Pete Wargent blogspot

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

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

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

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

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

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

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

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

Wednesday, 25 April 2012

25 April - ANZAC Day

They went with songs to the battle, they were young.
Straight of limb, true of eye, steady and aglow.
They were staunch to the end against odds uncounted,
They fell with their faces to the foe.

They shall grow not old, as we that are left grow old:
Age shall not weary them, nor the years condemn.
At the going down of the sun and in the morning,
We will remember them.


Lest we forget.

Monday, 23 April 2012

Risk on (again)

In spite of the dangers posed by European government debts, institutions piled back in to risk assets over the past week, with the Dow Jones recording its biggest weekly gain in five weeks, closing on Friday at just above 13,000 points.

Aussie market has bounced back but nowhere near as convincingly:


Despite all the talk of doom and gloom we have heard over the past few years, the truth is that it has been a wonderful few years to be invested in certain risk assets, in particular US equities, which have doubled in value since their financial crisis nadir.

Australian property, too, is showing some signs of life, with auction clearance rates in Sydney have crept up from 50% to 60% in the past few months.

The key Australian inflation data is out on Tuesday Oz time (I’m writing this in the Balearics – no, that’s not a joke, I actually am sailing through the Balearics – so I’ve lost most sense of times and dates this past week).

There has been some talk in the financial press that Prime Minister Julia Gillard is likely to apply some ‘gentle pressure’ on the Reserve Bank of Australia (RBA) to the cash interest rate. 

Can’t really blame her, if the opinion polls are any kind of useful guide, Gillard is on borrowed time and ‘Dr. No’ (aka Tony Abbott, leader of the opposing Coalition) will soon be getting his chance – so Gillard may as well push for interest rate cuts and anything else that furthers her cause.

Gillard’s unpopularity given the strong position of the Australian economy is quite extraordinary.

Thursday, 19 April 2012

Dow back in the black

After a bit of a blip, the Dow Jones (DJIA) stormed back by a stonking 192 points on Tuesday, back to well above 13,100, wiping out much previous week’s losses.

This was the seventh trading session from nine during which the Dow recorded a triple digit movement.

Increased volatility such as this can sometimes be an unwelcome signal (i.e. preceding the end of a bull market), but in this instance traders might take heart from the market firing on a seeming lack of material news as the US earnings season plays itself out (although perhaps the better-than-expected Spanish bond auction might have inspired the optimistic trade). Aussie stocks at 5 month highs.

Sad news that Warren Buffett has developed prostate cancer, well-wishers hoping for a full and speedy recovery for the great man.

Tuesday, 17 April 2012

Have Aussie stocks bounced back to pre-GFC levels?

Well, the answer is quite clearly no.


While US stocks have actually doubled since their nadir of 3 years ago and are hovering around only 10% off their all-time highs, Aussie stocks have not bounced back to anything like the same degree.
There could be a number of reasons for this, but the clearest factor must be the strength of the Australian dollar.

Back in 2008, the Aussie dollar was comparatively weak, buying only around 65 US cents – now it is buying more than $1.00 of US currency.

Although it is difficult to know precisely, somewhere in the region of a quarter of Australia’s share market is owned by overseas investors: a strong dollar discourages overseas investors, for their functional currency does not go as far and they are exposed to increased foreign-exchange risk.

The strong currency reflects the wonderfully strong position of the Australian economy as compared to other world powers. With low unemployment at 5.2%, inflation well under control and GDP growing, it’s extraordinary that we can somehow have such an unpopular Prime Minister.

While the US has interest rates at emergency levels of 0.25% and the UK having held rates at 0.5% seemingly forever now, Australia still has a significant interest rate buffer.

Despite rate cuts in November and December 2011, the cash rate Down Under is at 4.25%.  Naturally, these comparatively attractive rates therefore snare investment in to fixed interest investments, strengthening the currency.

Most Australian economists are tipping Aussie interest rates to slip back to 4.00% in May, pending the inflation results of April 24.

Meanwhile, ANZ is the latest bank to sneak a few extra points on its mortgage rates, citing higher funding costs as its defence (of course, to understand the real reason for their increased rates, Google the world oligopoly!).

