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Spring 2007 Newsletter

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             Spring 2007 Newsletter
                                                                                          September 3rd 2007



        A WORD FROM CHRIS                  My belief is that this cycle will happen
It is certainly interesting times.        again and once more we will be in a
                                          great position to take advantage of the
The fall and rise again of our stock mar-
                                          money that will flow into this state of
ket and the fall of the sub prime US
                                          ours.
housing market confirms the impor-
tance of regular reviewing.               So let’s not be too hesitant. Look at
                                          ways to get your money working in a              Inside the Issue
Much has been written about these
                                          way that you feel comfortable with and
goings on and while I was on holidays,                                                     A Word from Chris        1
                                          take advantage of these wonderful                The pitfalls of
spending some much needed time for
                                          times. If you need more information              leveraged investing
R&R, I did some catch up reading about
                                          and wish to see me, please phone my
what others feel about both our Austra-                                                    Australian Economy       2
                                          office to book a convenient time.
lian economy and overseas economies.
Some of it—well actually a lot of it—
especially that written about the US                                                       Mortgage Relief          3
market is very negative.                                                                   CGT Relief for small
                                                                                           business
My point here is that it is easy to talk
about a market after the event—                                                            10 Steps to Financial    4
Hindsight is a wonderful thing. How-                                                       Health
ever, we need to stay focused and stick       Chris and Vicki’s holiday in Port Douglas
to our original plans, that is to keep our       THE PITFALLS OF LEVERAGED
Risk Profile within our comfort zone,                        INVESTING
                                                                                          growth in the in the sub-prime
stick to our original time frames and        The recent collapses of several mezza-       loan market. Major Blue rib-
keep our original goal clear in our          nine property financiers locally and         bon investment houses on
minds. Nothing in life runs true and in a    some US hedge funds with exposure to         Wall St bought and packaged
straight line. That is we often encounter    CDO’S are a timely reminder of the
highs and lows but if we stick to the                                                     These loans as securities for
                                             inherent risks involved with debt secu-
                                                                                          investors seeking high yield.
original plan, staying focused, we do        rities offering high yields.
recover and emerge closer to our goals                                                    These securities were typi-
                                          In 2007, the collapses of another two           cally offered as either residen-
than we ever thought possible.
                                          mezzanine property financiers in Aus-           tial mortgage backed securi-
My thoughts about investing now and       tralia have taken investor losses close         ties (RMBS) or more often as
into the near future have been consis-    to $1 billion. Fears are now growing            part of a collateralised debt
tently positive.                          over the problematic US housing mar-            obligation. The attraction for
The amount of money to be invested in ket and the parlous state of the sub-               investors was understandable
Australia is staggering, with our own     prime mortgage sector. These events,            as these products offered
mining industry taking off over the next both at home and abroad provide a                higher returns relative to
2-5 years. Therefore it is my belief that timely reminder that debt securities            “comparable” debt securities
we are truly on the cusp of something     offering high yields can come at a high         with purportedly similar levels
not seen in this state for many years.    price.                                          of risk.
We just need a little patience. My mes-        LENDING LIKE THERE’S NO TOMORROW
                                                                                          HEDGE FUNDS GET CAUGHT IN ACT
sage to you here is to look at the bigger A rampant US housing market, which
                                                                                          The cracks started to appear in
picture and at the longer time frame.     saw prices on average rise by 98% in            the US home loan market in
South Australia was once one of the          the eight years to 2006, is now under-       late 2006. With house prices
wealthiest places to live, not just once,    going a painful correction. During this      declining, sub-prime mort-
but twice in the 1800’s, when farming        period, interest rates reached a low of      gagees found themselves un-
was a lucrative venture which created        just1% attracting borrowers who his-         able to repay loans as intro-
much wealth for many.                        torically couldn't afford a mortgage,        ductory honeymoon rates
                                             which in turn fuelled extraordinary
                                                                                                                                    2




