind super-cat insurance is that the underwriter expects to make a solid profit in most years but will occasionally incur a large loss in a year where a disaster occurs. Over the short term there is no way to know how the underwriter will fare, for a disaster can strike at any time, but it is expected that over the long term they will finish well ahead.

Skinny-dipping

“You never know who has been swimming naked until the tide goes out”.

I'm a sucker for Buffett quotes and this is one of my favourites. What does it mean?

What Buffett is referring to here is that while markets are going up, economies are strong and the going seems good almost everyone appears to be profiting. However, when the tide turns – as it will do periodically – it is those without protection who get caught out.

The losers may include those with no diversification, those who are forced to sell their assets at a poor price and those who acquired most of their assets at the peak of the boom stage of the cycle. This proved to be the case through 2007 and beyond as we saw the demise of various hedge funds, banks and other financial institutions, as their lack of liquidity caught them out.

Defences

There are a number of strategies which investors can use as defence. One is to always hold a reasonable buffer of cash in reserve in the event that cash flows are diminished for an unforeseen reason, such as a loss of a job or an investment that goes bad. A level of diversification is also important – if all of your eggs are in one basket then naturally this introduces risk.

If you are going to employ leverage (borrowing funds to invest) it is important that you do not become a forced seller of assets at the nadir of a market cycle – this can particularly occur when margin loans are used to invest in shares.

In the share markets especially, one of the best forms of defence is simply to average your investment cost by acquiring a diversified portfolio of assets over time rather than in one lump sum.

Residential property

Australia’s economy has shown remarkable resilience and strength over more than two decades since its last recession. We’ll get an economic downturn one day though, as all economies eventually do.

Our property markets did fall in 2011 and the first half of 2012, but not by a huge margin nationwide (6-7% is an oft-quoted figure - naturally enough some markets such as Brisbane and Darwin fell more than others such as Sydney). Since around May 2012, many markets have begun to recover reasonably well. Markets such as Sydney remain at around the highest they have ever been, while Melbourne has eased a little after a phenomenal boom in prices.

This fascinating recent article from The Guardian in the UK discussed some of the countries which have fared less well than Australia since the financial crisis.

What can we learn from this?

The US story has been well documented. Sectors of some markets such as New York have been reasonably resilient through the economic crisis, but other areas in low demand, including some speculative Florida markets and cities with a heavy reliance one industry such as Detroit, reveal horrifying stories of prices falling to effectively $nil.

The lesson from the UK is crystal clear to me. Outlying markets such as those in the north-east and many elsewhere away from the capital have been slammed, experiencing price falls of up to a third, and worse in many individual cases. The south-east of England with its continued and increasing demand together with a forecast housing shortage crisis - in particular in London - is a completely different kettle of fish:

“…in wealthier central districts, the crash never happened. In Kensington and Chelsea, the average home now costs £1.08m, up 13% during 2012 and £330,000 ahead of 2007.”

And rents have jumped very sharply too.

In Northern Ireland where house prices went into a bewildering upwards spiral through 2005 and 2006, prices have fallen all the way back to where they started out in 2005 – and, in fact, reportedly some 7 percent below that starting point.

I haven't travelled to the troubled city of Belfast in some years now but recently watched an eye-opening documentary which displayed great swathes of totally vacant “ghost” housing estates in Northern Ireland - the country reportedly has more than 120,000 vacant homes – which should be a salutary lesson to anyone considering speculating on a new house-and-land investment in remote outer areas. 

Deutsche Bank reported that the Republic of Ireland had more than 289,000 vacant homes in 2012 and it was estimated that with a staggerring vacancy rate of 15 percent the oversupply could take 43 years to fill (and 200,000 homes "may need to be bulldozed"). 

Australia's capital cities on average have a vacancy rate of 1.9% with some such as Sydney (1.6%), Adelaide (1.4%) and particularly Perth (0.8%) having very low vacancy rates indeed.

With virtually no population growth to speak of in Ireland, the housing market is in turmoil. Investors should look to countries (or regions) where the population is growing very strongly and supply is capped. Australia's population grew by 359,600 in the year to June 2012, a very healthy rate of growth. Cities in which supply is not meeting demand reports Matusik, include Sydney, Perth and Brisbane and Matusik lists some regional centres too including, for example, Newcastle.

