Saturday 21 February 2009

Some credit card cash-back

One of the oldest credit card 'rewards' schemes in Australia is FlyBuys. I've been a member since the program started, and it's always nice to redeem some of the accumulated points for a credit onto my credit card account. My latest FlyBuys. statement showed that some of the points balance had been accumulated three years ago, and would therefore expire at the end of February. So yesterday I used most of my points balance to claim a $450 credit onto my CC account. It was interesting that the reward confirmation screen advised that you should 'consult your tax advisor' to check if the value of the reward was taxable income. A quick check of the tax office website shows that such CC rewards are not taxable. That's not really surprising - if the value of the reward accumulated by using the CC was taxable, then the annual fee and interest charges would also be deductible expenses. The last thing the ATO wants is for consumers who 'earn' $100 worth of rewards points to be able to write-off hundreds of dollars of credit card interest!

I'll be earning fewer FlyBuys. points from now on - the points rate has been decreased from 2 points per dollar to only 1 point per dollar for spending on my National Visa CC, and I'm also using the CC for fewer bill payments since the RBA changed the rules and allowed service providers to "pass on" merchant CC fees. These days you have to check the fine print of any utility bill to confirm if there is a 1% or more fee for making payment via CC.

BankWest sent me a special offer for using my BankWest Zero CC during February, March and April. If I use that CC for at least $500 spending each month I'll be given a $30 credit. That works out to be 2% "cash-back" on that card, compared to the approximately 0.2% value of FlyBuys. points, so for the next three months I'll be using my BankWest CC for at least $500 of my usual bill payments and grocery shopping each month.

As I pay off my CC balances in full each month, none of these CC rewards schemes cost me anything (aside for a low annual account fee for a couple of my CC accounts).

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Thursday 19 February 2009

One last balance transfer offer

A couple of years ago I had fun opening new credit card accounts that offered 0% balance transfers for periods of 6 months or a year. Back then there were no fees for doing the balance transfer, and the funds could be invested in an online account earning 6%pa or more.

In the past year plunging interest rates and tightening credit markets saw fewer and fewer balance transfer offers appearing in my mail, and those that turned up were for "low" interest rates, short periods (4 months), or charged a fee for doing the balance transfer. Coupled with lower interest rates on savings accounts, it wasn't worthwhile doing balance transfer arbitrage any more.

But it looks like I may get one last chance to get some "free" money from my credit cards - Virgin Australia is getting out of the credit card business and their customers have been issued new "Ignite" credit cards by Westpac Bank (who were the card issuer for Virgin. The "ignite" card has no annual fee (same as the Virgin CC) and Westpac is offering 0% balance transfer (from any non-Westpac CC account) for 6 months. I'll apply for a $25,000 balance transfer "from" my existing NAB Visa CC account, which will put my NAB CC roughly $25,000 into credit. I can then withdraw the surplus credit via a "cash advance" for a $10 admin fee. Taking a cash advance on a CC is usually a very stupid move, as the interest rate on a cash advance is even higher than the usual CC interest rate. However, there is no interest charged if the "cash advance" is less than the amount the account is in credit.

I won't bother putting the funds into my online savings account however, as the interest rate on deposits has dropped below 4%pa. Instead I'll use the funds to pay off some of my variable interest rate margin loan balance, which is costing me around 8%pa. When the 6 months interest free period ends, I'll withdraw the funds back out of the margin loan account and repay the CC account. Overall, this should give me a benefit of around $1,000.

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Sunday 15 February 2009

I'm happy to save the planet - if the government (taxpayer) is paying for it

Our 315L electric water heater is pretty economical, as off-peak electricity only costs 5.2c per kWhr, but it still accounts for almost 1/3 of our total electricity consumption and a significant part of our quarterly electricity bill. Since the hot water tank is at least eight years old, which is close to the age at which they are prone to start leaking due to corrosion, I'm looking at replacing our existing system with a new "heat pump" system. A 315L domestic heat pump water heater is very expensive to purchase compared to a traditional electric water heater, costing around $3600, but the Federal government recently increased the rebate available for such systems from $1000 to $1600 and there is also a state government installation rebate and the value of the systems RECS rating which all together should reduce the purchase cost to around $300. Installation costs should be similar to that for a conventional system, so due to the government rebates the heat pump should pay for itself through reduced electricity bills in just two or three years.

