1 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: email@example.com 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.