In countries where governments have unsustainable debt such as Spain the housing market fallout has been remarkable. Fortunately Australia does not face that particular problem. Iceland experienced an economic bust and its house prices are back to 2005 levels too.

Australia’s outlook

In the near-term the low interest rate environment in Australia is likely to see property markets faring reasonably well. The headlines will show that after a "very strong" January, in February prices continued to move up in Sydney and Melbourne and were down a shade in other capital cities, resulting in a fairly flat month on a nationwide basis (insofar as you can read anything into monthly city median price data).

If you are an investor in property over the long term - and I would suggest that if your time horizon is a short one then your odds of success are immediately diminished due to the material transaction costs incurred - then it is highly likely that at some point over the life of a mortgage you will experience another property downturn.

Property Observer reported that the areas which have suffered the biggest falls in Queensland in recent times have included Cairns, the Whitsundays and Logan city, all areas which have variously been recommended by positive cashflow or yield-seeking investors. The woes of the Gold Coast have also been well documented, although some have reported that sentiment may be picking up in that sector.  

The above stories explain why most of my investment properties are no further than 1-6km from the centre of Sydney in the Inner West, the Eastern Suburbs or on the harbourside close to the CBD (or are properties within easy reach of the City 'square mile' district of London in respect of those I own overseas). Properties in the $500,000-$800,000 price bracket which buyers in those suburbs can afford. And it’s why experienced investors such as Michael Yardney tend to stick to quality suburbs in Melbourne. 

Promoters of regional property frequently invoke the "...in the last decade" argument, which is fair enough. But Australia has not experienced anything even approaching painful recession in that time. Hopefully we will not do so for the next decade either, but there are never any guarantees.

Importantly, experienced investors look away from the most expensive sector of the capital city markets where price action is notoriously volatile and yields frequently woeful (although it's tough to argue that capital city properties in quality suburbs have performed poorly over time when you note that a house in Dubbo costs ~$250k but a house in, say, Dover Heights ~$2.5m). 

Instead, investors should look towards established properties closer to the median price which are (a) more affordable to buyers in those suburbs and therefore in great demand, and (b) provide reasonable yields. Importantly they want to see sustainable real wages growth - overseas markets have shown that property prices cannot solely be inflated by burgeoning household debt ad infinitum.

Each country has different dynamics but the closest equivalents Australia has to a London or a New York are Sydney and Melbourne. Returns in the quality, well-located suburbs of these cities may be steadier at times (although they sometimes do boom), but it is in the lean times and market downturns that quality, well-located properties come into their own. 

As Buffett said: “You never know who has been swimming naked until the tide goes out”.

Capex data pushes out the yield curve

From the ASX:

The implied yield curve shows that a March interest cut has only a 19% chance priced in thanks to the capex data being solid.

However, due to the reasons mentioned in an earlier blog post the markets still price in two further rate cuts by October 2013 to a cash rate of just 2.50%.




Property Observer: expensive Aussie housing

I write for Property Observer today on the subject of expensive Aussie housing.

You can read the article here.


Stocks upbeat on capex news

And they're off again (after a small blip!)...

The "working from home revolution" stalls

Yahoo bans its employees from working remotely, a story which made the front page of the New York Times.

For many years now it has been argued that there will be a shift towards living away from capital cities as more of us choose to work from home. 

It's an interesting theory, and the internet has been widely used for a couple of decades now, but no seismic shift has been seen.

In the US, which is at the forefront of technology and where reportedly a huge percentage of the workforce has the potential to work from home, only a tiny fraction of the workforce nominates home as the principal location of work.

Around 10% of US employees "regularly" work from home, but are experiencing a backlash from employers who are coming to the conclusion that too often the result is simply "shirking from home".

Reports the New York Times:

"The work ethic at Yahoo among some workers has deteriorated over time, the Yahoo employees said, and requiring people to show up is a way to keep an eye on them and re-energize the troops. If some of the least productive workers leave as a result, the thinking goes, all the better.