I'll double check my figures and the fine print relating to the state and federal government rebates before placing an order, but it appears that the ROI on buying a heat pump is very attractive - but only due to the government rebates available. It's very nice that I can help save the planet (supposedly) by reducing our greenhouse emissions AND save money by doing so, but I'm not sure that this rebate program is the most effective use of taxpayer funds to reduce CO2 emissions.

The other government rebate available is $8,000 towards a $13,000 roof-top solar polar grid-feed system. I'm not sure that our house is suitable for such a system, due to the large tree in our front yard casting significant shadow on part of the roof. Also, even with the rebate such a purchase doesn't make a whole lot of financial sense - it would only generate enough power to satisfy around 1/4 of our electricity use (1/3 if I go ahead and install a heat pump water heater). The annual saving on our electricity bill would therefore be around $250pa after paying out $4000 for the system. A 6.25% ROI wouldn't be too bad, but after deducting depreciation of around 4%pa (the system has a 25-year expected working life) it really isn't a very appealing investment. In addition, I suspect that the storage batteries used by the system won't last anything like 25 years before requiring expensive replacement. This is another government rebate that I suspect is rather wasteful. Photovoltaic technology is advancing rapidly, so I expect the cost of solar power generation systems such as this will plummet in coming years. If that turns out to be the case, the money spent on subsidising household solar power systems now would fund many more such systems if deferred for a few years. In fact, within a decade such systems may be cost-effective even without any government subsidy.

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Saturday 14 February 2009

A tale of two stimulus packages

With Australia having just passed it's A$42 billion (US$26 billion) 'economic stimulus package' and the US$789 billion stimulus pack in the USA close to final approval, it's interesting to see how the two compare.

The first obvious difference is the size of the packages - the Australian effort is around 3.5% of Australia's GDP, while the US package is almost twice the size in terms of GDP, coming in at 5.7% of US GDP. On the one hand this is surprising given Australia was starting from a Federal budget in surplus while the US Federal deficit is already US$10.7 thousand billion (!). On the other hand, the Australian economy is in much better shape than the US (although we will suffer more from the impact of the global recession on our exports) and still has some fiscal stimulus available. Coupled with the problems the US is facing regarding future social security and medicare funding, I think the size of the US Federal deficit will be a drag on long-term growth (due to the need for higher taxes). Even if the US stimulus package is effective in boosting growth in 2009-10, it may just create worse problems down the track.

In some regards it seems that the global economic crisis was due to western consumers bringing forward too much consumption using personal debt, with low interest rates amplifying a feedback loop of inflated asset prices being used to obtain further borrowing at historically low interest rates. Once the private global credit limit had been reached and consumption dropped in order to repay debt and increase savings rates around the world, governments began trying to boost spending by increasing public debt. At some stage public debt will exceed the borrowing capacity of sovereign states (for example Iceland has already gone 'broke', and it seems as if Russia is also getting close to the point of defaulting on debt repayments), and when both private and public borrowing is constrained, the global economy is likely to suffer many years of minimal growth as debt is slowly unwound. It may not happen for quite a while though - the US dollar has remained relatively strong for the past couple of decades despite a huge and growing debt problem.

The second difference I think is very significant is the "quality" of the two packages. Despite considerable debate about how best to stimulate the economy (public spending vs. tax cuts for example), there appears to be a consensus that such a package should satisfy the "three T's" as much as possible - that it should be timely, targeted and temporary. The US package has been reported as delivering around 54% "3T", while only 12 to 20 cents in the dollar of the US package will be timely, temporary and targeted. The graphs below show when the spending is expected to feed into each economy:

It appears that around 75% of the Australian stimulus will be implemented by June 2010, whereas just over half of the US stimulus will be implemented before the end of 2010. Stimulus spending in 2011 is quite likely to fuel inflation and exacerbate the next boom-bust cycle, rather than fix the current crisis.

