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Tuesday 25 November 2008
A fun weekend away
My company held it's annual staff "conference" last weekend. We were flown from Sydney to northern Queensland, and put up at a five-star hotel for three nights. Aside from attending the official dinner on Saturday night, the rest of the weekend was free time. DW and I arranged for DS1 and DS2 to stay with my parents for the weekend, so we had a chance to relax and take things easy for a couple of days. The stock market went up nearly 6% today, so I'm still in a holiday mood at the moment ;)
Thursday 20 November 2008
Bailing rapidly, but the boat is still sinking
The Australian market followed the US lead and dropped another 4.5% today. It's now declined by more than 50% in the past year, dropping to levels last seen 4.5 years ago. Although my three margin lending accounts hadn't quite gone into the "buffer" zone (100%-105% margin utilisation), it was time to bite the bullet and start selling some of my stocks. From my Comsec account I sold my ASX shares (around $8K worth). They have dropped by a similar amount to the overall market (around 50%), but I doubt that they will recover as much as other stocks when things start to improve. The current bear market will have scared a lot of "mum and dad" investors and day traders out of the stock market for quite a while, which will impact on ASX trading volumes and profitability for years to come.
Out of my Leveraged Equities account I sold off the rather large block of Telstra (TLS) shares I had built up from the T1 float and the T3 float (I fortunately didn't buy into the T2 tranche as it was way overpriced). That will realise around $40K which will improve my overall margin utilisation in that account (since the margin value of the TLS shares was around $32K). I also took the opportunity to sell off $1,000 worth of miscellaneous Babcock and Brown infrastructure trust stocks, which I'd wound up with after a takeover:
After the market drop and these stock sales my accounts margin utilisation currently stands as follows:
Recent Trades:
Sell ASX .20 Nov 2008 ..200 @ $29.734
Buy. IANG 18 Nov 2008 ...90 @ $77.000
Sell LDW .17 Nov 2008 1,350 @ .$2.500
Sell BBW .17 Nov 2008 1,782 @ .$0.820
Sell THG .17 Nov 2008 4,000 @ .$0.580
Out of my Leveraged Equities account I sold off the rather large block of Telstra (TLS) shares I had built up from the T1 float and the T3 float (I fortunately didn't buy into the T2 tranche as it was way overpriced). That will realise around $40K which will improve my overall margin utilisation in that account (since the margin value of the TLS shares was around $32K). I also took the opportunity to sell off $1,000 worth of miscellaneous Babcock and Brown infrastructure trust stocks, which I'd wound up with after a takeover:
Trades:
Sell BBI ...Babcock & Brown Infr 25/11/2008 ...222 $0.04 .....-$8.21
Sell BBP ...Babcock&Brown Power 25/11/2008 ...197 $0.04 .....-$6.90
Sell BBW ...Babcock & Brown Wind 25/11/2008 .1,241 $0.77 ...-$889.57
Sell BEPPA .Bbi Eps Limited .....25/11/2008 ...472 $0.10 ....-$47.67
Sell TLS ...Telstra Corp .......25/11/2008 10,200 $3.98 -$40,149.44
After the market drop and these stock sales my accounts margin utilisation currently stands as follows:
Comsec Margin Lending
...Loan:................ $107,752.98
...Portfolio Value:..... $197,079.95
...Margin Value:........ $110,578.33
...Margin Utilisation:........ 97.44%
Leveraged Equities
...Loan:................ $170,473.54
...Portfolio Value:..... $178,075.27
...Margin Value:........ $138,921.53
...Pending sale proceeds: $41,101.79
...Margin Utilisation:........ 93.13%
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Tuesday 18 November 2008
Ejecting ballast from my portfolio
My margin loan portfolios continue to sink rapidly in value as the market slide shows no sign of abating. Last weekend's G20 meeting didn't inspire market confidence, with the Australian market trading down another 3% in the morning session. I decided to dump some of my smaller holdings in small cap stocks, as they could be no liquidity available in these stocks if the market has another "black" day, and I get a margin call. I'd have preferred to clear out my block ING Private Equity stock (I still have 90,000 of these - bought for approx. $1.02 via option rights, and last traded around $0.52), but there is no trading volume in these at the moment. The current bid price is around $50c, but only for 1,000 shares. The next offer is at $0.40 for 25,000. There hasn't been 100,000 IPE shares traded in total this month, so putting my 90,000 shares on the market would probably depress prices considerably. Although there is a risk that many of the small, unlisted companies owned by the Private Equity funds that IPE invested in will go out of business in a severe recession, at current prices it is probably not worth trying to liquidate this stock. Although any cash realised from selling off IPE would help reduce the margin utilisation of my Comsec account (as IPE currently has 0% margin value), the 0% margin value also means that any change drop in the price of IPE shares won't trigger a margin call.