Some employees have abused the former policy permitting work at home to the point of founding start-ups while being on salary at Yahoo, said the Yahoo employees and others who have worked at the company.

Several business analysts said that if work-at-home arrangements don’t work, it is generally a management problem.

Yahoo’s culture and employee morale have dissolved as it has fallen behind hotter tech companies. And, business analysts say, those are two things that are difficult to repair without having employees present in the same place.

Still, Ms. Mayer has said many times that one of her top priorities for the company is to recruit the most talented engineers and other employees. Even if requiring people to show up is the only way to repair Yahoo’s culture, it could result in losing valuable employees.

And even if Yahoo’s broader work-at-home policy needed revision, the internal memo announcing the new policy struck some as tone-deaf by implying that employees should avoid staying at home even once in a while when there are extenuating circumstances."

Private capex data: are interest rates heading to record lows of 2.75%?

The mining investment boom is not over just yet with a huge $168 billion of estimated total capital expenditure for 2012-2013. The forecast for total capital expenditure next year is lower, however, at $152 billion (although forecasting capital investment is acknowledged as being extremely difficult).

The Aussie dollar seemed initially heartened by release ticking up to 102.5 cents. Stocks are up as well by ~0.75% at the time of writing. Overall, it's a very interesting release from the ABS here:

"Estimate 5 for total capital expenditure for 2012-13 is $168,235 million. This is 4.0% higher than Estimate 5 for 2011-12. The main contributor to this increase was Mining (13.9%). Estimate 5 is 1.3% lower than Estimate 4 for 2012-13. The main contributor to this decrease was Mining (-2.7%).

Estimate 1 for total capital expenditure for 2013-14 is $152,494 million. This is 8.1% lower than Estimate 1 for 2012-13. The main contributor to this decrease was Mining (-11.6%)."

Total capital expenditure


Mining

The tricky figure in the report is this one, being the first estimate for mining capex in 2013-2014, which is noticeably weaker:


And manufacturing...

...looks terrible. The RBA will be very concerned by the lack of real indication of a pick-up in non-mining investment:


And so, for interest rates

Crystal ball time...it is "probable" that there will be no interest rate cut in March given the result in the December 2012 quarter, but there is still "likely" to be one in the pipeline for these five reasons and others:

-inflation lingers at the low end the target range (and seems unlikely to pick up materially while the non-mining economy remains at sub-trend);

-iron ore spot price still strong at ~$150/tonne but is forecast by almost everyone to fall;

-median dwelling prices will be reported tomorrow by RP Data as ticking up in Sydney and Melbourne but down across other the capital cities; housing capex hasn't really picked up and credit growth remains around record lows - there is some sign of new housing sales improving a little but nothing inspiring given the very low level of interest rates;

-the RBA is of the opinion that the Aussie dollar is still "4-15% overvalued" in spite of 175bps of interest rate cuts delivered to date; and

-the non-mining sectors of the economy have shown few signs of picking up to plug the gap that will be left after the peak of the mining investment boom - which appears from this quarter's estimates to be coming soon.

What the RBA forecasts for mining investment

Will be interesting to see what transpires.


Graph 9: Mining Investment Forecasts

Property Update: Sophisticated investors

Read my article today on Property Update on the subject of what makes for a "sophisticated investor".

The full article is here.





Wednesday, 27 February 2013

Construction data not great

Not a very inspiring data set from the ABS for the December quarter construction figures. 

Yes, the year-on-year figures look very healthy, particularly for engineering construction, as expected. But the trend is weak and total construction fell by a seasonally adjusted 0.1% in the quarter against expectations of a moderate increase. Residential construction was up over the quarter but is hardly inspiring over a longer period of time.

Tomorrow's ABS capex release will shed more light: has the mining investment boom finally reached its top? And if it has, when will the RBA have to drop the cash rate to a record low of 2.75%?

Elsewhere, UBS have forecast a huge drop in in ore prices which won't inspire much confidence either.

Stock markets don't seem too stressed about it, recording a 0.6% gain at the time of writing following re-asurrances in the US from Mr. Bernanke that the Fed will not cease its stimulus too soon. 



