Revisiting "the chart I wish I'd seen a year ago"

Way back in 2008 I posted about a chart I made of the All Ords Index vs the Australian GDP price index series, which appeared to be a good warning sign of when the market was 'irrationally exuberant' and when it was 'oversold'. ie. When you might think about 'taking profits' and getting out of the stock market, and when the market was 'on sale' and a good buying opportunity. Of course, as Moom pointed out at the time, there are reasons why the stock market may increase relative to GDP, such as the decades long decline in interest rates (which made higher stock p/e multiples sensible - from 8-12x in the 80s and 90s to 15x-20x today). However, in the 'long term' it seems rational for the stock market as a whole to increase in line with GDP. So when the 'irrationality of crowds' makes the market oversold or overbought, one has better than normal chance of actually benefiting from trying to 'time the market' (I generally buy and hold, as timing attempts generally increase transaction costs more than performance, and I tend to buy index funds or ETFs rather than trying to 'pick' individual stocks or sector funds).

So, with the recent market drop and recovery during the first half of 2020, I thought I'd get some updated data on the AllOrds Index (the ASX200 Index follows the same basic pattern) and the Australian GDP Price index series, and see how the plot looks today. As you can see below, this plot is still pretty good at showing when the market is relatively 'expensive' (too high) and when it is probably 'cheap' (too low). But, as DS1 pointed out, if you sold out of the market when it goes 5% or 10% above the 'expected' level, and bough back in once it dropped 5% or 10% below the expected level, you would have missed the large market gains of 1986-87 and 2005-2007.  So, you'd probably want to take these levels as warning bells, rather than simplistic buy/sell signals. Possible it would be useful to combine tracking 30 vs 90 day moving averages with this simple 'too high'/'too low' market indicator to decide when a long-term investor should consider reducing and increasing their exposure to the stock market. That would help with making the decision to buy into the market when it is oversold, as it is usually quite hard to 'pull the trigger' and invest/reinvest when the market has dropped a lot - like in Mar 2008 or March 2020. Seeing that the market may have 'turned around' (rather than just a 'relief rally' during a bear market run), helps identify if the 'bottom' has passed.

If anyone is interested in tracking this relationship for themselves, quarterly GDP Price Index data and Monthly adjusted close All Ords Index data was obtained from the following free resources:

ABS website

Yahoo Finance

Subscribe to Enough Wealth. Copyright 2006-2020

Putting a foot into the water

Yesterday I decided to invest a bit more in the market, buying about $5K worth of each of the ETFs on my 'list' via my Commsec margin lending account. The total invested was less than the $50K I'd put into the Commsec ML account via a  drawn down on my St George portfolio loan, so there isn't any prospect of getting a margin call, regardless of how badly the market performs in future. So although I'm investing using borrowed funds, it isn't quite as risky as a straight out margin loan.

Anyhow, after the orders were filled yesterday, my current portfolio of securities held on my Commsec and Leveraged Equities ML accounts is:

This snapshot doesn't include the managed fund investments held on my St George ML account or the CFS Geared unlisted fund investment that is also on my Commsec ML account (those were included in an earlier post), as my yahoo portfolio tracker only includes my ETF and share investments.

I'll see how the local and US stock markets performs over the next few weeks/months before deciding whether to increase my investments. I still suspect that the markets have reacted to the various economic stimulus packages and rate cuts in a way that would be rational if this was a financial/economic crisis alone, but may not be applicable to the current situation. The medical aspect of this current crisis may well mean that people don't get back to 'business as normal' even after  governments ease the current 'lock down' style restrictions. After all, most of the 'social distancing' and other regulations that have had an immediate economic impact are intended to 'flatten the curve' and allow ICU capability/staffing in hospitals to be ramped up to cope with an influx of Covid-19 patients over a longer time period. When restrictions are eased there is likely to be a 'second peak' of even more cases and deaths than before, but at a time when hospitals are better prepared to cope with the need for ICU treatments. So, even if 'social distancing' rules have been eased, it may not restore economic and social activity to previous levels if the populace is still concerned about the levels of Covid-19 cases and risk of serious illness. After all, by the time restrictions are eased, while some people may be very keen to get back to 'normal life' and socialise, others may have got used to the 'new normal' and continue to work from home, avoid shopping and eating out, etc. So the economic recovery may be quite slow once the current 'lock down' period has passed. Still, one has to start investing again at some point, so when the market has rebounded about 10% from the recents lows, but is still about 35% below its February highs, it is probably a reasonable time to start making some investments for the 'long term'. After all, even the Great Depression was a 'buying opportunity' when one views market returns over the scale of decades rather than weeks, months or even years...

