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Wednesday, 28 November 2012 13:57

Life Insurance for young families

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Young family having a baby

New priorities and responsibilities

As a 'young family' you have a natural instinct to care, nurture and protect those you are now responsible for. It isn’t just about you anymore, it is about your responsibilities and knowing that your family is secure in your care. You are thinking about the things you are currently providing but, more importantly, you are already planning for the future-such as education for your children; a safe and comfortable home; and family holidays and recreational activities.

As with all life stages, you like to think that you will always be there for your family, and be able to work and provide a steady income. There is nothing stronger or more compelling than the natural instinct of a parent wanting to ‎protect their family.

Why you need life insurance to protect your family

No one plans to get sick, injured or to die unexpectedly and we all have a tendency to think that it won’t happen to us. ‘I’m too young to get cancer or have a heart attack’ and ‘I’m the safest driver on the road,’ are common misconceptions.

The first step in addressing your family’s financial security is to become aware of the risks you and your family are exposed to. One of the greatest risks you may face in your life is losing your ability to earn an income and to provide a secure and comfortable lifestyle and future for your family. Despite this being the case, many people don’t insure themselves for this risk, whilst almost everyone insures their car!

It’s worth taking a moment to consider what would happen if an extended illness or injury or premature death stopped your ability to work and provide an income. This could have a devastating impact to your family’s financial security and long-term lifestyle choices. It’s hard to imagine losing your health and your ability to go to work or even losing your life, but it is easy to imagine the practical impact the lack of an income would have.

The perfect time to put in place a life insurance plan

It is so important to consider your life insurance needs while you are relatively young and healthy, before you have any health scares and while there are still a range of options available to you. Too many people only realise the need for life insurance once they begin to experience health problems and it is often too late.

Wednesday, 07 November 2012 17:04

How long before share market beats its previous high?

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We recently celebrated the 5th anniversary of the high point for the Australian share market that occurred in November 2007.  The value of the market remains 30-40% below this peak.

History tends to repeat itself so lets compare the last 5 years to other large market downturns in history.

The chart below shows the value of the Australian share market many years after a large drop such as the 2008 drop.  The blue line is the journey investors have witnessed over the last 5 years and plots that journey against other times in history when the market fell heavily.

The question on most investors lips is when will the market recover to new highs?

The chart above shows that it took around 4 years for the market to reach new highs after the 1980 downturn (purple line) and around 5 years after the great 1929 crash (green line). This makes the current downturn one of the most severe in history.

The 1973 and 1987 downturns took 6 - 7 years to recover the previous high.  From the current level the Australian share market would need to rise by around 50% to move back to the previous high.

Bear markets do end and can move quickly when they do.

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, 05 November 2012 16:05

Steve Jobs’s Best Quotes (Steven Paul Jobs, 1955-2011)

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Steve Jobs, one of the fathers of the personal computing era and the founder of Apple,  died 5th October 2011 at the age of 56. Although he will be remembered for ushering in fundamental changes in the way people interact with technology, he has also been known for his ability to turn a phrase – and a knack for taking complicated ideas and making them easy to understand. Below, a compendium of some of the best Steve Jobs quotes.

On Technology

“It takes these very simple-minded instructions—‘Go fetch a number, add it to this number, put the result there, perceive if it’s greater than this other number’––but executes them at a rate of, let’s say, 1,000,000 per second. At 1,000,000 per second, the results appear to be magic.” [Playboy, Feb. 1, 1985]

***

“I think it’s brought the world a lot closer together, and will continue to do that. There are downsides to everything; there are unintended consequences to everything. The most corrosive piece of technology that I’ve ever seen is called television — but then, again, television, at its best, is magnificent.” [Rolling Stone, Dec. 3, 2003]

On Design

“Design is a funny word. Some people think design means how it looks. But of course, if you dig deeper, it’s really how it works. The design of the Mac wasn’t what it looked like, although that was part of it. Primarily, it was how it worked. To design something really well, you have to get it. You have to really grok what it’s all about. It takes a passionate commitment to really thoroughly understand something, chew it up, not just quickly swallow it. Most people don’t take the time to do that.