Value of construction work done:

Graph: Value of construction work done, Chain volume measures—Trend estimates

Value of building work done:

Graph: Value of building work done, Chain volume measures—Trend estimates

Source: abs.gov.au

Property Observer: interest rate cut in March?

A short piece I wrote on Property Observer here on the prospects of a March interest rate cut.

Property Update article: fast and slow economies

My article on Property Update today - on economies moving fast and moving slow - you can read it here.



Tuesday, 26 February 2013

Becton into receivership

"Eat dirt"

More excited triumphalism today from those with bearish preferences as a development company goes into receivership, reporting that "Becton bites the dust":

"Another major developer eats dirt today with Becton Group defaulting on loans to Goldman Sachs"!

Becton Group (BEC) going into a limited receivership may prove to be heartbreaking news for employees and shareholders (ASX trading has now been suspended after a trading halt was requested on Friday). Becton doesn't really qualify as a "major developer", however - it was absolutely clobbered through the financial crisis and has been in a great deal of trouble ever since the downturn in late 2007.

The group's total market cap is all of $2 million, a genuine market minnow. The group has been around for a long time but its turnover in 2011 was miniscule at ~$70m. 

Bear in mind that the favoured US definition of a small cap stock is often held to be a company with a market cap of between $300 million and $2 billion. A micro cap stock is usually defined as a company with a market cap of between $50 million and $300 million. So a $2 million stock is way down in nano-cap territory.

Yes, I do understand the point of the excited economic bears - a developing company has struggled to manage its cashflow and pay its debts as they fall due and therefore this may reflect trends to be seen elsewhere in the sector. Fair point, although property development and construction companies often run cashflows close to the wire. You get the full picture through also looking at the genuine major developers not only highlighting the failures.

Who are the major Australian real estate groups? There's no agreed-upon definition, of course, but I'd say a group such as Mirvac (MGR) with a market cap of around $5.5 billion is a major developer, with its annual revenues of well over $1.75 billion. Becton's story is not a happy one but the true story includes what is happening with the big boys.

Mirvac (MGR)

Mirvac's results weren't overly exciting - revenues for the half year dipping slightly and profit before exceptional items of $194m as compared to comparative period of $202m, although Mirvac did book some non-cash write-downs in the half year (to huge excitement on the internet forums). Net operating cashflows improved very significantly on 2011, however, as is clearly reflected in the rapidly increasing share price. That's because stock analysts attempt to look at the full picture and future prospects instead of only highlighting bad news.



Source: www.asx.com.au

Stockland (SGP)

The results of another major market player Stockland Group (SGP) - with its market cap of $8.2 billion - on the face of it didn't look particularly flash. Revenues were solid enough but margins were somewhat lower, and Stockland also booked a sizeable non-cash write down of inventory (again to much excitement on the forums). Again, however, net operating cashflows improved very favourably in 2012 and again this is reflected in the rapidly rising share price, with analysts only interested in the group's prospects going forward.



Source: www.asx.com.au


Lendlease (LLC)

LendLease (LLC) is another major player in the property space, with a market cap of over $6.2 billion. It recorded a very healthy result and earnings thanks to its profitable undertakings on the massive Barangaroo project and the share price has boomed accordingly.



Source: www.asx.com.au

Non-cash write-downs aren't uncommon in an environment such as we've experienced through 2011 and 2012, but it is the sector's cashflows going forward that are important here rather than retrospective book entries and accounting adjustments. And cashflows have improved markedly in the past year.

Receivership of Becton

"I’m wondering if this kind of Chapter 11 limited bankruptcy is what we need here. Maybe we just need some dead set Chapter 13 bankruptcies in the developer space with a consequent flood of cheap assets out of land banks and into fresh hands for better priced developments."

An unusual viewpoint. We should re-write corporations law for small property developing companies as compared to all other corporations - forcing them under, instead of allowing them to restructure in the same way as any other Australian company is permitted to? I'm not sure exactly how that suggestion would even work from a legal perspective (it wouldn't), but I am sure the shareholders (and creditors) in question would quite rightly have something to say in response to that.