were reset to prohibitive levels. This       The Australian Economy                     Its export volumes have grown by only
set the scene for a growing number                                                      1.5% a year since 2000, down from an
                                                                                        annual average of 8% in the 1990s.
of defaults and the failure of many
                                          AUSTRALIA may lie towards the bottom          Farm exports have been hurt by
loan originators.                                                                       drought; manufactures by the rise in
                                          of the map, but its economy has been
While the market was hoping the           top of most rankings of developed             the exchange rate to a ten-year high.
problem would be contained, hedge countries in recent years. Despite the                But the biggest disappointment has
                                          deflation of its housing bubble and a         been in minerals. Thanks to past under-
funds with leveraged exposure to                                                        investment, Australia cannot get as
                                          severe drought, the kangaroo economy
CDO’s were beginning to feel the          keeps bouncing along.                         much stuff out of the ground or onto
brunt of plummeting valuations. The                                                     ships as it would like. Coal, for exam-
                                           It is now in its 16th year of unbroken
collapse of two Bear Stearns funds in expansion, during which time it has               ple, is Australia's biggest export, ac-
                                                                                        counting for one-fifth of its foreign
the US may have grabbed most of the grown at an average annual rate of                  earnings. But its sales are held back by
headlines, but by no means have           3.6%, well above the OECD average of
                                                                                        the lack of port capacity. Outside the
                                          2.5%.
they been alone in this turmoil. While                                                  port of Newcastle, a record 70 ships are
                                          This resilience is partly its just deserts.   waiting to load coal bound for Asia.
not as aggressively leveraged as the
                                          The government has kept its budget in         Few Australian economists lose sleep
two Bear Stearns funds, it’s still strug- surplus, the central bank has largely
                                                                                        over its current account any more. The
gling to meet it’s margin obligations. kept inflation in check, and structural          country has run a deficit in all but one
                                          reforms have helped the economy han-          of the past 50 years. Many people ar-
LESSONS FROM THE LEVERAGE                 dle shocks.                                   gue the government has done all it can
FALL– OUT.                                But Australia also owes a lot to good         to reduce the gap, running a budget
                                          luck. As a large commodity producer, it       surplus and encouraging personal sav-
If nothing else, the issues facing in-
                                          has been blessed by a surge in the            ing, to no great effect. The deficit
vestors with exposure to certain          prices of its exports thanks to booming       therefore reflects the private decisions
high—yield debt securities highlight global demand, notably from China.                 of “consenting adults”.
the inherent risks of investing in        The country's terms of trade (the price        But the government cannot wash its
opaquely structured products, par-        of its exports divided by its imports)        hands of the deficit quite so easily.
ticularly if they are supercharged        have leapt by 30% over the past three         Saul Eslake, the chief economist at ANZ
                                          years to their highest level for over 50      Bank, accuses the government of wast-
with leverage. While leverage can                                                       ing the windfall revenue from the com-
                                          years (see below-chart). Despite the
enhance returns, it can also magnify enormous gain in its terms of trade,               modities boom.
losses—as many Australian investors Australia still runs a huge current-                Most of it has been squandered on
have recently learned the hard way. account deficit, close to 6% of GDP in              vote-seeking tax cuts, he calculates, not
                                          the fourth quarter.                           on bolstering the economy's growth
If an investor ’s prime objective is to
                                                                                        prospects.
meet income needs, there are less
speculative and more liquid invest-
ment options available.



By Patrick Noble, Investment Spe-
cialist, Zurich.