“Creativity is just connecting things. When you ask creative people how they did something, they feel a little guilty because they didn’t really do it, they just saw something. It seemed obvious to them after a while. That’s because they were able to connect experiences they’ve had and synthesize new things. And the reason they were able to do that was that they’ve had more experiences or they have thought more about their experiences than other people.

“Unfortunately, that’s too rare a commodity. A lot of people in our industry haven’t had very diverse experiences. So they don’t have enough dots to connect, and they end up with very linear solutions without a broad perspective on the problem. The broader one’s understanding of the human experience, the better design we will have. [Wired, February 1996]

***

“Look at the design of a lot of consumer products — they’re really complicated surfaces. We tried to make something much more holistic and simple. When you first start off trying to solve a problem, the first solutions you come up with are very complex, and most people stop there. But if you keep going, and live with the problem and peel more layers of the onion off, you can often times arrive at some very elegant and simple solutions. Most people just don’t put in the time or energy to get there. We believe that customers are smart, and want objects which are well thought through.” [MSNBC and Newsweek interview, Oct. 14, 2006]

On His Products

“I don’t think I’ve ever worked so hard on something, but working on Macintosh was the neatest experience of my life. Almost everyone who worked on it will say that. None of us wanted to release it at the end. It was as though we knew that once it was out of our hands, it wouldn’t be ours anymore. When we finally presented it at the shareholders’ meeting, everyone in the auditorium gave it a five-minute ovation. What was incredible to me was that I could see the Mac team in the first few rows. It was as though none of us could believe we’d actually finished it. Everyone started crying.” [Playboy, Feb. 1, 1985]

***

“We made the buttons on the screen look so good you’ll want to lick them.” [On Mac OS X, Fortune, Jan. 24, 2000]

***

“Every once in a while a revolutionary product comes along that changes everything. … One is very fortunate if you get to work on just one of these in your career. Apple’s been very fortunate it’s been able to introduce a few of these into the world.” [Announcement of the iPhone, Jan. 9, 2007]

On Business

“You know, my main reaction to this money thing is that it’s humorous, all the attention to it, because it’s hardly the most insightful or valuable thing that’s happened to me.” [Playboy, Feb. 1, 1985]

***

“Being the richest man in the cemetery doesn’t matter to me … Going to bed at night saying we’ve done something wonderful… that’s what matters to me.” [The Wall Street Journal, May 25, 1993]

***

Q: There’s a lot of symbolism to your return. Is that going to be enough to reinvigorate the company with a sense of magic?

“You’re missing it. This is not a one-man show. What’s reinvigorating this company is two things: One, there’s a lot of really talented people in this company who listened to the world tell them they were losers for a couple of years, and some of them were on the verge of starting to believe it themselves. But they’re not losers. What they didn’t have was a good set of coaches, a good plan. A good senior management team. But they have that now.” [BusinessWeek, May 25, 1998]

***

“The problem with the Internet startup craze isn’t that too many people are starting companies; it’s that too many people aren’t sticking with it. That’s somewhat understandable, because there are many moments that are filled with despair and agony, when you have to fire people and cancel things and deal with very difficult situations. That’s when you find out who you are and what your values are.

“So when these people sell out, even though they get fabulously rich, they’re gypping themselves out of one of the potentially most rewarding experiences of their unfolding lives. Without it, they may never know their values or how to keep their newfound wealth in perspective.” [Fortune, Jan. 24, 2000]

***

“The system is that there is no system. That doesn’t mean we don’t have process. Apple is a very disciplined company, and we have great processes. But that’s not what it’s about. Process makes you more efficient.