The "Chapter 11 limited bankruptcy" referred to is actually a part of the US bankruptcy code (different from Australian insolvent-trading law governed by the Corporations Act 2001 - which is among the world's toughest and can involve criminal charges - and our long-standing Bankruptcy Act) and available to every US business where it is unable to pay its creditors. 

Chapter 11 allows for a restructuring of a company's debts out of  to the shareholders and to the creditors. Such defensive legislation and ranking of creditors for corporations are part of the very foundations of a capitalist economy and the way in which limited companies are treated and creditors subordinated.  

"Chapter 13 bankruptcies" are also a part of the US bankruptcy code but instead enforce individuals to undertake a swift repayment of debts and may require the debtor in question to use 100% of its income to make the repayments. A totally different thing.

"God help me, I am LOVING that."

Well, clearly. Nobody doubts that economic bears want to see property companies go bust and jobs lost in the ongoing hope that land prices fall. 

But although some appear to want to allow the failure of property development and construction companies preferentially, Becton's management will continue operations and restructure debts as it is entitled (compelled) to do by law. Besides, the cashflow management and prevailing misfortunes of a $2 million minnow are not really of huge consequence to the wider stock market nor to a residential property bust as is the implication.

One thing I won't quibble with is that off-the-plan residential developments could prove to be a very hard sell during the road ahead and it is likely to prove very difficult to entice first home-buyers into new-build developments. A number of other factors are conspiring against levels of construction which in part explains why residential property markets in parts of Sydney, Perth and Brisbane remain under-supplied.

RBA's Debelle: we retain scope to cut rates further

Markets have fairly well priced out the chances of interest rates being cut to record lows in March.

As at the close yesterday the ASX 30 Day Interbank Cash Rate Futures March contract was trading at 97.050. This indicates only a 24% expectation of a rate decrease to 2.75% at the next RBA Board meeting.


Source: www.asx.com.au

Is that decision cut and dried? It's probably a bit early to say so.

Guy Debelle of the RBA gave an interesting speech in Adelaide yesterday on the RBA's function in the financial markets.

It seems that the Reserve will not intervene on currency and again it was re-iterated that rates may yet be cut further as and when required:

"To date in Australia, we have been able to counter the effects of the higher Australian dollar with lower interest rates, as my colleague Phil Lowe described recently. 

We still obviously retain scope to lower interest rates further, should the need arise, including to counterbalance the pressures of an elevated exchange rate."

It's going to be a rough old day on the stock markets (down ~1.2% so far) due to fears among investors that the gridlock in the Italian election could eventually impact Italy's ability to pay down its debt.

Key data will be released by the Australian Bureau of Statistics on Thursday in the form of the capital expenditure and expected expenditure.

Perhaps the most important chart will be the second of the three below, which shows total mining expenditure and expected expenditure

If it appears that the mining capital expenditure boom is about to peak, another interest rate cut may yet not be far away. The RBA needs the rest of the economy to step up and plug the gap, and to date there does not seem to be much evidence of it so doing.

Actual new mining capital expenditure:

Graph: Mining

Total and expected mining expenditure:


Total and expected capital expenditure:


Source: abs.gov.au

Monday, 25 February 2013

Australian markets lurching towards FOMO rally

“I shouldn’t but…”

Back in my cricketing days there was nothing surer on ‘the circuit’ than each Saturday's match being followed by a night on the town. It was a part of the culture, and for some it was even the raison d’ĂȘtre, virtually the only reason for playing cricket.

Every week without fail someone would also suggest a follow-up Sunday afternoon ‘session’, supposedly “a few quiet drinks” to while after the weekend hours.

And every week one of the senior players would say: “Definitely not for me, guys. I was out last night, I can’t afford it, my wife would give me earache and I can’t face another Monday hangover…say, where are you headed again?”

He knew he shouldn’t go and yet he was there, regular as clockwork, every Sunday. By his own admission, his main reason for going along was a “fear of missing out”. After all, other people might be enjoying themselves!

Most Sundays it would be a relatively sedate affair and good fun for all. Occasionally, boys being boys, it would escalate into over-zealous exuberance and the wretched Monday hangovers would leave all concerned wondering why they had ever gotten involved in the ill-advised scheme in the first place...

