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Tuesday, 23 October 2012 09:02

The Secrets of a Happy Marriage

Remember that marriage is the number one cause of divorce.  Statistically 100% of all divorces started with marriage.

Here is the amusing article "The Secrets of a Happy Marriage".

The current political environment is a cartoonists dream.  The Craig Thomson affair has attracted its fair share of attention too and we bring you a selection of cartoons from around Australia.

Is the glass half empty or half full? The pessimist would pick half empty, while the optimist  would choose half full.

Investors would be excused for failing to realise that share markets over the past 12 months have returned over 10%.  Investor sentiment is still negative as can be seen in the equity risk premium chart below.

Equity risk premium is defined as "The excess return that an individual stock or the overall stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of the equity market. The size of the premium will vary as the risk in a particular stock, or in the stock market as a whole, changes; high-risk investments are compensated with a higher premium" (definition sourced from Investopedia)

Currently investors require a higher return from the share market due to risks, or perceived  risks, before they will commit money - which explains a high equity risk premium.  You will notice that the equity risk premium is at a level not seen since early 2009 during the peak of the GFC.  Once global policy makers took assertive action at that time, the share market rallied strongly.

What catches our eye is that share markets have performed strongly over the past 12 months despite enormous pessimism.  The ASX 200 for example at the time of writing is trading at 12 month highs and yet investor sentiment toward the share market is trading at multi decade lows as can be seen from the chart below which was sourced from Westpac Economics.

Historically, strong share market rallies have followed periods of extreme pessimism.

One of Warren Buffett's famous quotes is "be greedy when others are fearful". (and be fearful when others are greedy)

Those sitting on the sidelines must ask themselves "Is it different this time?"

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.


Monday, 08 October 2012 08:17

Where to for the Australian Dollar?

The strength of the Australian dollar has been positive for those wishing to travel overseas or to purchase goods online from overseas, but inbound tourist operators, exporters and bricks and mortar retailers are not likely to share the enthusiasm.

The Australian currency is often referred to as a commodity currency which means that it generally behaves in keeping with commodity prices.

Below is a chart showing the long term trends of Commodity Prices (green line) and the $AUD/$USD (blue line).

$AUD vs Commodity Prices

Source:  IRESS, RBA and Macquarie September 2012

In the past 20 years the Australian dollar has followed the Commodity Price Index, and yet right now there lies a massive gap between the currency and commodity price index.

Picking currency trends is a dangerous occupation, however it seems to be accepted within the finance profession that the Australian dollar is over valued and is only a matter of time before is corrects itself.

Should the Australian dollar devalue, which investments would benefit?

  • Unhedged International Equity Funds
  • Australian companies with earnings from overseas (providing not hedged), ie CSL
  • Companies providing in bound tourism services
  • Australian companies exporting goods (providing no hedging)

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

 

Wednesday, 10 October 2012 02:46

US Housing Market - the recovery has begun

Warren Buffett (one of the world's best investors) previously stated that he believes the recovery in the US Housing market will be a defining moment for the US economy.

It is considered that the annual underlying demand for houses in the US is 1.5 million houses per year due to immigration and family formation.  For example, since the Global Financial Crisis the US population has increased by over 10 million.  The chart below shows the number of new houses being currently built as around 600,000 per year which is well below annual demand.  At the moment this does not represent a problem as there is as oversupply of housing due to the housing boom leading up to 2007.  During that time many more houses were built than the underlying demand, which lead to surplus housing stock (and let's face it you can only live in one house at a time).

The key message here is that in time the surplus housing stock will be soaked up by demand that is not being met with new home building currently.  This explains Macquaries research which shows (in blue bars) the likely trend for US Home Building over coming years as ultimately the US will have to build houses to keep up with demand.

The question for Australian investors is how can you take advantage of this?

 

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

 

 

 

 

 

Wednesday, 12 September 2012 07:13

Consumer Sentiment rises slightly but remains weak

•The Westpac Melbourne Institute Index of Consumer Sentiment rose by 1.6% in September from 96.6 in August to 98.2 in September

This is the seventh consecutive month that the Index has been below 100. Apart from the 2008/09 period when the Index held below 100 for 16 consecutive months this represents the longest run of consecutive ‘sub 100’ prints since the early 1990s. Furthermore, there have only been two months in the last 15 when the Index has printed above 100.