“But innovation comes from people meeting up in the hallways or calling each other at 10:30 at night with a new idea, or because they realized something that shoots holes in how we’ve been thinking about a problem. It’s ad hoc meetings of six people called by someone who thinks he has figured out the coolest new thing ever and who wants to know what other people think of his idea.

“And it comes from saying no to 1,000 things to make sure we don’t get on the wrong track or try to do too much. We’re always thinking about new markets we could enter, but it’s only by saying no that you can concentrate on the things that are really important. [BusinessWeek, Oct. 12, 2004]

On His Competitors

Playboy: Are you saying that the people who made PCjr don’t have that kind of pride in the product?

“If they did, they wouldn’t have made the PCjr.” [Playboy, Feb. 1, 1985]

***

“The only problem with Microsoft is they just have no taste. They have absolutely no taste. And I don’t mean that in a small way, I mean that in a big way, in the sense that they don’t think of original ideas, and they don’t bring much culture into their products.”

“I am saddened, not by Microsoft’s success — I have no problem with their success. They’ve earned their success, for the most part. I have a problem with the fact that they just make really third-rate products.” [Triumph of the Nerds, 1996]

***

“I wish him the best, I really do. I just think he and Microsoft are a bit narrow. He’d be a broader guy if he had dropped acid once or gone off to an ashram when he was younger.” [On Bill Gates, The New York Times, Jan. 12, 1997]

On Predicting the Future

“The most compelling reason for most people to buy a computer for the home will be to link it to a nationwide communications network. We’re just in the beginning stages of what will be a truly remarkable breakthrough for most people––as remarkable as the telephone.” [Playboy, Feb. 1, 1985]

***

The desktop metaphor was invented because one, you were a stand-alone device, and two, you had to manage your own storage. That’s a very big thing in a desktop world. And that may go away. You may not have to manage your own storage. You may not store much before too long. [Wired, February 1996]

On Life

“When you’re young, you look at television and think, There’s a conspiracy. The networks have conspired to dumb us down. But when you get a little older, you realize that’s not true. The networks are in business to give people exactly what they want. That’s a far more depressing thought. Conspiracy is optimistic! You can shoot the bastards! We can have a revolution! But the networks are really in business to give people what they want. It’s the truth.” [Wired, February 1996]

***

“I’m an optimist in the sense that I believe humans are noble and honorable, and some of them are really smart. I have a very optimistic view of individuals. As individuals, people are inherently good. I have a somewhat more pessimistic view of people in groups. And I remain extremely concerned when I see what’s happening in our country, which is in many ways the luckiest place in the world. We don’t seem to be excited about making our country a better place for our kids.” [Wired, February 1996]

***

“You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.” [Stanford commencement speech, June 2005]

***

“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don’t settle.” [Stanford commencement speech, June 2005]

***

“When I was 17, I read a quote that went something like: “If you live each day as if it was your last, someday you’ll most certainly be right.” It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: “If today were the last day of my life, would I want to do what I am about to do today?” And whenever the answer has been “No” for too many days in a row, I know I need to change something.

“Remembering that I’ll be dead soon is the most important tool I’ve ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure — these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.” [Stanford commencement speech, June 2005]

***

“I think if you do something and it turns out pretty good, then you should go do something else wonderful, not dwell on it for too long. Just figure out what’s next.” [NBC Nightly News, May 2006]

***

And One More Thing

“No one wants to die. Even people who want to go to heaven don’t want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life’s change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma — which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.” [Stanford commencement speech, June 2005]

 

Thursday, 29 November 2012 12:03

The Conflict of Industry Super Funds

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Illustration: Rocco Fazzari.

We are concerned about the conflict of interest within the Industry Superannuation Fund movement which has close ties to the union movement.

Below is an article we have been authorised to reproduce from the Intelligent Investor.

"As many of you will be aware we are currently doing the Intelligent Investor national tour. Returning from Brisbane on the plane yesterday, I grabbed the Australian Financial Review and came across the page two article 'Union super leaders see assets sale conflict ‘.