Buying on impulse

One of the best things about deciding to opt out of watching countless hours of television is that you are no longer subjected to those mindless daytime shows which are quasi-entertainment/quasi-advert.

You know the ones: “The new Body Excel Super Trim Machine – exercise for 3 minutes a day and get yourself abs like Arnie. Be one of the first 50 callers or miss out forever, just 24 monthly payments of $49.95…”

Do you think anyone has ever phoned up and been told: “Sorry caller, you’re the 51st person to dial, so we can’t sell you a Body Excel today”? Call me a sceptic, but I very much doubt it.

The reason that adverts are phrased in this way is that researchers, marketers and advertisers have come to understand that one of their most effective sales techniques is to tap into that human “fear of missing out” in order to trigger impulse purchases.

The salesman wants to change your emotional state from that of behaving rationally to the state of being fearful. Scary stuff.

The fear of missing out

“The thoughts of the diligent tend only to plenteousness; but of every one that is hasty only to want.” - Proverbs 21:5

The world has changed a lot over the past three millennia, but human nature certainly hasn’t, as this quote from the Book of Proverbs shows. In the investment world, we refer to this phenomenon using the acronym FOMO – the fear of missing out.

It’s something for investors to be wary of. When you start to make investment decisions based upon fear rather than based upon reason, you begin to make suboptimal choices and are prone to taking ever-greater risks in order to chase fast returns.

Those who take too many short-cuts tend to be caught out. It is nearly always better to have a solid plan to get rich slowly than it is to take the short-cut.

Stocks in a FOMO rally?

Another day passes and yet more gains for the stock market. What was driving the gains today? Solid data? Positive news? Well, no, not really.

In fact, the data out of China was weak showing that China’s manufacturing sector fell from two-year highs, with the HSBC flash purchasing manufacturers’ index (PMI) falling from 52.3 in January to 50.4 in February. In spite of that a measure above 50 represents a state of “expansion” and therefore China’s economic growth appears to remain set for a steady enough recovery.

In any case, in the face of the relatively weak data, the XJO (ASX 200) actually rose by 0.8% on the day.


It’s interesting, isn’t it? Through much of 2011 and 2012, share markets simply couldn’t catch a break. And yet today it seems that even in the face of disappointing data the share market can smash out impressive gains day after day after day.

Momentum is everything when it comes to investment markets. When the trend is up the market can keep running upwards even in the face of bad news. Yet when sentiment reverses, even positive sounding news doesn’t seem able to arrest the inevitable declines.

At present, low interest rates and dismal yields on fixed interest investments have dragged investors out of cash and term deposits and into the risk assets. And why not, with plenty of blue chip shares paying tax favourable dividends that knock the proverbial socks off term deposit yields.

It’s relatively easy for investors to sit out of the market as it climbs by 5% or 10%, but with the market having jumped by 25% in a very short space of time, a FOMO rally can begin to kick in – what if the gains increase to 30, 40, 50%? Would-be investors who have been kicking their heels become filled with remorse and begin to dive in as the stock market climbs its ‘wall of worry’.

How long the bull market runs for is never clear until after the event. There is no question that it could run for a long while yet, for with PE ratios priced in the mid-teens the markets have scaled far dizzier heights than these before. But equally, a setback could stop the run dead in its tracks. Stock markets are liquid by nature and can turn on a dime.

I would suggest if you have an investment plan based around calling the timing of this bull market correctly, your odds of success are not particularly great.

Property markets lurching into FOMO mode

As for Australia’s property markets, well some of them seem to be lurching into FOMO mode too. Logically it doesn’t really any make any more or less sense to invest in property in February 2013 than it did in November 2012, but the one thing that has changed is that people are beginning to sense that prices could rise rather than fall.

These things tend to become self-fulfilling. George Soros has observed as part of his Theory of Reflexivity how a rise in prices in leveraged markets often leads to further price gains in the short-term.

Fixed rate mortgages are now available at extremely low rates of 5% and falling which is a level that investors are beginning to find irresistible - and there is a strong suggestion that much of the market activity to date has been investor-led. Cash-flows on investment properties may be close to neutral when rates are this low.