In the end I cleared out three of my smaller share holdings (@$19.95 brokerage per trade), realising $7,096.39:
As LWD and BBW had 0% margin value, and THG only 50%, selling these stocks will have the same impact on my Comsec gearing as injecting $6,000 of cash. It will also reduce the number of individual stocks I own and therefore simplify my annual tax calculations of dividends and trust income.
I also placed an order to BUY 90 IANG shares with the proceeds, but the order hasn't been filled as yet. At around $77 the IANG shares are trading at a substantial discount to the underlying bond portfolio (around $100 per share), and yield a fully franked dividend of around 6%. The next reset date for the shares is 15 March 2010, at which time they may be redeemable for closer to the full $100 than their current market value. I already have 200 of these shares, so I'm just adding to an existing holding rather than adding another new security to my portfolio. The IANG shares have a margin of 80%, so using the sale proceeds to buy this stock will still have the effect of adding another $5,000 cash to the portfolio.
In the end I cleared out three of my smaller share holdings (@$19.95 brokerage per trade), realising $7,096.39:
Stock Price Qty Net
Sold LDW $2.500 1,350 $3.355.05
Sold BBW $0.820 1,782 $1,441.29
Sold THG $0.580 4,000 $2,300.05
As LWD and BBW had 0% margin value, and THG only 50%, selling these stocks will have the same impact on my Comsec gearing as injecting $6,000 of cash. It will also reduce the number of individual stocks I own and therefore simplify my annual tax calculations of dividends and trust income.
I also placed an order to BUY 90 IANG shares with the proceeds, but the order hasn't been filled as yet. At around $77 the IANG shares are trading at a substantial discount to the underlying bond portfolio (around $100 per share), and yield a fully franked dividend of around 6%. The next reset date for the shares is 15 March 2010, at which time they may be redeemable for closer to the full $100 than their current market value. I already have 200 of these shares, so I'm just adding to an existing holding rather than adding another new security to my portfolio. The IANG shares have a margin of 80%, so using the sale proceeds to buy this stock will still have the effect of adding another $5,000 cash to the portfolio.
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Saturday 15 November 2008
Just a thought
It was interesting watching the US election from the outside. Obama's win seemed inevitable, given Bush's record breaking unpopularity and that the Democrats came close to winning the last couple of elections. But it was still nice to see Americans finally elect a "minority" candidate - although why someone who is equal parts "white" and "black" is universally labelled as "the first black President" seems a bit odd.
Anyhow, the enthusiasm that accompanied Obama's historic victory wasn't shared by the stock market. I wonder how the current market performance compares to first ten days post-election of previous US presidents? Is there any correlation between market reaction immediately post-election and how it performs over the one or two term period of the presidency?
Anyhow, the enthusiasm that accompanied Obama's historic victory wasn't shared by the stock market. I wonder how the current market performance compares to first ten days post-election of previous US presidents? Is there any correlation between market reaction immediately post-election and how it performs over the one or two term period of the presidency?
