Friday 24 April 2009

If a tree falls in the forest and the manager is in administration, will I get paid?

Timbercorp (TIM.AX)today announced that it has gone into voluntary administration. It has about $500m in assets and owes about $600m - sounds like it's gone bankrupt. It cites the changes to the tax rules regarding agricultural investments, the GFc etc. etc. for going broke - the usual 'the dog ate my homework' excuses that managers everywhere use to explain why it isn't really their fault that a company has gone bust. (Otherwise how could CEOs and top management move on to their next highly paid job with big 'performance' bonuses?).

I have about $22,500 invested in managed agribusiness investments - $12,500 in hardwood (Eucalyptus) forests via Timbercorp, and $10,000 in Tea Tree and Sandlewood plantations managed by Rewards. I've valued the investments at the amount originally invested as the projected incomes from agricultural investments are always sky-high but highly risky. In theory my tree plantation investment managed by Timbercorp should keep most of it's value, as I own the trees and pay the management,insurance and land rental fees annually (which from now on should be handled by the administrator). But when the trees mature and require logging, the value of the timber may be greatly reduced as Timbercorp was supposed to harvest the trees using in situ chipping technology to maximise revenue from the timber. Although wood chip prices have held up well to the end of 2008, I think the $12,500 'book value' for my timber investment may prove to be optimistic.

Year ..... GTP Wood Chip Index
1992 ..... 159.36
1993 ..... 159.36
1994 ..... 161.44
1995 ..... 171.89
1996 ..... 176.89
1997 ..... 173.47
1998 ..... 176.89
1999 ..... 165.51
2000 ..... 162.67
2001 ..... 170.63
2002 ..... 169.49
2003 ..... 177.46
2004 ..... 180.87
2005 ..... 184.28
2006 ..... 184.28
2007 ..... 189.40
2008 ..... 207.40

Aside from charging huge management fees, I've found that many 'alternative' investments have very poor risk mitigation. In the good times investors get very modest returns while the management companies skim off most of the 'excess' profits, and in the bad times the investor is left with a worthless investment shell. The management company goes out of business and the managers keep all the bonuses paid out in previous years. Ideally the investors should be able to 'vote with their feet' by investing with managers that offer good value - but there don't seem to be very many alternative investments around that provide good value. We'll see whether or not investing with two different managers and three different agricultural products was sufficient diversification in this area. Fortunately the agribusiness investments only account for around 3.% of my net worth, so even a total write-off of these investments would have little impact compared to the vagaries of the Australian and international stock markets.

At least I didn't buy shares in Timbercorp itself (ASX code TIM). After hitting a high of $4 a share in 2006, they fell all the way down to 4c a share before a trading halt was imposed prior to the announcement of going into voluntary administration.

Subscribe to Enough Wealth. Copyright 2006-2008

Wednesday 22 April 2009

Fixed the interest rate on part of our home loan

Most (90% or so) of home loans in Australia are variable rate, and fixed rate loans are generally only available for terms up to 5 or 7 years. My parents had a 30-year fixed rate home loan when they bought a house back in the early 1960s, but Australian banks moved to the 'standard' variable rate loan during the high inflation (nearly 20%) period of the 1980s.

We fixed the interest rate on our investment property loan for five years when rates started to climb about four years ago. And we will probably end up paying about the same average interest over the five year period as if we had stuck with a variable rate (due to the recent record low interest rates).

We had been hoping to change part of our home loan from variable rate to a fixed rate this year, and I had expected the fixed rates on offer to keep dropping during 2009 as the RBA keeps cutting the official interest rate. However, the last rate cut by the RBA didn't result in much change in the variable rates of the 'big four' Australian banks, and yesterday the Commonwealth and Westpac banks announced a RISE in their fixed rate loan interest rates. So today we took advantage of my day off to do the paperwork for moving $270,000 of our home loan to a fixed rate of 5.34% for three years. There is a $500 fee involved, so over three years the effective fixed rate will be around 5.5%. This is higher than the current standard variable rate (with a 0.7% negotiated discount), but may save us some money over the next three years if the economy starts to recover towards the end of 2010 and interest rates start to trend up again.

We still have the other $230,000 of our home loan at the negotiated variable rate, so we're hedging our bets.

Subscribe to Enough Wealth. Copyright 2006-2008

When is a target not a target?