Auction clearance rates in Sydney and Melbourne have increased sharply in recent weeks. You can argue the toss over whether the ‘true’ clearance rates were 76.3% or 73.6%, but there is a clear inference that quality, well-located properties are selling at very strong prices, particularly in the favoured market sectors with a tight supply such as Sydney’s Inner West (which recorded an 83% clearance rate this weekend).

Prospects also look solid for some other city markets, such as resources-rich Perth. 

Matusik recently noted that Brisbane is another city market where in some suburbs we are not building enough new homes in order to meet underlying demand. After half a decade of lacklustre activity prices in Brisbane appear very favourable as compared to those of the southern states – what has been elusive in recent times is that intangible thing called ‘confidence’.

Dwelling Prices graph

With an auction clearance rate of more than 76% last weekend and the newspaper headlines talking of “boom time” returning, Sydney looks perilously close to moving into a self-perpetuating FOMO rally and prices bursting through to new all-time highs.

How long these FOMO sentiments last is unknown. Bull and bear markets are forever highly irrational and can run for much longer than we think they will. And at times they can see prices move very quickly as was witnessed fairly recently in the price rises in Melbourne after the financial crisis through 2009 and 2010.

Watch the headlines carefully over the coming few months.

Property Update: Counter-cyclical investing

I write for Property Update today on the subject of counter-cyclical investing.

You can read the article here.


And again...


More 'B' word talk from Sydney Morning Herald...

---

Markets expecting more share market gains this morning, but traders will eagerly anticipate news from the Italian elections today.

Sunday, 24 February 2013

Didn't take long...

Sydney Morning Herald casually tosses the 'B word' out there to the masses...



The Phar Lap approach to investment

Phar Lap
A few years ago I went to Canberra for a weekend. Everyone in Sydney told me I’d be bored stupid, but I don’t buy that: if you visit a capital city and you’re bored then you aren’t using your imagination.
Canberra is a pleasant place. I enjoyed visiting Manuka Oval, and the suburb of Manuka itself is a great spot, particularly if you enjoy Tandoori food as I do.
One of the highlights of that trip was going to see Phar Lap’s mighty heart which is kept in the National Museum. Phar Lap was Australia’s most famous ever racehorse, winning an impressive range of races and capturing the nation’s imagination during the misery of the Great Depression.
When Phar Lap died of a mysterious illness in 1932 - it was suspected that he was poisoned – his passing resulted in a period of national mourning.
The peculiar thing about the Phar Lap tale is that when his heart was examined it proved to be huge, weighing 6.2kg! Racehorses have large hearts anyway weighing 3.2kg on average, but Phar Lap’s heart was truly enormous, and when he raced he just kept going and going…and going...
Buffett
“I think of the economy as being like a racehorse: it’s going fast or it’s going slow…but it’s going.”
Buffett is the master of the one-liner and this was one of the master’s best lines. It explains in part why Buffett is the greatest investor of all time yet most people struggle to ever build any wealth at all. In today’s world of fast information and quick fixes, most are looking for ways in which to make money over the next few months or years.
Buffett worries himself not with economic cycles or trying to outsmart the vagaries of the market. Instead he buys quality assets at a good price and holds on to them for as long as possible – the most efficient wealth-building strategy there is.
As for Australia’s economy, read what Ross Gittins had to say this week about the mining boom: it is not a passing phenomenon, it is a structural shift in the landscape and is here to stay. Resources will be the Phar Lap heart of our economy.
This week in equities
We saw some good examples of short-termism this week. Australia has experienced a very strong equities bull market over the last half a year or so, and those who stayed the course profited handsomely.
On Thursday, the minutes of the FOMC hinted at a shift in stance in the Fed’s bond buying programme, resulting in a slightly panicked sell-off and a correction of 2.3% on that day.
The online commentary was comical: "the party is over, I told you this was coming!" 