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Zero Equity in Equities
Although the Australian market recovered weakly on Friday (in response the Wall Streets huge rebound) it was still close to the four-year lows reached on Thursday. That drop had increased the margin utilisation on my three margin loan accounts back over 90%, with only the recent injection of the last of my available cash holdings preventing them moving into the margin "buffer zone" or getting a margin call (when margin utilisation goes over 105%).
My equity in my stock portfolios had increased from around $100,000 four years ago to around $400,000 a year ago. It's now plunged down to roughly $0 - that is, the overall value of my stock portfolio is now roughly equal to the amount I borrowed to invest in the stock market! The reason that my equity has reached zero while the gearing of my margin loan accounts is still less than 70% is that I last year I borrowed around $240,000 to invest in stocks (mostly ING Private Equity) using a HELOC (a property-secured "Portfolio loan" from St George bank). The stocks I bought using the HELOC are part of my margin loan portfolios.
I made some truly stupid investment decisions (or indecision) in the past 12-18 months:
1. Despite realising that the market was getting overpriced after a lengthy bull run, I decided to not sell some of my stock holding to reduce my gearing levels. For tax reasons I decided to maintain my tax-deductible borrowings and avoid realising capital gains. I'd often read that you shouldn't let tax considerations govern your investment decisions, but I'd now go even further and say that you should try to ignore tax when making financial strategic decisions, and then only consider tax effective ways to implement the intended strategy.
2. Instead of selling stocks, I chose to "insure" my portfolio buy purchasing Index Put Options with a 9-month expiry period early in 2007. However, I then didn't ensure that I replaced them with a new set of Options when they expired in December 2007. I did make a token move to buy replacement put options during December, but when I couldn't easily find a suitable listed option (with the desired expiration date and index value) I gave up. Having decided to use options to protect my gains rather than sell some stocks, I should have followed through on this plan - even if it meant taking a day off work to implement the plan.
3. I was tempted to invest all investible funds immediately they were available, rather than wait for a buying opportunity:
When we opened our self-managed superannuation fund in March last year we started "rolling over" our existing retirement account funds into the SMSF bank account. This meant that almost 100% of our retirement savings were in cash last July. Despite feeling that the market was possibly due for a significant correction, or even an overdue 20%-30% bear market decline, I still decided to reinvest our retirement savings into our long-term asset allocation (100% Australian and International Equities) immediately. My token effort at dollar-cost-averaging only meant that we invested 5% each week. Spreading out the DCA period for 1-2 years would have been much better in hindsight.
When we changed our home loan to "interest only" I setup a portfolio loan facility to let me borrow against the "unused" equity we had built up in our property portfolio. Again, I invested the available funds almost immediately, rather than having the patience to wait until there was an obvious buying opportunity.
On days like last Thursday, when the market has dropped more than 6% in a single day, I can't help day-dreaming about how much better off we would be financially if I had replaced my Index Put Options when they expired, and had delayed investing my $240,000 HELOC until now, when the market is 40%+ below it's high point.
My equity in my stock portfolios had increased from around $100,000 four years ago to around $400,000 a year ago. It's now plunged down to roughly $0 - that is, the overall value of my stock portfolio is now roughly equal to the amount I borrowed to invest in the stock market! The reason that my equity has reached zero while the gearing of my margin loan accounts is still less than 70% is that I last year I borrowed around $240,000 to invest in stocks (mostly ING Private Equity) using a HELOC (a property-secured "Portfolio loan" from St George bank). The stocks I bought using the HELOC are part of my margin loan portfolios.
I made some truly stupid investment decisions (or indecision) in the past 12-18 months:
1. Despite realising that the market was getting overpriced after a lengthy bull run, I decided to not sell some of my stock holding to reduce my gearing levels. For tax reasons I decided to maintain my tax-deductible borrowings and avoid realising capital gains. I'd often read that you shouldn't let tax considerations govern your investment decisions, but I'd now go even further and say that you should try to ignore tax when making financial strategic decisions, and then only consider tax effective ways to implement the intended strategy.