Now I have to admit to having a bit of a gripe when it comes to industry super funds – the marketing of their outperformance over retail super funds. Not that I am wanting to defend the poor performance of many retail funds but:

1. I don’t think it is an apples and apples comparison and, in any event, the timeframes covered are generally too short to be reliable. Industry funds make a big deal of the fact the asset allocations (between industry and retail) are different. This is the very reason why the comparison is inappropriate. Industry funds may well outperform their retail equivalents but the data that proves it has not been put in front of us yet.

2. More specifically, the performance of industry super funds in the post GFC period benefited from what investment bankers like to refer to as ‘mark to guess’ valuations.

What do I mean by ‘mark to guess’?

Accountants use two broad means of reporting assets on a balance sheet – historical cost (the original price paid for an asset) and mark to market (the current market value). Funds will generally use mark to market to calculate both their assets and their performance for a year.

What is often forgotten is that ‘Mark to Market (or MTM)’ itself consists of two broad subcategories:

1. Actual mark to market – where you look at the price of a security on a public market (for instance the ASX) and use that price. So if I was marking BHP shares to market today I would use $34.

2. Mark to guess – where someone sits at their desk and comes up with a number. Now some ‘mark to guess’ valuations are very accurate (typically where the asset has a strong relationship to a listed security) but others are less so. For instance, if you’ve had a property valuation done, one of the first things they ask is whether it is a ‘stamp duty valuation’ (ie low) or ‘sale/bank valuation’ (ie high). Enron’s energy traders were able to make massive profits (and bonuses) by doing their own mark to guess valuations of the positions they had on their books (nice work if you can get it). So, if BHP were to be de-listed, a mark to guess valuation might put it’s price anywhere between $30 and $40, depending on what the purpose of the valuation was.

Now, in the period post GFC, many assets benefited from the use of ‘mark to guess’. The ‘stock or bond market is not functioning properly’ was a popular excuse for why the market price of an asset wasn’t an appropriate value. Unlisted assets (esp property and infrastructure) were beneficiaries of this phenomena. They were valued more highly than listed assets (similar property and infrastructure) simply because the unlisted asset owners hadn’t been silly enough to have their shares quoted on a stock exchange.

What do industry super funds tend to hold more of than retail funds? Unlisted assets. So their performance benefited from the ‘mark to guess’ phenomena (and it has been a drag in the years since, as the gap between listed and unlisted has closed back up).

The ads were flying thick and fast, trumpeting their GFC performance, but the real message should have been ‘how lucky was that?’ Industry funds may well be better performers than retail funds but being able to use ‘mark to guess’ is not the factor that proves it.

So that’s my gripe explained. Back to the AFR article. In this case some of those with dual hats (union official/industry super board member) have come out and criticized proposals to sell various logistics, energy and water assets.

Whether this is a good idea or not is not the point. What this case highlights is the huge conflict of interest involved in having union officials also sitting on industry super fund boards.  A super fund’s focus should be (and is required to be) the retirement savings of fund members – those working, those approaching retirement and those who have retired. The financial interests of industry super fund members may well be served by having the Government doing a poor job of privatizing these assets. Every dollar the Government misses out on is a dollar that can be made by the buyers of the assets (which could include industry super funds).

Clearly, employees of these businesses (and their union representatives) have a completely different perspective. Again, their interests may clash directly with the financial interests of potential buyers. A cheap (or botched) sale by the Government may be great for the buyer, but not so good for the employees (it may also not be in the national interest – but that’s another point again).

Like a lawyer trying to act as both prosecution and defence, it’s a bridge too far. Sitting on the board of an industry fund, or acting as a union official, are both reasonably lucrative gigs. No-one’s going to starve choosing one or the other.

Of course, there may also be retail fund board members with similar conflicts. In either case I would say, in the interests of members, it’s time to pick a side.

Source:  Intelligent Investor Blog Site (http://blog.walnutreport.com.au/)

 

Tuesday, 23 October 2012 19:32

The Secrets of a Happy Marriage

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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".