Well, yes, if you predict doom and gloom daily for 6 months, sooner or later there will be a down day (even though you missed the 25% upswing). Unfortunately for the gloomers, after Glenn Stevens’ speech - from close to Phar Lap’s heart in Canberra - the market recovered a fair amount of its lost ground the very next day and will probably claw back more of it early next week. Cue deafening silence.
This week in real estate – markets are on the move
Glenn Stevens made reference in his speech to plenty of stimulus still being “in the pipeline”. What he meant by this is that economies do not respond to interest rate cuts immediately – and Australia has had the equivalent of seven of them or 175bps in the past year and a bit with the cash rate dropping from 4.75% to 3.00%.
The delayed response to monetary policy easing is particularly likely to occur in an illiquid market such as property: punters don’t go out and buy a property the day after an interest rate cut. They may decide to make an enquiry about a mortgage and then start viewing a few properties but the point of sale will be some months down the track.
Last weekend Sydney’s property market showed some real signs of life with APM recording an impressive auction clearance rate of more than 71%.
Suspicions that this was an anomaly were erased this weekend when, from nearly 1,500 auctions in the two main metropolises, Melbourne recorded a remarkable 73% clearance rate and Sydney a staggering 76.3% (corresponding week in 2012: 56.6%). 

As I've long predicted, the Inner West of Sydney continues to be the hot sector of the market, with auction clearance rates coming in at 83% again from the highest number of listings. Where auctions begin to clear at these sorts of rates, prices will almost certainly follow them upwards.
The racehorse approach
Over the coming weeks we will hear all kinds of excited chatter about both the equities markets and the property markets. Here are some of the things you will hear from the soothsayers of market timing:
“The market will become overheated and then it will crash”
“Here comes the boom!”
“The best time to sell will be 3/6/9/12 months from now”
“Property in Australia is in a bubble and will soon crash”
“The interest rate easing cycle is over and rates will go up”
“The markets will hit a double top/form a head-and-shoulders pattern/experience a dead cat bounce/go into a slow melt…”
Will any of these statements prove to be true? Any one of them might be, I don’t know. But, crucially, nor will the people who announce them. And simply saying something more often doesn't make it any more or less likely to be accurate.
The problem for people who are continually calling a crash is that they are unwittingly playing the game of timing the market, which most professional investors and experts do badly - so the hope of average punters getting their timing right is slim to none.
Interest rates going up? Not so sure about that – if either Thursday’s capex data or the next GDP figures print weak, the cash rate still has further to fall to record lows of 2.75%, which will only serve to ratchet up property and share market activity levels.
Technical analysis? Who knows? Give a technical analyst a random chart of figures and they will start to see anything from horoscopes and sine waves, to saucepan handles and animal shapes.
Remember: markets are highly irrational and both bull and bear markets have a discomforting habit of lasting for far longer than we believe they will.
Think longer-term
Another illusion arriving in parrallel with the advent the rapid-fire market commentary is the myth of the new market mini-cycle. By analysing price charts in ever shorter timeframes, we start to see cycles and patterns in corresponding timeframes. However, how we interpret charts when reading charts from left to right is very different to what we see when reading them from right to left.
Market prices have never moved in a smooth fashion in the short-term – they simply continue to move in one of three directions: up, down or flat. In the short-term movements will appear to be haphazard, and only in retrospect will a cycle become clear. That has never changed, only our attention span has.
Some time ago we heard that markets were "becoming more rational" and that as they learned from previous mistakes crashes would become a thing of the past. That has clearly not happened and never will happen – markets will continue to be hugely irrational as we are emotional beings.
The best chance that most people have of becoming wealthy is to make a plan to make themselves financially secure 10, 20, 30 or 40 years from now.
I can’t honestly tell you what will happen to stocks and property prices over the next few years, but I can tell you that at some point in the future we will again be discussing irrational exuberance in the stock market and bemoaning housing being unaffordable in Sydney and Melbourne. Only next time around the numbers involved will be much bigger.

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A large 5.7-6.2 earthquake (depending on your source) off the coast of East Timor last night, causing a little panic here in Dili as we had to evacuate all buildings - the build quality here is not always top notch. A few aftershocks but nothing major yet.

Reports the Washington Post here.

East Timor has now been operating without peacekeeping forces for approaching two months and the country is slowly rebuilding from the destruction/torching of 70% of its infrastructure and buildings in 1999...what we really don't need right now is an earthquake!