The Reserve Bank of Australia (RBA) has an official inflation target band of 2%-3% "over the economic cycle". Apart from the difficulty of determining exactly what time period defines an "economic cycle", the target also seems to only affect RBA behaviour when it's broken on the upside. When inflation had spiked above 3% due to the oil and commodity price bubble, the RBA was intent on preventing inflation getting out of hand, raising interest rates in 2007 even when the US sub-prime crises was apparent.

At the moment inflation in Australia as just dropped back within the "target band" - dropping to an annual rate of 2.8% with the release of the latest 0.1% rise in CPI for the March 2009 quarter. This was lower than expected (0.5% was the consensus), and follows on from a -0.3% decline in the previous quarter.

With the past two quarters producing a drop in CPI of -0.2%, and the global economy not yet showing much sign of recovery, I can't imagine the next two quarters will show CPI increases of more than 0.5% each. That would see annual inflation drop to below 1% by the end of 2009 - well below the RBA target.

And yet despite the definite prospect of inflation dropping below 2%, the RBA seems more worried about cutting interest rates too far and creating excessive inflation pressures once the economy starts to recover. Indeed, the RBA only seems to show concern if there is a prospect of deflation. If that's the case, why not set the inflation "target" as 0%-3%, rather than having a target that isn't fair dinkum?

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Tuesday 21 April 2009

Bought some new mobile phones

We've been using two Sony Erikson K608i handsets with our $28 shared plan for just over three years now. Aside from the recent problems with being charged for unwanted 'premium SMS' messages being sent to DWs phone, we've been pretty happy with the plan and the handsets - enough to get rid of our land line last year.

However DWs handset has been dropped a few times too often while looking after DS1 and DS2, and had started having problems. The charger plug was a very loose fit, which sometimes caused the phone to stop charging if it was nudged during a charge. And today the mouse-stick controller suddenly stopped working. So we dropped into the nearest retail outlet of our phone service and I signed a new two year contract. The service plan remains the same ($28 a month for the two phones) and we got two new Sony Erikson G502 handsets for $14 a month with a $10 per month credit. So, in theory, my monthly bill for the next two years should now be $32 rather than $28. However, I'll have to check this on the next phone bill - the $5 'credit' might turn out to be additional included call credits rather than actually reducing the monthly handset payment to $2.

If the credit is applied in the way it was explained in the shop, the total cost of the new phones should be $48 each. If we decide to cancel our phone service within two years we would have to pay out the balance of the full cost of each handset ($168).

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All quiet on the Eastern front

I'm having next-door neighbour issues. When we bought our house in 2001 the side boundary was a three-foot high brick retaining wall, with a standard six-feet high wood paling fence on the boundary line behind our retaining wall. On the far side of the fence was a typical Aussie back yard, with a lawn sloping fairly steeply down the the fence from the neighbour's house. Over the years a bit of dirt had washed down and accumulated about 50mm (2") deep at the bottom of the fence palings, but basically the neighbours ground level was at the bottom of the fence.

About a year after we moved in, the house next-door was sold, and soon after the new neighbour started 'landscaping' his garden. I have no problem with him wanting to level parts of his garden and establish some fruit trees and a vegetable garden, but he's undertaken major earth moving activities, which culminated up with him piling about four feet deep of earth against our wooden boundary fence, held back only by some sheets of corrugated iron (which he only started using after I complained that the dirt being piled directly against the wood fence would make it rot).

Despite making a complaint to our local council about the weekend earth works being done at the time, my neighbour didn't remove the earth he'd piled against the fence. I didn't pursue the matter any further at that time (a BIG mistake), as I assumed the council should have enforced the relevant building rules. After all, the council ranger had come to see what he was doing.

Then, about six weeks ago, my neighbour came over and announced that he intended to pull down the boundary fence (expecting me to pay for half the cost of replacing the entire 18m length of fence!) and rebuild it 300mm (about 15") closer to our house after building a 'proper' retaining wall on top of the existing brick retaining wall.

The problems I have with his plans are:

a) according to the survey report I got when I bought our house, the property boundary is at the existing wood paling fence, NOT on our side of the brick retaining wall. He claims to have a survey that shows our side of the brick retaining wall as the boundary line, but he hasn't given me a copy of that report. Also, surveyor's I've talked to recently state that there's no way two modern survey reports would vary by more than about 50mm in the position of a boundary. A 300mm difference seems unbelievable. Relocating the boundary fence would add about 6 square meters to his land area (about 1% of the property size) by taking it from our property. Based on current property values that amount of land is worth about $6,000!

b) having located a listing of the local building regulations on the Internet, it turns out that our neighbour wasn't allowed to add (or remove) more than 200mm of earth (about 10") from natural ground level without submitting a development application - his previous earthworks piled earth about 600mm deep against the boundary fence.

c) any new retaining wall built without getting a development application approved can't be more than 900mm high AND also has to be set back AT LEAST 900mm from the boundary line!

d) the existing wood paling boundary fence is being damaged by the earth my neighbour piled against it. If he simply removes the dirt he piled against it and puts in a retaining wall 900mm back from the boundary line (where it's permitted without requiring a DA), only the 2m of fence closest to the road actually needs to be replaced (as it's started to lean over where the posts have rotted). That will cost a LOT less than replacing the entire 18m of fence.