Sunday, 15 April 2012

Should we be in shares or property right now? Or both?

Property and the CPI result

The key indicator for the property market, as ever, will be the inflation print for the quarter which will be released by the Australian Bureau of Statistics (ABS) on April 24.

Should the CPI result come in at 0.5% or below, we can be fairly sure that the Reserve Bank of Australia will cut interest rates in May for the third time since November 2011, in the face of otherwise uninspiring economic data (though unemployment remained steady at 5.2%, a figure that is the envy of the developed world).

If the CPI result is very low at, say, 0.3% or lower, there is even talk of there being a 50 basis points (0.50%) interest rate cut, but that seems rather unlikely to me, the RBA preferring to promote a smooth interest rate policy.

As the vast majority of mortgages in Australia are variable rate loans, the property market tends to be particularly sensitive to the direction (and implied future direction) of interest rates.

Property in 2012 to date

Despite widespread predictions of a property super-crash, according to RP Data, Sydney’s property values have increased by a surprisingly robust 1.8% or so in the first 3.5 months of 2012. 

This implies annual growth of around 6.25%, and while I’m not at all sure that will happen, the market confidence does appear to have picked up in 2012.

Of course, dedicated share investors snicker about these seemingly moderate returns, claiming that the stock market has always outperformed over the long term, which in percentage terms, it has indeed tended to do.
But this overlooks the fact that property investors tend to use far greater leverage than their share-investing counterparts.

The benefits of a diversified portfolio

Over the last couple of days I read A Million is not Enough by Michael K. Farr, a US financial analyst who proclaims that when it comes to investing: “the stock market is the only game in town”.

This is far from an uncommon view (especially in the US) but I’ve always felt that it is safer to have a balance of shares, property and cash in a portfolio (and if you are approaching retirement, fixed interest investments such as bonds too). Why? Well…

Farr says that a 35 year old should be 100% invested in shares, moving this percentage down to around 85%-90% as you approach retirement, the theory being that the stock market will deliver the highest percentage returns over time.

That’s fine, but unfortunately he released his book in 2008, immediately prior to one of the greatest stock market crashes in the history of the world, precipitated by a proliferation of toxic sub-prime debt.

Farr also selected a list of “core holdings” stocks – there were some good ‘uns in there, but the list did include AIG, which the sub-prime fallout caused to go bust almost as soon as the book went to print.

A key lesson is that we must looking beyond company earnings and also consider cash flows – even if a company is making great profits, if it cannot service its debts as they fall due, they will be insolvent.

So if you went 100% into stocks as specifically advised by Farr, even if you dared to hold tight through 2008, 2009, 2010, 2011 and 2012 to date, you still would not have recovered the massive losses from the global financial crisis – and you would still be no closer to building anything like a retirement portfolio.

Far from it, in fact, you would be way behind where you started. So that’s why a more balanced portfolio might be preferable.

The ol’ property v. shares debate

It’s worth noting here, that property investors don’t actually need to make the 10%, 15% or 20% annual returns to build wealth due to the leverage they can employ.

A long-term investor in property is more than happy with even the most moderate gains above inflation as demonstrated in the table below.

A theoretical $4 million portfolio that attains, say, a 4.5% annual gain, builds significant equity over a decade due to the combination of leverage and compound (i.e. snowballing) growth.
Of course, despite what they may try to tell you, nobody knows what will happen to property over the next 1, 2, 3 or 5 years. 

The only thing we can be certain of is that with rapidly growing household incomes, an inflationary economic environment and a booming population (particularly in Sydney and South-East Queensland), values will be higher at some point in the future.