Overall, I'd give the Australian package a B+ (points off for political ideology and horse trading that has shaped the spending decisions) and the US package a C-, with quantity being substituted for quality in an effort to make the grade.

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Friday 13 February 2009

Asset Allocation and Gearing Review

I updated my asset allocation spreadsheet today, and it confirmed how the stock market crash has distorted my asset allocation and blown out my gearing levels. I'd be pretty close to my ideal LVR and gearing ratios if stocks were still at their Jan 2007 prices:

My asset allocation in 2007 was overweight residential property compared to my target allocation, and I wanted to increase my gearing (debt) levels slightly from 40% LVR (65% debt:equity) to 50% LVR (100% debt:equity). Since it wasn't feasible to sell off part of our home or investment rental property, I decided to borrow against our real estate equity and invest the funds in Australian stocks. If share prices had stayed at their Jan 2007 levels my current situation would by something like "The Plan" - with debt:equity still under 100%. As it turned out, I borrowed and invested the extra funds in the stock market just before the GFC took hold, and the drop in share market valuations has meant my debt:equity has blown out to 170% and my net worth has nearly halved.

At the same time my asset allocation has shifted from around 40% real estate to almost 50% real estate, and my allocation to stocks has dropped from around 50% to only 35%. NOT what I had expected!

My debt:equity should drop back to around 150% this July (if the stock markets remain flat until then) as the fixed rate term on my margin loans expires, and I can use some of the cash sitting in these accounts (from selling off some stocks in the past year) to repay some of the margin loan debt.

I'm currently adding about $50,000 per annum to my retirement savings (which is being invested roughly 44% in Au shares, 36% in International shares, 10% in property and 10% in fixed interest). This should bring my gearing back down to 100% within five years, all else being equal. Any improvement in the stock market would of course help immensely!

If the market gains 50% over the next 5 years (fairly optimistic in the current situation, but still 20% below it's previous peak) I would be roughly in the same position as I was in Jan 2007 - pretty depressing as it will mean that saving about half my salary for 7 years had not improved my net worth over that period. In hindsight it would have been much better to sell off my stock holdings in 2007 and stick the money in the bank.

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Sunday 8 February 2009

Bushfire tragedy highlights the dangers of living in 'the bush'

The recent heatwave in South-East Australia for the past week have brought more than 400 bushfires that have so far already burnt out 200,000 hectares of land, destroyed about 700 homes and left 84 people confirmed dead and several more fighting for life with critical burns. Sydney has been fortunate to escape major fires this time around, with temparatures only rising above 41C for the past few days, and a cool weather front expected later tonight.

The Prime Minister, Mr Rudd, announced a joint federal-state $10 million relief fund, and appealed to Australians to give generously. One or more of the big four Australian banks usually collects donations over the counter, or via EFT into an appeal account. I'll probably make a $10 tax-deductible donation (it will make me feel better, even if it doesn't do much for the victims of this disaster), but I wonder why the government doesn't just reduce the proposed $950 economic stimulus by a dollar? $1 per stimulus recipient would roughly double the size of the government relief fund, and would be more likely to be immediately spent by the relief recipients than the typical recipient of the stimulus payment. However, even $20 million relief is only equivalent to $30,000 per destroyed home, so I hope most of the affected survivors have home insurance with bushfire coverage.

My parents own two small (for Australia) farms in NSW. One is reasonably safe fron bush-fires, being sited on a small, gently sloping hill surrounded by many tens of acres of paddock with very few trees. Although the house design isn't very bushfire resistant (having lots of unshielded picture windows and an underfloor space that burning embers could get in and start spot fires) there is an inground swimming pool and plenty of bore water to help with fire fighting. And if a bushfire was close by it would be fairly quick and easy to use the tractor to clear a substantial fire break around the house.