2. Instead of selling stocks, I chose to "insure" my portfolio buy purchasing Index Put Options with a 9-month expiry period early in 2007. However, I then didn't ensure that I replaced them with a new set of Options when they expired in December 2007. I did make a token move to buy replacement put options during December, but when I couldn't easily find a suitable listed option (with the desired expiration date and index value) I gave up. Having decided to use options to protect my gains rather than sell some stocks, I should have followed through on this plan - even if it meant taking a day off work to implement the plan.
3. I was tempted to invest all investible funds immediately they were available, rather than wait for a buying opportunity:
When we opened our self-managed superannuation fund in March last year we started "rolling over" our existing retirement account funds into the SMSF bank account. This meant that almost 100% of our retirement savings were in cash last July. Despite feeling that the market was possibly due for a significant correction, or even an overdue 20%-30% bear market decline, I still decided to reinvest our retirement savings into our long-term asset allocation (100% Australian and International Equities) immediately. My token effort at dollar-cost-averaging only meant that we invested 5% each week. Spreading out the DCA period for 1-2 years would have been much better in hindsight.
When we changed our home loan to "interest only" I setup a portfolio loan facility to let me borrow against the "unused" equity we had built up in our property portfolio. Again, I invested the available funds almost immediately, rather than having the patience to wait until there was an obvious buying opportunity.
On days like last Thursday, when the market has dropped more than 6% in a single day, I can't help day-dreaming about how much better off we would be financially if I had replaced my Index Put Options when they expired, and had delayed investing my $240,000 HELOC until now, when the market is 40%+ below it's high point.
Subscribe to Enough Wealth. Copyright 2006-2008
Wednesday 12 November 2008
Back online
Early last week I arranged to have my $30 per month landline disconnected, as I hardly ever use it and it costs more than the mobile phone plan DW and I share. The phone service was supposed to be turned off within a day or so, but it was still working last Thursday when suddenly our cable Internet stopped working. I phoned the Optus help line the next day and after spending nearly half an hour on the mobile phone I managed to book a service technician to visit on Saturday morning (between 7:30 and 12:30). On Saturday the technician didn't turn up before we finally had to go out in the afternoon, and the next day Optus phoned my mobile number to let me know that we weren't at home when the technician visited (at 3pm!). We had to rebook the service call for Wednesday morning (when DW would be at home) and when the technician eventually arrived it didn't take him long to work out that there was actually nothing wrong with our cable modem - it turned out that Optus had disconnected our cable Internet instead of our phone service by mistake! Our Internet service is now back on, and it will be interesting to see whether or not our telephone service stays connected and if we stop being billed for the telephone after this month.
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Tuesday 4 November 2008
Economic cloud has a silver lining
I'm glad to receive any good financial news these days, so the Reserve Bank of Australia's larger-than-expected rate cut (0.75%) today was indeed welcome. The RBA has now made three consecutive rate cuts, of 0.25%, 1.00% and 0.75% - slashing the official interest rate by 28% from 7.25% to 5.25%. Although the tax-deductible mortgage interest for our investment property is at a fixed rate, our home loan is the standard (for Australia) 25-year variable rate loan. With our home loan balance still almost $500,000 the recent rate cuts will reduce the annual interest expense by around $10,000 pa. Since the interest on our home loan isn't tax deductible, this is equivalent to DW and I earning an extra $15,000 pa or thereabouts.
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Monday 3 November 2008
Net Worth Update: October 2008
I thought last month was pretty dismal - this month proved that I didn't really know what a bad month was. There's an old saying that the equity markets go up by the stairs and down via the elevator, but last month it felt as if the elevator cable had broken and I was hurtling to my doom. At the moment the emergency brakes appear to have been applied, but I'm holding my breath waiting to see if the plunge resumes.