Then again, as John Maynard Keynes famously quipped "In the long run we are all dead", so this viewpoint is probably more applicable to DS1 and DS2 than myself ;)

Subscribe to Enough Wealth. Copyright 2006-2020

Not game to go back into the market just yet

After the overnight collapse in the US and European stock markets, the ASX200 was down by another 7% or so on the opening. So the All Ords is already down to about 5,000 pts (where I said I'd *think* about reinvesting about 25% of my previous $100K portfolio mix back into the market using my portfolio loan credit line), and the banks (NAB and WBC) that I have small (and getting smaller!) investments in are already down to the lows they reached at the nadir of the post-GFC crash!

BUT, with the market dropping so rapidly, and the Covid-19 situation surely going to get a *lot* worse (cases are growing at 4% each day, and the fatality rate is creeping up over 4% of reported cases - which suggests that there is both under-reporting of case numbers, and, therefore, a lot of undetected cases in the community to spread the disease...) before it can start to 'improve', I can't see any chance of the economy (global and Australian) not suffering a huge hit in the next 3-6 months. So, I suspect that there will be more significant market declines to come (interspersed with some 'bounces' and 'bargain hunting' on the way down).

Overall, I'm not willing to invest $25K of borrowed funds in the stock market at the moment, and putting in a smaller amount (say $10K) seems rather pointless. So, for the moment, I'll just continue to sit on my hands and what the disaster unfold...

** update **

In the end I decided to buy 100 WBC at $15.63 to increase my WBC holding by 20% to 600 shares in my Commsec ML account. A fairly trivial amount, but lets me feel like I'm buying some stocks when they are cheap (?). It also lets me enjoy the slight increase in share price this afternoon (ignoring the recent decrease in WBC and NAB share price). I would have also bought some NAB more shares, but they are held on my Leveraged Equities ML account and trading on that account has to be done via a third party (broker) so it isn't as easy to trade as on my Commsec ML account. I'll just let the NAB holding build up over time via the DRP (assuming the July dividend isn't slashed, I should end up getting 2 or 3 NAB shares via DRP rather than the normal 1 or 2, due to the decline in share price).

I also still have some Vanguard Index Fund investments on my St George ML account (I didn't bother doing a redemption in Feb as they wouldn't accept my phone redemption request and I couldn't be bothered filling in the paper form and mailing it in! Fortunately I did bother with our SMSF investments), and some Colonial First State Geared Global Share Fund units on my Commsec ML account. I haven't bothered calculating how much these holding have declined in value since Feb - they were worth about $150K in total, so I guess I'll be down by about $50K overall - I'll find out when I do my monthly NW calculations at the end of March. Ah well, at least I moved our SMSF investments out of Vanguard High Growth Fund (down about 16% based on yesterday's closing unit price compared with 6 Feb), and into a mix of Vanguard Conservative Fund (down 'only' 4.6%) and Vanguard Diversified Bond Fund (its actually up by 1.5% since 6 Feb). As we are invested about 30% in the Bond Fund and 70% in the Conservative Fund (excluding the 4% of SMSF assets sitting in a cash account), the overall SMSF investments are down by 2.6% since 6 Feb (to yesterday's closing unit price) - a lot better than if I'd left us invested in the 'High Growth' Fund.

Overall it seems (so far) that it was lucky that I decided to buy a $1MM 'off the plan' apartment last year, as that encouraged me to liquidate my share holdings in early Feb when it looked like the share markets could be adversely affected by Covid-19. It allowed me to clear off nearly all of my portfolio loan and margin loan debts, so I'll be in a better position to fund the $900K that will be due upon 'settlement' in 2023. I suspect that the share market decline/volatility will encourage a lot of investors to switch to investing in real estate - as was the case in 1988 after the 1987 stock market crash. We'll see how things develop.

Subscribe to Enough Wealth. Copyright 2006-2020

Catching a falling knife - WBC

As I suspected, it was a bit early to buy bank shares - so the $10K worth of Westpac shares I bought early last week at $22.49 were already down to $21.35 by COB on Friday, and will probably be lower in Monday trading in Australia after Wall Street had another decline on Friday. It's not really a surprise, but with a trailing p/e of only 11 it is likely to 'come good' when the economy eventually improves and the fallout from the Royal Commission washes through. I keep an eye out for other 'bargains' as the market falls, and buy a tranche of this or that each month or so (essentially 'dollar cost averaging' into the market on the way down). I might defer buying an more shares for a while though, as it is probably way too early for the market to 'bottom out' yet.

The other shares I still own are a small holding of NAB bank shares - I initially got some via a final dividend payment DRP after I had previously sold out my share holding in 2018, and have received 1 or 2 shares every 6 months via the ongoing DRP (I'll have to keep my 'portfolio' records up to date with the DRP details, as the eventual CGT calculations when I sell the shares are otherwise a pain - as I found out when I sold shares in 2018 that I'd initially bought back in the 1990s...)

Anyhow, Westpac remains in a bit of a down trend while the market is heading south, so it probably has quite a bit further to fall before hitting the bottom, but you never can tell. If you believe in 'charting' there *might* be some support around $20 (if the broader market isn't in a melt-down)...