This time round I immediately contacted the council to complain about his intended construction activity, and council sent him a letter stating the current building regulations and suggesting he contact them to submit a development application. A council engineer wasn't available to come out and inspect the earthworks he'd done previously, as they were in the process of hiring a new engineer responsible for our area, and the engineer that was 'filling in' was about to go on holiday. Unfortunately my neighbour appears to have chosen to misinterpret the rules outlined in the council letter as allowing him to proceed with his planned works - according to him he's just 'replacing' the existing corrugated iron 'retaining wall' with a new one, less than 900mm high. He just grinned and ignored me when I pointed out that the rules also require the retaining wall to be at least 900mm back from the boundary line! And that the corrugated iron sheets he placed against the boundary fence isn't any 'existing retaining wall' as he wasn't allowed to pile the earth against the fence in the first place.

After the Easter weekend his workmen turned up and started construction work, so I immediately phoned, faxed and emailed the council to tell them they REALLY need to come out a see what he intends to do, and explain the rules to him. The council did send out the supervisor and he brought along the newly appointed council engineer responsible for developments in our suburb, but when they phoned me to let me know they had discussed the retaining wall with my neighbour, it appeared that they had focused on the work he was doing on the retaining wall on the front of his property (where council would be liable if the wall fell onto passing pedestrians!) and NOT on the work he is planning to do on our boundary line...

I've since had to make repeated (almost daily) calls to the council to urge them to enforce their own development rules, which should stop my neighbour building a new retaining wall on the boundary line and, hopefully, force him to remove the earth he's already piled against our boundary fence. Yesterday I faxed a copy of my survey diagram to the council, to show that the existing paling fence is the boundary line. The council engineer said he'd be calling the neighbour in the afternoon to make sure he understood the rules.

Now I just have to wait and see what happens after the latest call from council to my neighbour (if it was actually made). A solicitor I talked to advised that I should initially try to get the council to enforce the building regulations, rather than start any legal action myself, but it's a bit frustrating not knowing what misinformation the council was fed when they talked to my neighbour, or what they have in fact told him. Last time I talked to my neighbour he was still claiming that council had no problem with 'fixing the existing retaining wall', and was going to proceed with his previous plans.

At the moment every time I go to work I half expect to come home and find our boundary fence demolished and a new retaining wall to have been erected on my property!

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Monday 13 April 2009

Rowany Festival

Yesterday we threw together some 'medieval' looking garb, packed the kids into the car, and headed off to Rowany Festival for a day trip. The Festival is an annual five day event held over the Easter long weekend, and many SCA (Society for Creative Anachronism) members travel from all around Australia to camp at the event. I've never been keen enough to camp at Rowany Festival, and we hsdn't visited the Festival for several years after it had been relocated to a site near Canberra, about three hours drive South of Sydney. However, last year the Festival had been moved closer to Sydney again - to a new site at Glenworth Valley, which is only about 45 minutes drive from where we live, so this year we decided to go for a visit.

When we arrived we spent most of the morning watching the SCA fighters making 'war', which is always quite spectacular:

After a leisurely picnic lunch we attended a class on easy medieval dances, and in another class the kids learned how to make a period windmill toys, which they enjoyed. Unfortunately, although the weather was fine it was extremely humid and warm, so we left early in the afternoon rather than stay to watch the afternoon battles and attend the royal court.

The cost for one day family entry to the Rowany Festival was $73, which was quite expensive relative to the amount of time we ended up staying on site. But the kids had a fun time so I'll be sending in our $50 SCA family membership renewal on 1 May. Hopefully there will be some weekend tournaments and classes held during the year which we can attend.

I may even attend some of the weekly fighter training sessions this year, now that they are being held on Monday nights rather than on the weekend. But first I'd have to finish making/buying the pieces of armour I'm still missing. Over the years I've accumulated a great helm, elbow and knee white armour and a gambeson, but I still need to get some body armour - either by finishing off the coat of plates I started many years ago, or else start 'kniting' a mail hauberk.