Acacia glacoptera (Flat leaved Wattle)
                                                                                                                               3




 More spending on infrastructure and      I have done some reading on the
education could have relieved bot-        subject and believe the information     CGT RELIEF FOR SMALL BUSINESS
tlenecks, and a bigger budget sur-        presented by Gary Dowd, Head of
plus would have shielded the econ-        Compliance and Risk Management          Recent amendments to the capital gains
omy against a future downturn in          for Choice Aggregation, is based on     tax (CGT) small business concessions
prices.                                   fact and addresses that question.       have extended the range of situations in
                                                                                  which tax relief applies. This means that
Instead Australia's economy has                                                   more small business owners may be eligi-
been stretched taut. It is short of                                               ble to take advantage of the changes and
workers as well as infrastructure: at                                             minimise tax on the sale of their CGT as-
4.6%, unemployment is close to a
                                            Nationwide house-
                                            price inflation was                   sets.
32-year low (down from almost
11% in 1992) and inflation is above         propped up by a                       The maximum net asset value test limit has
the Reserve Bank's target of 2-3%.          40% surge in Perth                    been increased from $5 million to $6 mil-
                                                                                  lion in 2007/8. However, a taxpayer may
Most worrying, the economy's                last year, thanks to
                                                                                  still be able to access concessions even
speed limit has fallen.                     the minerals boom.                    where they fail this test provided they
 Productivity growth has slowed to an                                             pass the new “aggregated turnover” for
annual rate of only 1.2% since 2000,                                              that year must be less than $2 million.
from 2.4% in the 1990s. In the long       Here is what Gary stated in the         Another key change is the replacement of
run, a nation's standard of living de-    Choice News Bulletin Edition 34         the “controlling individual test” with the
pends on its productivity.                                                        significant individual test” Whereas previ-
                                          The Australian market is very differ-
The commodity boom has so far con-                                                ously an individual needed to have at least
                                          ent to the US. Sub-prime loans in
cealed the slowdown, but even if                                                  a 50% share in a company or interest in a
prices stay high, further gains on this   Australia represent less than 1% of     trust to qualify as a CGT concession stake-
scale seem unlikely. Without further      our market; in the US it represents     holder in that entity, this has been re-
policy reform, the Australian kanga-      around 15%.                             duced to 20%. The only exception to this
roo risks turning into a sleepy                                                   rule is the spouse of a significant individ-
                                          Sub-prime LVR’s in Australia aver-      ual, who can qualify as a CGT concession
koala.
                                          age around 75% compared to 90%          stakeholder with a lesser percentage pro-
From The Economist print edition
                                          in the US.                              vided they have a share in the company or
                                                                                  trust. The new definition allows there to be
                                          Credit policy in Australia has always   up to 8 CGT concession stakeholders in a
                                          been much tighter compared to the       company or trust. These individuals may
                                          US – hence why the defaults in the      be able to benefit from small business
                                          US are expected to get worse.           concessions available to the company or
                                          The rapid increase in the market        trust. New provisions have also been in-
                                          share of non-conforming lenders in      troduced to allow a company or trust to
                                          Australia is the result of the provi-   access CGT relief upon the sale/disposal
                                          sion of new products not previously     of shares in another company or interests
                                          available to a section of the           in a trust.
                                          market.                                 We can help you navigate this complex
                                          Similarly the rise of lo doc and no     maze of tax legislation to determine your
                                          doc products simply filled a market     eligibility for CGT relief and other tax
                                          gap for people who could not previ-     concessions.
                                          ously obtain finance. These are now     By Dimitri Diamantes, Senior Technical Analyst,
                                          mainstream products and offered by      Zurich.
                                          most major lenders, not just non-
The recent crisis in the US regarding     conforming lenders.
lenders, lending policies and the         As a Mortgage Broker, I deal with a
unfortunate position some home            number of Lenders, who offer a wide
owners have found themselves in           variety of products.
has raised many issues debated both
                                          I am therefore able to compare sev-
on the TV and in the papers.
                                          eral products at any one time.
It has cast the belief that all non-
                                          Please give me a call if you wish to
conforming or non-bank lenders are        check that your current loan is still
villains and are the cause of the cri-    suitable for your current needs.
sis.
                                          By Vicki Harris, Manager
The overlying question and one that
needs to be considered carefully is       Mortgage Relief.
“could this happen in Australia?”         0408 820 443
                                                                                                                                                                    4