The consumer is clearly stuck in an extended ‘cautiously pessimistic’ phase. In September last year the Index printed 96.9 so it has only increased by 1.3% over the whole year. That is despite 1.25% of rate cuts from the Reserve Bank; a more or less steady unemployment rate which is close to full employment; and some recent positive news around the threatening European situation.

This does not bode well for consumer spending and is consistent with the slowdown in consumer spending indicated by the June quarter national accounts. Although this followed a strong March quarter rise, the softening has come despite major policy boosts to household incomes including $1.9bn in fiscal handouts. With a sharp fall in July retail sales confirming this boost is now reversing, underlying momentum appears to be soft, in line with the consistently downbeat signal from the Consumer Sentiment Index.

Media coverage is often a major factor shaping respondents’ confidence including how they assess their own financial position and how they evaluate macro issues.

In the September report we receive an update on the news items which are capturing the attention of consumers and whether these were favourable or unfavourable. It shows the dominant news in September was around ‘economic conditions’ with 47% recalling news on this issue. Next was ‘budget and taxation’ (39.8% recall); international conditions (25.5% recall); and employment/wages (20.6% recall). Other topics registering lower recall include covered interest rates; inflation; politics and the Australian dollar.

Since June, the overall sentiment Index has increased by a modest 2.7%. Respondents generally recalled slightly less unfavourable news on international conditions although these items were still overwhelmingly negative. Other news was viewed as even more unfavourable than in June.

Four of the five components of the Index increased with the sub- indexes tracking views on “family finances compared to a year ago” up 0.3%; “family finances over the next 12 months” up 4.8%; “economic conditions over the next 12 months” up 0.6% and “economic conditions over the next 5 years” up 3.4%. The sub- index tracking views on “whether it is a good time to buy a major household item” fell by 0.4%.

By June this year we were particularly concerned by readings on “family finances over the next 12 months” which was printing at a level around the low-point of the 2008-09 period. Since thenwe have seen an encouraging improvement in this component which has increased by 11.4%. However it is still at a historically low level. For example the average print of that component during that 2008/09 period when the Index registered 16 consecutive months below 100 was 105.2 – today’s print of 96.2 is still well below that average. We can only conclude that respondents remain concerned about their finances despite the recent rally.

This survey also provides a quarterly update on respondents’ savings preferences. There was a sharp increase in the proportion of those respondents who assess bank deposits to be the wisest place for savings, with that proportion increasing from 32.6%

in June to 39.0% in September. That proportion is the highest proportion since December 1974 and comfortably exceeds the peak proportion during the 2008/09 period of 36.9%. For this survey the 6.4ppt increase in preference for bank deposits was at the expense of real estate which fell from 25.0% in June to 19.8% in September. The proportion of respondents favouring shares stayed near record lows at 5.5%, while the proportion opting for ‘pay down debt’ was steady at 20.4%.

If we compare the total proportion of respondents who prefer conservative savings options, covered by bank and other forms of deposits in conjunction with “pay down debt” the current proportion registers 63.5% of respondents. That compares with 64.2% in December 2008 when we were at the height of risk aversion during the Global Financial Crisis. In short, respondents are exhibiting a similar level of risk aversion in terms of their savings preferences as we saw in 2008.

The Reserve Bank Board next meets on October 2. Our forecast has been and remains that the Bank will decide to cut the official cash rate by 50bps over two meetings by year’s end. The case for lower rates is strong. Inflation remains well contained and the Bank’s own forecast has inflation remaining consistent with the target over the next one to two years. Interest rates are only slightly below neutral levels. The June quarter national accounts showed that consumer spending is slowing and investment in residential construction and plant and equipment has been contracting for the last few quarters. Despite a near 10% fall in the terms of trade the Australian dollar has failed to perform its usual ‘shock absorber’ role. Fiscal policy at both Federal and

state levels is tightening. Both consumer and business confidence are soft. From a domestic perspective only the fall in the unemployment rate and the ongoing surge in mining investment counter the case for lower rates. However, the fall in the unemployment rate has been due to discouraged workers leaving the workforce while the medium term outlook for the mining investment has recently been revised down by some mining companies.