Wednesday, 24 October 2012 10:20

Health/Reality Check on the Australian Economy

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David Murray, the former CEO of the Commonwealth Bank and former head of the Future Fund spoke recently to the 7.30 Report.

He spoke about the current path of the Australian economy and whether it is sustainable.

[youtube]http://www.youtube.com/watch?v=7-U2f5ttNdA[/youtube]

 

Wednesday, 24 October 2012 10:24

The Lighter Side of the Craig Thomson / HSU antics

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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.

Monday, 12 November 2012 13:31

RBA has more to do - how low will the cash rate go?

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Interest rates dice

Key Points

  • The reserve Bank of Australia (RBA) will have to cut interest rates further to boost the non-mining sectors of the economy as the mining boom fades at a time when the Australian dollar remains strong and fiscal cutbacks are intensifying.
  • After the global financial crisis (GFC) caution has likely resulted in a reduction in the neutral level for bank lending rates, as they are only now starting to become stimulatory.
  • Our assessment remains that standard variable mortgage rates will need to fall to around 6%, which implies that the official cash rate will need to fall to 2.5%. We expect this to occur over the next six months, with the RBA cutting again next month by another 0.25%.
  • Bank deposit rates will fall further, but the Australian share market is likely to be beneficiaries as lower interest rates eventually boost housing activity and retailing.

Introduction

The Australian economic outlook has deteriorated. Recognising this, the Reserve Bank of Australia (RBA) has cut interest rates. Our assessment remains that the RBA has more work to do. But how low will rates go? What does it mean for investors? The growth outlook while economic growth in Australia has been reasonable of late, approximately 3.7% over the year to the June quarter, and well above growth in comparable countries, our assessment is that storm clouds are brewing and that growth will slow to around 2.5% in the year ahead, which is well below trend growth of around 3%-3.25%. The basic issue is that the mining boom is losing momentum at a time when the non-mining part of the economy is weak and fiscal austerity is intensifying:

  • Mining investment looks like it will peak next year. For the first time in years the June quarter survey of mining investment intentions did not show an upgrade in plans for the current financial year and projects under consideration have peaked. Falling mining sector profits suggests mining projects remain at risk. Investment outside the mining sector remains weak. This all points to a sharp slowing in business investment in 2013-2014.

  • At the same time, a sharp fall in Australia’s terms of trade is leading to a loss of national income which will also slow spending and growth. Stronger mining exports will provide a boost to growth but this may not become evident until around 2014-2015.

  • This is all occurring at a time when non-mining indicators for the economy remain soft. Consumer and business confidence are sub-par, despite being almost a year into an interest rate cutting cycle.
  • Retail sales remain subdued, with government handouts providing a brief boost in May and June, only to see softness return again. Annual retail sales growth is stuck in a range around 3%. With confidence remaining sub-par, job insecurity running high and interest rates still too high, its hard to see a strong pick up in the near term. Ongoing consumer caution in terms of attitudes towards debt and spending is highlighted by the next chart showing a much higher proportion Australians compared to the pre-GFC period continuing to nominate paying down debt as the wisest place for savings.

A higher proportion of Australians are focused on paying down debt

  • While, on average, housing related indicators have probably bottomed, taken separately they present a very mixed picture.  House prices are up over the past few months. Housing finance, housing credit and building approvals look like they have bottomed, but remain soft. In addition, new home sales are still falling. The fact that there has only been such a tentative response to lower mortgage rates indicates that mortgage rates have not fallen enough.
  • The jobs market remains soft with weak job vacancies pointing to soft employment and rising unemployment ahead. Whereas anecdotal news of job layoffs was previously limited to the non-mining sectors of the economy, it has now spread to the mining sector. This is likely fueling ongoing household caution, acting to constrain retail sales and housing demand.