My net worth as at 31 October decreased by another -$141,895 (-15.68%) during the month to $763,094 (AUD), due to the huge losses in my geared equity investments (down by $93,422 (60.72%!) to only $60,429 despite a slight rebound in the last few days of the month) and a drop in the valuations of our real estate investments and retirement account. The estimated valuation of my share of our real estate assets decreased by -$12,263 (-1.47%). The balance of my half of the mortgage increased by -$939 to -$367,778 as we continue to redraw some of our advance payments to cover the interest payments while DW is working part-time (until DS2 starts school in a couple of years). The recent large cuts in the official interest rate by the RBA has now flowed on to a reduction in existing variable home loan interest rates, but the monthly repayment amounts won't decrease until December. There is widespread speculation that the RBA may cut rates by another 0.25%-1.00% at their next monthly meeting, but the scope for further interest rate cuts to offset the effects of the global recession are limited by continued inflation concerns. We have around half of our property loans at a fixed rate for the next 3-4 years, so we avoided the full impact of increased home loan rates. But a cut in the interest rate on the variable component of our home loans will make life easier.
I had to sell off most of my US stock portfolio and deposit the cash into my Australian margin lending accounts to avoid margin calls, but my margin utilisation remains over 90%. Continued market declines would force me to sell off some stocks and park the proceeds in a cash management account. The timing of the sale of my US stocks could not have been worse - I managed to sell "at market" on the morning of "Black Friday" which cost me around $15,000 compared to selling a day earlier or later. Such is life.
The balance of my retirement account also decreased substantially this month, by -$35,271 (-12.31%) to $251,236, as it's now invested about 98% in the Vanguard Lifestages "High Growth" fund which is allocated mostly to domestic and international equitites. There was no employer contribution into our SMSF account this month, although two month's worth of contributions were processed on 3 November, which will boost next month's balance. Hopefully by the time I retire the "blip" in stock market in 2008 will look similar to the "blip" that occurred in 1987, and not the one that happened in 1929...
My net worth as at 31 October decreased by another -$141,895 (-15.68%) during the month to $763,094 (AUD), due to the huge losses in my geared equity investments (down by $93,422 (60.72%!) to only $60,429 despite a slight rebound in the last few days of the month) and a drop in the valuations of our real estate investments and retirement account. The estimated valuation of my share of our real estate assets decreased by -$12,263 (-1.47%). The balance of my half of the mortgage increased by -$939 to -$367,778 as we continue to redraw some of our advance payments to cover the interest payments while DW is working part-time (until DS2 starts school in a couple of years). The recent large cuts in the official interest rate by the RBA has now flowed on to a reduction in existing variable home loan interest rates, but the monthly repayment amounts won't decrease until December. There is widespread speculation that the RBA may cut rates by another 0.25%-1.00% at their next monthly meeting, but the scope for further interest rate cuts to offset the effects of the global recession are limited by continued inflation concerns. We have around half of our property loans at a fixed rate for the next 3-4 years, so we avoided the full impact of increased home loan rates. But a cut in the interest rate on the variable component of our home loans will make life easier.
I had to sell off most of my US stock portfolio and deposit the cash into my Australian margin lending accounts to avoid margin calls, but my margin utilisation remains over 90%. Continued market declines would force me to sell off some stocks and park the proceeds in a cash management account. The timing of the sale of my US stocks could not have been worse - I managed to sell "at market" on the morning of "Black Friday" which cost me around $15,000 compared to selling a day earlier or later. Such is life.
The balance of my retirement account also decreased substantially this month, by -$35,271 (-12.31%) to $251,236, as it's now invested about 98% in the Vanguard Lifestages "High Growth" fund which is allocated mostly to domestic and international equitites. There was no employer contribution into our SMSF account this month, although two month's worth of contributions were processed on 3 November, which will boost next month's balance. Hopefully by the time I retire the "blip" in stock market in 2008 will look similar to the "blip" that occurred in 1987, and not the one that happened in 1929...
Subscribe to Enough Wealth. Copyright 2006-2008
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