In short, we think the case for lower rates has already been made and there must be a reasonable chance that the Bank will decide to move in October. However, central banks are conservative so a November ‘call’ for the first move looks to be more prudent.

Bill Evans, Chief Economist

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With the constant symphony of politicians from all parties clamouring over each other to bash up the banks and accuse the Australian banking industry of profiteering from mortgage holders since the GFC, we examine the truth behind why the interest rates on home loans have risen more than the official Reserve Bank cash rate.

First some revision, where do banks source money to enable them to lend out to homeowners?  Banks can either attract deposits by offering term deposits and cash accounts or they can "buy" money from the wholesale market, largely from overseas.

The graph below shows the increase in the cost to acquire these sources of funding since the start of the GFC, courtesy of Commonwealth Bank's analyst pack at their recent results presentation.

The chart highlights that Australian banks have paid an additional 1.65% to obtain funds from the wholesale market and have had to pay cash account and term deposit holders 1.86% over what they were paying before 2007 to attract funds.  Those who watch term deposit rates would know this as term deposits are currently more than the RBA official cash rate of 3.5%, whereas prior to GFC banks paid around 1.5% below the cash rate for deposits (source RBA Bulletin March 2010)

Despite having to pay on average 1.78% more to acquire funds to lend out, CBA's increase to the standard variable home loan rate has been less than 1.5% which means that the bank has absorbed some of the pain of the increase cost of funding.

The bank bashers will not accept this and point to their record profits.  The banks higher profitability has come through acquiring several of the second tier lenders such as BankWest (CBA) and St George & RAMS (Westpac) so one would hope their profits are higher as their businesses are now much larger.

We readily accept that the cost to build a house has increased due to the increased cost of raw materials such as steel and timber, and yet when the cost of "raw materials" for banks increase we accuse them of gouging.

Australia should be proud of our healthy banking system and pay no attention to the ill informed politicians who are bank bashing to distract voters from their own inadequacies.

 

 

 

Thursday, 23 August 2012 00:36

Don't trip up when Chasing Income Yield

With official interest rates hovering at 3.5% and residential property income yields typically running at between 4-5%, investors are clamouring for investments that pay a higher rate of income.

Is it as simple as running a ruler over the dividend yield column in the Financial Review to select your investments?

The table below highlights the top 20 dividend payers from the Australian share markets based on forecast dividend payments for the current financial year.

What are some of the questions investors should ask themselves when considering high income investments?

What is the likely profit growth trend that can support future dividends?

What proportion of company profits are being paid out as dividends?  A high proportion doesn't leave the company much room to maintain dividends if profit drops.

Is the dividend being artificially inflated by asset sales, debt or financial engineering?

What is the outlook for the sector in which the company operates within?

These points are best illustrated comparing the highest ranking dividend payer in the chart above, Metcash with its larger rival Woolworths.  Woolworths dividend is not as high as Metcash but the share price chart below shows that Woolworths has been a better performing investment despite paying a slightly lower dividend.  (Woolworths is the blue line and Metcash the red line)

Woolworths vs Metcash Share Price Performance

There is no doubt there are some juicy dividends to be enjoyed by investors in the current market, but care must be taken to avoid what is referred to as a value trap.  (where an investment appears good value - but performs as a dog)  We encourage investors to look beyond the headline dividend yield when considering an investment.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Westpac Consumer Confidence index was released in July showing an improvement in Consumer Sentiment.

Finally we have some evidence that the Reserve Bank’s policy of cutting the official cash rate by 1.25% between November last year and June this year is starting to gain more positive traction with households.

However, this result is far from convincing and should not be interpreted that we can expect confidence to steadily return to more normal levels over the months ahead.