However, my parent's other farm house is just as poorly designed for surviving a bush fire, and is unfortunately much more vunerable to bush fires as it is located on a small (25 acre) hobby farm that is mostly uncleared forest, and the farm backs directly onto a large state forest. That farm is also steeply sloping, so a fire front would travel rapidly from the state forest to the house once it crested the hill behind the house. Several years ago (before the house was built) a bush fire spread from the state forest onto the farm and burnt out most of the hillside and almost spread across the paddocks to the shed sitting next to the dam. Local volunteer rural fire fighters managed to save the shed on that occasion.

Since I might be inheriting that hobby farm one day, and in the meanwhile we hope to be able to use it for holiday stays with the kids (it needs some renovations first), I need to give some serious thought to making that farmhouse more fire-resistant and add a 'safe-haven' room. I'd like to add an a two-storey extension to the rear of the home to provide enough accomodation for my parents and us to all stay there at the same time during summer vacations. The top floor would be living space with a nice view over Lake Wallace, and the bottom level would be partly cut into the hill-side and provide storage space, a games room and a wine cellar. In light of the bush fire risk I think I'll get the lower level of the extension made from cement blocks (with no windows) on a concrete slab directly on the ground, and opt for a concrete slab roof. As the lower level would be partly earth-sheltered, it should provide a secure safe-haven room if a bush fire ever set the house on fire.

Unfortunately many families in the Australian bush live in timber framed houses that provide minimal protection once a fire reaches the house, so a timely evacuation is often preferable to staying and trying to defend the home. That's why the loss of 700 homes hasn't resulted in a much higher death toll, but there are thousands of people left with nothing but the clothes on their back.

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Net Worth Update: January 2009

My net worth as at 31 January decreased by another -$45,270 (-6.85%) during the month to $614,565 (AUD). This month the decline was due to further significant losses in my geared equity investments (down by -$25,825), another drop in the valuations of our real estate investments (down -$$12,494 or -1.62%) and a decrease in the value of my retirement savings (SMSF down $7,440 or -3.04%). The balance of my half of the mortgage was fairly constant at -$367,377. Further interest rate cuts have meant that soon we won't need to make any further redraws to meet the monthly interest charges on the loan. While DW works part-time (uat least ntil DS2 starts school in a couple of years) we are unlikely to pay off any of the investment property loan principal.

If the stock market continues trading sideways during the rest of February, this month might see a slight improvement in net worth due to a small rebound in house price sales data for our suburb, and the payment of three months (Oct-Dec '08) worth of 'salary sacrifice' and SGL superannuation payments by our employer last week. It would be nice to finally see a month with a positive change in my net worth - so far there have only been two positive months (Apr and Aug) since the GFC took hold in Nov 2007. During this period my net worth has declined by a massive -$557,862 or -47.58%!

Things would have been a lot different if I'd reduced my level of margin loan gearing during 2007 (Plan B, with capital gains draw-implications), or actually followed through with keeping enough Index Put options in place to "insure" against a sever bear market (Plan A). Looking back it's hard to believe that I didn't make enough effort to buy new Put options in Dec '08 when my previous ones (bought around Mar '07) expired (a quick online search didn't find a suitable option on offer at the Index level I wanted for Sep 08 - I should have called my Comsec options broker to get some help). At the time it didn't seem urgent as the market was still testing new highs, and the sub-prime crisis in the US in June didn't seem to have had any impact on the "real economy", especially globally. I let the fact that the expired options had cost me around $8,000 and that most market pundits were predicting a flat market in 2008 (or single digit returns) after three years of 20%+ gains, lull my into a false sense of security. The slight dip in the second half of 2007 appeared to have been the limit of the impact of the US sub-prime fiasco, whereas in reality it was just the first ripple warning of the coming financial Tsunami.

Lesson from all this: if you make a financial plan (I my case to sell Index put options rather than sell physical stocks to reduce my gearing) you have to FOLLOW THROUGH with it!