10 Steps to Financial Health
1. Work out a budget and                            – everyone needs an occa-                             7. Be careful with credit
stick to it, which means                            sional splurge on a night out                         cards. Credit cards can be a
spending less than you earn.                        or new outfit. If you are start-                      recipe for disaster, tempting
A budget is a detailed record                       ing your working life, consider                       you to buy things you cannot
of your total income and ex-                        making your own contribu-                             afford. Credit cards are not
penditure. So many people                           tions to superannuation; if                           free, and the interest rates are
say, ‘I don’t know where my                         you are an older worker, con-                         high. Unless you are certain
money goes.’ This will not                          sider increasing your contribu-                       that you can pay your bill in full
happen if you budget cor-                           tion.                                                 each month, the safest option
rectly; your purse may still be                     4. Have financial goals.                              is to do some ‘plastic surgery’
empty, but at least you will                        Having something to save for,                         and cut up your credit card/s.
know exactly where the                              e.g. a holiday, a car, your own                       8. Never sign a contract or
money went! Budgeting is a                          home, will inspire you to per-                        agreement unless you have
chore for everyone, but no                          severe with your budget when                          read it thoroughly and com-
matter how boring you find it,                      the going gets tough.                                 pletely understand its terms
it is an essential first step in                                                                          and conditions.
managing your finances.
                                                    5. Pay off debts as quickly
                                                    as possible. Interest rates                           9. Avoid activities or sub-
2. Get organised. Start a                           charged on loans can mount                            stances that may become
file for financial matters and                      up very quickly. Always pay                           addictive, i.e. gambling,
keep your accounts in order.                        the debt earning the highest                          drugs, alcohol or cigarettes.
3. Always save a regular                            interest first.                                       These can very easily lead to
amount of your income –                             6. Avoid impulse spend-                               financial ruin, not only for you
make that a priority. As the                        ing. Don’t buy what you don’t                         but also for your family.
old saying goes, ‘Look after                        really need. Before buying an                         10. Put your money to work.
the pennies and the pounds                          item, ask yourself how many                           It’s not much good saving your
will look after themselves.’                        hours you would have to work                          money if it is just sitting around
Small amounts will build up                         to pay for it. For example, if                        in a basic on-call bank account
over time into substantial                          you earn $15 an hour, you                             earning a minute amount of
sums. Build an emergency                            would have to work ten hours                          interest. Shop around for the
fund in case of the unex-                           to pay for a $150 bottle of                           investment that best suits your
pected crisis, and a ‘fun’ fund                     perfume.                                              needs, taking into account such
                                                                                                          things as fees, interest rate and
135 Fullarton Rd
                                                                                                          accessibility.
Rose Park
PO Box 241                                                                                                Article by Money Management
Kent Town
SA 5071

Phone: 08 8431 8222                                         Financial Lifestyle Solutions Pty Limited ABN 86                     We’re on the web!
Fax: 08 8431 8211                                           077 643 960
E-mail: chris@moneyworkspl.com.au                                                                                         www.moneyworkspl.com.au
                                                            Australian Financial Services Licence No:
                                                            232498

If you have any questions relating to any of the articles contained in this newsletter or would like to make a time with
Chris Harris to discuss any of the topics further please call our office on (08) 8431 8222.
Need Help with a Home Loan? Contact Vicki Harris at Mortgage Relief on 0408 820 443




Disclaimer

The information provided in this newsletter is of a general nature only and does not constitute financial advice or a recommendation. Please seek expert advice
from a qualified and experienced Financial Planner or accountant or other professional, prior to making a decision on your financial situation. Detailed infor-
mation on our services and fees is provided in our Financial Services Guide, which is provided prior to or at the first consultation and is also available on re-
quest.

				
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