The Index is now 2% above its level in October last year prior to the beginning of the rate cut cycle. However it is still 4.1% below the reading in November last year when households responded positively to the first rate cut in November. Following that initial
positive response in November concerns around the international and domestic economic outlooks offset any positive impact of the rate cut in December. These ongoing concerns, particularly around the international economic outlook, continued to mute the impact of subsequent rate cuts in May and June. In fact, despite the cumulative cuts of 125bps we still have the situation that pessimists slightly outnumber optimists.

Over the month, households were probably buoyed considerably by the result from the Greek elections and the positive reception to the latest European leaders’ summit , averting, at least for the time being, a new crisis in Europe.

While the Reserve Bank did not cut interest rates further there was a strong 5.5% jump in the confidence of those respondents who hold a mortgage.

There was also some positive news around the domestic economy.Petrol prices are down by 7% since the last survey and have now fallen 13% since May. The Australian dollar rallied from 98¢ to 102¢ versus the US dollar, and the share market rose 2.7%.

All components of the Index increased in July. The sub-indexes tracking consumer expectations for economic conditions over the next 12 months and five years increased by 5.8% and 5.2% respectively. The sub-index tracking responses on ‘whether now is a good time to purchase a major household item’ rose by 1.1%.

Respondents were also more positive around their own finances. The sub-indexes tracking assessments of finances relative to a year ago improved by 4.6%; and the outlook for finances over the next 12 months improved by 3%.

However, disturbingly, the sub-index tracking respondents’ outlook for their finances over the next 12 months is still 9.4% below the level in October last year prior to the beginning of the Reserve Bank’s rate cut cycle.

The Board of the Reserve Bank next meets on August 7. It is our view that interest rates in Australia are still too high. In his Statement following the interest rate decision on July 3 the Governor described interest rates as “a little below medium term averages”. With the Australian dollar back above parity, despite lower commodity prices, and fiscal policy being quoted by the RBA to be contradictionary in the order of 0.75% – 1.5% of GDP financial conditions in Australia are mildly stimulatory at best. Although there are tentative signs of improvement emerging in some interest rate sensitive parts of the economy, these have yet to show a convincing recovery and remain vulnerable to renewed weakness. Mean while the threat from a deteriorating global economic outlook continues to build.

Not with standing these issues the recent rhetoric from the Bank indicates that it is in a ‘wait and see’ mind set. Accordingly, whilst we think it is likely that, as we saw in the first half of 2012, the Bank’s ‘wait and see’ approach will eventually evolve into further
rate cuts totaling 0.75%, our call that the next cut will come in August could prove to be too early. However, because we believe that Australia needs lower rates and much can happen, particularly in the international economy, we are comfortable
maintaining that view.

Sourced from Bill Evans -Chief Economist Westpac

 

 

This is the advertisement that is being prominently displayed around the country (at great expense to the taxpayer) relating to the tax cuts that become effective from 1st July 2012 to offset the impact of the carbon tax.

This ad should be accompanied by the sort of warning you would expect to find on your car side mirrors "Tax Cuts are smaller than they appear".

Our issue lies with the assertion in the ad that the tax free threshold is tripling to $18,200.  This leaves the reader with the feeling that they are about to receive a  very generous tax cut and fails to state that the current effective tax free threshold is currently $16,000 when the low income rebate is considered.

The Government goes to great lengths with retailers to ensure that prices must be expressed as a dollar figure per litre of drink, or per tissue etc.  Financial services providers must disclose in dollar terms as well, rather than using percentages as apparently studies suggest that more than half of Australians do not understand how to calculate them (note I did not use the term 50%).

Despite the Government insisting that business openly disclose facts in a manner that the average member of the public can understand, there appears to be a double standard when it comes to Government advertising.

The reality of the July 2012 tax cuts is that an average Australian taxpayer earning less than $80,000pa receives a tax cut of around $300 when all of the various changes to the tax free threshold, marginal rates and rebates are considered.  Refer our previous blog article on what the tax cuts mean for you at http://www.gemcapital.com.au/blog/carbon-tax-tax-changes-and-what-it-means-to-you-from-1st-july-2012

But then I don't suppose that a $300 tax cut sounds anywhere near as good as tripling the tax free threshold.

There shouldn't be a rule for us and a separate rule for the Government and the Unions when it comes to advertising