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Tuesday 3 February 2009

A whiff of panic in the air

Today the Australian government announced a second economic stimulus package of A$42 billion on the same day that the Reserve Bank slashed official interest rates by another 100 basis points (1%) to a 50-year low of 3.25%. It appears that the full impact of the GFC on our local economy is finally being admitted by the government, with an element of panic as a technical recession seems unavoidable and the steps taken in 2009 woefully ineffective. The series of interest rate cuts in the past six months is unprecedented. Most charts though underplay just how dramatic the fall has been, choosing to use simple bar charts showing the series of rises and cuts as if they were evenly spaced:

In reality, plotting the changes against time shows that the controversial interest rate rise during the last election campaign was "one too many", and after making jsut one unusually large cut in March 2008, the RBA held fire for a long while, probably expecting the single cut would be enough "shock therapy" to insulate Australia from the impacts of the sub-prime crisis. It was only in Sep/Oct last year that the magnitude of the GFC became apparent, with the drop in economic growth rate in China showing that Australia couldn't hope to avoid being affected.

So far I've tried to keep my stock portfolio as intact as possible, only selling the minimum necessary to avoid getting a margin call. But looking at the stock market and interest rates over the past 5 or 10 years it doesn't look like we're going to see a recovery any time soon. However, I'm too stubborn to give up on my long-term "buy and hold" strategy and high-risk asset allocation. So I think I'll still hang in there in the expectation that the Australian economy does start to recover in the second half of 2009, and that the stock market recovery leads the economy by the usual 6 months or so. However, if the stock market continue to fall I'll be forced to sell off stocks fairly rapidly to settle my margin loans. In the worst case I could end up with no direct stock investments, no margin loans, but a $250,000 HELOC debt (my St George "portfolio loan") offset by only $50,000 or so value in unlisted funds (such as Ord Minett OM-IP) and agribusiness investments. Those investments don't mature for several more years, and the unlisted funds only have a price guarantee if held to maturity. If that happened I probably wouldn't be in a position to reinvest in stocks when the market eventually recovers, so I'd be unable to recover my losses even in the market reached new highs at some time in the future. C'est la vie.

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Bills, bills, bills

For some reason I've always liked getting mail, even though it's 99% financial statements and bills. Today was a 100% bill day - $289.30 due for the quarterly council rates on our home, another rate notice for $293.50 due on our investment property, and the dreaded annual state government land tax assessment on the two properties. Even though our home is exempt from land tax, the rental property value had leapt up from $436,000 in 2007 to $540,000 in 2008, and it was given the same valuation for 2009. The percentage rise in land valuation seems excessive - properties sold in our area only increased by around 10% in 2007, declined by about 5% in 2008 and are still heading downwards in 2009. It will be interesting to see if the valuation is lowered in 2010 - if not, the supposed land value will soon be more than we could sell the house and land for!

The increased valuation has an even bigger impact on our land tax liability, due to the $368,000 land tax threshold. Only the value above the threshold is taxed (at 1.6%), plus $100. Our land tax bill has doubled since last year to now be $2,262.80

I'm having a bit of a cash flow crisis at the moment - I only have a couple of thousand cash sitting in my credit union savings account, having poured all my spare cash into my margin loan accounts in the past few months as the stock market crash threatened to generate margin calls. This month my CC bill is higher than normal due to the recent purchase of the swing set for the kids, and next month it will be bigger again due to the purchase of the DIY pool fencing to replace the existing safety fence that is on it's last legs. I also have to pay $806 uni fee for this semester that's due next week...

I can't complain too much, as the cash shortage is largely a result of my decision to salary sacrifice around half my salary into retirement savings. But it sure would be nice to have an extra $10,000 sitting around in a savings account right now.

The only bright note is that the land tax bill only gets a small ($35) discount for paying the entire amount "up front". If I elect to pay the bill in three monthly installments I may just have enough dividend income coming in during March and April to get by. I just hope we don't have any unexpected expenses this year (like when the tree fell on our rental property and we had to cut the rent by half for six months).

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