Year
Portfolio value ($)
Cumulative gain @ 4.5% growth
0
4,000,000
-
1
4,180,000
180,000
2
4,368,100
368,100
3
4,564,665
564,664
4
4,770,074
770,074
5
4,984,728
984,728
6
5,209,040
1,209,040
7
5,443,447
1,443,447
8
5,688,402
1,688,402
9
5,944,381
1,944,381
10
6,211,878
2,211,878

Note that even 3.5% capital growth per annum builds a decent pot of equity over 10 years:

Year
Portfolio value ($)
Cumulative gain @ 3.5% growth
0
4,000,000
-
1
4,140,000
140,000
2
4,284,900
284,900
3
4,434,872
434,871
4
4,590,092
590,092
5
4,750,745
750,745
6
4,917,021
917,021
7
5,089,117
1,089,117
8
5,267,236
1,267,236
9
5,451,589
1,451,589
10
5,642,395
1,642,395

***

Went in to Sharm-el-Sheikh yesterday.  It’s just a beach and casino desert resort really, nothing much to distinguish it from a thousand other beach resorts, except that this one perhaps has a greater volume of plastic bags blowing around it than most. It’s a bit like Las Vegas with litter.

Far more interestingly, as I write this we are transiting through the Suez Canal, which you can see on the Cunard Queen Elizabeth webcam.

As the ship passes through the canal, my old mucker Arabist and camel expert Eamonn Gearon (author of the excellent and recently-released book The Sahara) is providing entertaining on-board commentary for the passenger - in his own irreverent style, of course.

Saturday, 14 April 2012

Borrowing money to buy shares?


This can be done, via the use of what is known as a margin loan.

Depending on the cash and collateral you have available, a lending counter-party such as ANZ Bank will extend you a loan facility of $25,000, $50,000, $100,000 or even more for the purpose of investing in shares.

Interest rates on margin loans tend to be higher than mortgage lending rates (perhaps around 9% at present) so the investor needs to make a decent return on investment to get ahead.

The good, bad and ugly of margin loans

In a raging bull market, margin loans are an excellent means for investors to boost their returns by using leverage to put more capital to work for them.

The downside, as noted, is that the investor must make a decent return just to break even.

Where margin loans can become particularly troublesome is in sideways-trending markets.

In a bear market with sliding values, investors tend to be forced to sell shares bought on margin when the lending party issues what is known as a margin call (insisting that the investor either sells shares to reduce the loan to value ratio, or pay in more cash to top up the account balance).

With the market trending sideways, the investor has a harder decision – he or she is unlikely to be making the return to cover the loan interest but doesn’t want to miss the opportunity to participate in the upside potential if the share market makes a positive breakout.

Margin loans right now?

I have a total facility of $100,000 for investing in margin loans which I have used in full in the past to help magnify returns, but I’m only using a very small percentage of it right now – I’m just not feeling it at the moment.

While the market might continue to drift upwards a little in the absence of bad news, I feel that potential market shocks could see the market with more downside risk just now. It’s down to personal choice, of course, but it would certainly be smart to exercise caution in the current market.

Warren Buffett famously once said of leverage: “If you’re smart then you don’t need it – and if you’re dumb you definitely shouldn’t use it!”

Negative gearing and tax effects

Under current Australian law, margin loan interest is tax deductible, which is a handy benefit for leveraged investors. Thus from a tax return perspective:

-Dividends are treated as taxable income
-Margin loan interest is treated as tax deductible
-Capital gains/losses are taxed in the normal manner

So if you’re receiving dividend income of say, 4.5% and paying margin loan interest of 9%, then this leaves the investor still needing some reasonable capital growth to finish in the black. 

I don’t know whether we’ll see this kind of growth over the rest of 2012, but time will tell.

Thursday, 12 April 2012

Investing with insurance: sell stops and puts


One thing that puts many people off investing is the fear of a stock market crash. On ‘Black Wednesday’ the market famously fell more than 22.5 per cent in a day.

And many of us cannot spare the time to be watching the market all day every day, particularly when on holiday or travelling.

Sell stops

An investor can insure against this risk by placing a sell stop order at a pre-determined price, so that shares are automatically sold when the stop is triggered.

The price you set the stop at is not a guaranteed worst-case scenario – if the market tanks very quickly then you might get ‘gapped’ – but if you are trading larger, liquid stocks then you will likely get something close to your pre-determined price.

Brokerage sites have become more sophisticated in recent years and it is also possible to place trailing sell stops that only trigger when a share price falls a certain percentage from a peak.  This allows the investor to participate in upside potential as the price moves northwards, while retaining insurance against a certain percentage drop in price.