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Saturday 4 April 2009

Net Worth Update: March 2009

My net worth as at 31 March increased by $35,340 (+6.09%) during the month to $615,554 (AUD), recovering almost exactly the amount lost during February. The increases this month were mostly due to the share market recovery, which boosted my geared equity investments (up by $19,615) and the value of my retirement savings (SMSF up $9,963 or 4.25%). Our employer will make the monthly contributions to our SMSF for Jan-Mar during April, but this won't boost our SMSF balance very much as the annual superannuation tax for 2008 of around $8,500 has to be paid before 15 May.

The valuation of our real estate investments also increased slightly (by $2,360 or 0.31%). The balance of my half of the mortgage reduced by $3,502 to -$364,461 as we used our tax refund for 2008 to pay down some of the variable loan balance.

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Thursday 2 April 2009

Computer Game: DEFCON

The last computer game I bought, 'Vanguard', was a dud. It cost around $80, took many hours to download the update patches the first time I tried playing the game (even with a broadband connection), and was incredibly boring to play when first starting out - just wandering around the countryside aimlessly slashing monsters to death to progress to the next skill level, with the occasional insoluble puzzle thrown in (no doubt the solutions are something like "jump onto the rock in the SE corner of the temple while holding the orc mace, and the magic thingamy will be revealed"). It probably is a good game for those who want to spend huge amounts of time online in a MUD environment joining guilds, playing co-operatively and memorising reams of arcane "lore", but I found the whole experience a bore. Having to pay a monthly subscription to use the game servers meant I abandoned the game after a couple of months, and I haven't touched it since as there is no offline, single-user play mode available.

In complete contrast, the game I bought last Sunday was much better value. 'DEFCON' cost a little under $20, loaded in a few minutes from the CD-ROM and authenticated the CD-Key without any issues. The interface is visually appealing, making excellent use of simple wireframe graphics to represent the global thermonuclear war arena in a style inspired by the classic WWIII/nuclear missile attack movies such as Wargames, Dr Strangelove and the various James Bond movies. The game tutorial provided a basic introduction to the game controls in a series of easy steps, and there is an automated demo play mode available for you to watch AI players slug it out. Once I'd worked through the tutorials in half an hour or so, I played a couple of games offline against one or two AI opponents. Those games were enjoyable enough, and help work out the strategies required to do well in the game. Wikipedia has a good description of the game, and the the game maker's website has links to an interesting university student's Masters Project Report that provides more details about the game environment and a description of an improved AI 'bot' developed using an API that is available for anyone to have a go writing their own AI bots. The game also supports Mods, so if you get bored playing Global Thermonuclear War based on real countries and cities, you can create you own maps - anyone fancy nuking Narnia or Middle Earth?

I haven't played against human opponents online yet, as I'd accidentally used up my monthly Optus 2GB broadband allowance before the end of the month (I was watching an ABC iView episode of Time Team and left it on pause during dinner - apparently iView continues to stream the same video frame while on pause, continuing to consume my Optus monthly download quota!). I tried joining one two-player game online, but the download was taking forever at the speed-limited "dial-up" rate Optus allows once the broadband quota has been exceeded for the month. I'll try playing a game online on Wednesday when I have high-speed internet access again. Meanwhile I've been playing against the AI bots to practice controlling my submarine fleets, switching my missile silos from air defence to ICBM launch mode, and so forth. The game is played in 'real time' with various fast forward buttons available to speed up progression from Defcon 5 to Defcon 1 if you have all your pieces in position and are just waiting for the next events to occur. A game played entirely in real time would take around 6 hours to complete, while using maximum fast forward for the entire game it would only take 15 minutes to get a result.

The aim of the game in 'normal' mode is to minimise your own civilian casualties (measured in the millions, or 'Megadeaths') while inflicting maximum casualties on your opponent's cities. Two other modes are available - 'survivor' when only you own casualties are tallied up, and 'Genocide' where only enemy casualties are used to calculate the winner.

One feature I missed in the game play was any effect of fallout. Each missile strike simply vapourises part of an enemy city, installation or fleet. It would have been nice to have data of wind streams and to use fallout from earlier strikes as an ongoing weapon against the enemy population. However, that would probably have detracted from the elegant simplicity of the interface and game-play. Although the theme of the game is death on a massive scale, it's focus is mainly on strategy and seems more akin to Chess than a blood-thirsty shoot-em-up like 'Doom'.

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