The bottom line is that with the mining boom likely fading over the year ahead, the non-mining part of the economy (e.g. retailers, tourism, manufacturing, and housing and
non-mining construction) needs to pick up to fill the breach. The good news is that the RBA appears to recognise this. The bad news is that its task is being made challenging
by two factors:

  • First, the continuing strength in the Australian dollar, presumably on the back of safe haven buying, and moving out of the US dollar and euro in the face of QE3. In addition, the Australian dollar has a high correlation to the US share market as part of a ‘risk on/risk off’ trade, which has meant that it has not provided the shock absorber it usually does to falling commodity prices.
  • Second, having seen the budget handouts around mid-year, fiscal tightening will now kick in at the federal level and may even intensify if the government seeks to retain its projected surplus for the current financial year. At the same time, various states are announcing budget cutbacks, including job cuts.

In order to offset these forces and ensure that non-mining demand strengthens sufficiently, interest rates will have to fall further.

The cash rate is low but lending rates are not

While the RBA has cut the offi cial cash rate to within 0.25% of its GFC low, because of bank funding issues lending rates are still well above their 2009 lows.

Basically banks have been seeking to reduce their reliance on non-deposit funding which has proved unreliable since the GFC. To do this they have had to offer higher deposit rates relative to the cash rate than would normally be the case. This has resulted in higher lending rates relative to the cash rate than was the case pre-GFC. Banks have done well to raise the proportion of their funding they get from deposits to 53% from around 40% pre-GFC, but they still lag behind banks other major countries and tougher capital requirements mean they are under pressure to do more.

The standard variable mortgage rate is below its long term average of 7.25%. It is currently around 6.6%, assuming banks pass on around 0.2% of the RBA’s latest 0.25% rate cut. However, normally rates need to fall well below their long-term average to be confident stronger growth can be delivered. In an environment of household and business caution post-GFC, the neutral rate has likely fallen, probably to around 6.75%, which is shown as
the ‘new neutral’ level in the next chart. This would suggest that current mortgage rate levels are only just starting to become stimulatory.

In the last two easing cycles the mortgage rate had to fall to around 6.05% in 2002 and to 5.8% in 2009. Given the fall in the likely neutral level for mortgage rates and the current headwinds coming in the form of the strong A$ and fiscal tightening, mortgage rates will at least need to fall to these lows. Given the ongoing issues with bank funding, to achieve a circa 6% mortgage rate the cash rate will need to fall to around 2.5%.

Interbank lending spreads have collapsed in Europe

Our assessment is that the RBA is coming around to this view. As such we expect another 0.25% cash rate cut next month on Melbourne Cup day, followed by a cut to 2.5% in the March quarter next year.

Based on the assumption that the RBA cuts interest rates further, the global economy stabilizes and growth in China stabilizes around 7.5% next year then Australian economic
growth should pick up again by the end of 2013.

Implications for investors
There are a number of implications for investors.

  • Interest rates need to fall a lot further. This means that term deposit rates are likely to fall further in the years ahead, even though the size of the decline will lag that of the official cash rate given bank funding reasons. As a result, the attractiveness of bank deposits for investors will continue to deteriorate.

Bank term deposit rates likely to deep falling

  • While record low bond yields mean bonds are poor value for long term investors, yields will likely remain lower as the RBA cuts interest rates. However, if foreign investors start to develop concerns surrounding Australia, international bonds will do better than Australian bonds.
  • Australian shares should benefit from interest rate cuts and cheaper valuations. We continue to see the Australian share market being higher by year end. Key sectors likely to benefit from lower rates are retailers, building materials and home builders.
  • Declining interest rates in Australia will take pressure off the Australian dollar. However, a fall in value is likely to be constrained by quantitative easing in the US and central bank buying. Overall we see the Australian dollar stuck in a range around US$ 0.95 to US$ 1.10. The best has likely been seen for the Australian dollar.

 

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, 17 October 2012 10:57

Share market rallies usually follow pessimism - October 2012

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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 18:47

Where to for the Australian Dollar?

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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)

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