Sell stops can give investors great peace of mind, and force a sell if the market craters. They can also be useful for investors who lack discipline, forcing them to sell automatically rather than rely upon their own untrustworthy hands!

Put options

An alternative is to take a put option – paying a premium for the right, but not the obligation, to sell shares at a pre-determined price and at a certain future date (or, depending on your jurisdiction, on or before the certain future date).

If you have shorted the stock (i.e. bet on it to go down rather than up) then you can insure yourself with a call option, the right but not the obligation to buy at a certain price.

Volatility caused by electronic trading

An interesting effect of all this is that when the market falls sharply sell stops can be triggered widely and the market falls yet further as a result.

We went through an extremely volatile couple of months in 2011 after the US and Eurozone debt crises came to a head.

In one day the Australian stock market fell by no less than 5%, likely in part due to stops being triggered, only for the market to whipsaw back up by 6%, closing up 1% for the day. 

This was a totally unprecedented occurrence in the stock market’s entire history.

***

Off to Petra tomorrow, can’t wait.

Tuesday, 3 April 2012

Sydney house prices rise 1.1% in March quarter


As reported by Christopher Joye in his blog and Property Observer article.  So not yet the major bust being gleefully predicted by our American friends, then.

Sounds as though inflation might sneak in higher than expected, though, so interest rates seem likely to stay as they are in April.

"Anyone? Anyone? The Laffer Curve...."


OK, little quiz for you - name the movie:

“…described by George Bush as something ‘-doo’ economics…Anyone?  Anyone?  Voodoo economics…”

If you love the movie Ferris Bueller’s Day Off as much as I do, then you’ll recognise the quote (the economics teacher is drawling inanely to himself as the class tune out and dream of doing something more interesting).

I think so many of us loved that movie because it represented mine and every schoolchild’s dream: the chance to sack school and all its banalities (such as, indeed, learning about the Laffer curve and voodoo economics) to go and do something they actually care about - like hanging out with your mates in town or by the pool.

Heck, what am I saying, I still felt exactly like that when I was 29 years old and working at Deloitte.

The Laffer curve

Anyways, it gave me a chuckle to see the good ol’ Laffer curve back in the news of late.

The theory drawn up by Laffer (on the back of a napkin, as legend has it) goes something like this:

·      - Tax rates at 100% are useless – no-one would bother doing any work as it wouldn’t be worthwhile

·         - Tax rates at 0% are useless too – the poor old government would have no revenue, and we can’t be ‘aving that!

·       -  Thus, the best tax rate is somewhere in-between

Well, I can’t fault the logic!  The key, of course, is to work out where the curve’s efficient frontier lies.

This was all obliquely relevant to the UK scrapping its temporary 50% tax rate in the recent budget.

Nowadays, most of us tend to agree that a top bracket of income tax of much under 40% would not be ideal, as the government would soon fail to meet its Medicare (or NHS depending on your jurisdiction) and Social Security liabilities.

Some studies have implied that income tax rates can lurch up to 70% or higher – in the short term at least – before people start voting with their feet and migrating.  Though in my view this may well change as world migration becomes more fluid (I wouldn’t work in any country that charged me 70% tax – so I expect plenty of others wouldn’t).

Theoretcially post-war years were supposed to offer us all a “peace dividend” of prosperity and lower taxes (LOL!) whereas in fact, the UK persisted with unbelievably high rates of tax right through until the mid-1970’s (in 1974 - 83% income tax, 98% for unearned income – Sir Paul McCartney for one must have been absolutely livid) before Maggie Thatcher finally wielded the tax-axe.

Of late, though, very few countries have persisted with income tax rates of above 60% (Cameroon, the Democratic Republic of Congo – and one other country that I can’t remember off-hand – a total of just three countries) as it is now generally agreed in progressive capitalist countries that lower tax rates benefit the economy overall.

(Regular readers will know that paying lots of income tax is not something I’m particularly a huge fan of – and I loved the look and feel of Singapore a week or two back…or perhaps a stint in Honkers would be fun…maybe one day).