Subscribe to Enough Wealth. Copyright 2006-2020

Took up part of my Santos Share Purchase Plan entitlement

I decided to purchase $5000 worth of Santos shares under the SPP that closes next week (31 Jan). The issue price will be around $4.00. As I also have some long crude oil CFDs, I'm obviously punting on the oil price going back up a bit in future. My current holding of Santos shares is around $15,000 market value, so this will increase my investment in Santos by around 1/3. While the oil price has fluctuated wildly over the past 30 years (from below $20 to over $140!), there seems to be some support around the $40 mark, which corresponds roughly to a Santos share price around $4.00. So, overall, it seems that the downside risk is for the share price drop to as low as $2 (or the company to go broke in a period of prolonged low oil prices), whereas a continuation in the current rise in oil prices (if there is stronger global growth in future) could see oil hit $60-$80 again, and the Santos stock price rise to $6-$8 again. While this share purchase is a bit of a gamble, as the amount only represents about 1% of my geared stock portfolio, and 1/4% of my net worth, so either outcome won't have a big impact on my net worth.

The top chart below shows the crude oil price (http://www.macrotrends.net/1369/crude-oil-price-history-chart) over the past 30 years, and the bottom chart is the Santos stock price since 1988.

Subscribe to Enough Wealth. Copyright 2006-2017

My current Portfolio of ASX listed investments

I'm a fairly passive investor in the stock market, so aside from some small changes in holding quantities due to dividend reinvestment plans, the only substantial changes since I last posted my stock portfolio details in 2015 are a large decrease in the value of my IPE holding (due to some substantial returns of capital as the fund is slowly wound up), and the liqudation of my holding in the Berkshire ETS last year. I also added small holdings of AFI and ARG in mid 2016, which are both listed investment companies, in order to reinvest some of the cash into the market.

LEML account: (17.JAN.17)
CODE QTY Company Name Mkt Price Mkt Value
AGL 1035 AGL Energy Ltd A$22.03 A$ 22,801.05
ANN 480 Ansell Ltd A$24.25 A$ 11,640.00
ANZ 2149 ANZ Banking Ltd A$30.04 A$ 65,329.60
BHP 748 BHP Billiton Ltd A$26.92 A$ 20,136.16
CYB 236 CYBG PLC A$ 4.67 A$  1,102.12
NAB 1013 National Aust Bank A$30.73 A$ 31,129.49
QBE 1572 QBE Insurance Ltd A$12.295 A$ 19,327.74
S32 748 South32 Limited A$ 2.81 A$  2,101.88
TWE 1250 Treasury Wine Estate A$10.43 A$ 13,037.50
------------
Market Value sub-total A$186,605.54

CSML account:
AFI 5000 Australian Foundation A$ 5.93 A$ 29,650.00
ARG 4000 Argo Investment A$ 7.61 A$ 30,440.00
IFL 2000 IOOF Holdings A$ 9.26 A$ 18,520.00
IHD 1000 IShares ASX Div Opport A$13.86 A$ 13,860.00
IPE 244000 IPE Limited A$ 0.17 A$ 41,480.00
RDV 500 Russel High Div Au Shrs A$29.99 A$ 14,995.00
STO 3750 Santos Limited A$ 4.06 A$ 15,225.00
WBC 490 Westpac Banking Corp A$32.75 A$ 16,047.50
WPL 239 Woodside Petroleum A$32.02 A$  7,652.78
------------
Market Value sub-total A$187,870.28 
============

Market Value total A$374,475.82

Subscribe to Enough Wealth. Copyright 2006-2017

Adding to my share portfolio - AFI and ARG

I decided to buy some listed investment company (LIC) shares today. I bought 5,000 shares of Australian Foundation Investments at $7.26 $5.642 (total cost with brokerage: $28,185.73) and 4,000 shares of Argo Investments at $5.642 $7.26 (total cost $29,036.75). The share purchase was funded using my Comsec margin loan, currently costing 7.13% pa interest, and I transferred $20,000 from my St George portfolio loan account (costing 4.99% pa interest) which will reduce the amount funded using my margin loan to $37,222.48. Annual tax deductible interest cost for this investment will therefore be around $3,651.96 (or an average interest rate of 6.382% pa), The AFI shares paid a dividend of 23 cps in 2015, and the ARG shares paid a dividend of 29.5 cps in 2015, the the annual dividend from the investment will be around $2,330, leaving a net negative cashflow (and net reduction in taxable income) of $1,322 or so, plus some franking credits (a tax credit available to Australian investors for the company tax paid on dividends from Australian companies, based on the amount of company tax paid).

In the long term (ie. when I retire in 10-15 years time) the 'plan' is to sell off these shares for more than they cost, making a capital gain (which would be taxed at half my marginal tax rate at that time), hopefully more than the cumulative cost of the net cost of holding these investments.

AFI had a total return (dividends and share price appreciation) of 8.4% pa over the past 5 year period, and ARG had a total return of 9.0% pa over the past 5 years. The ten year average annual total return figures are a lot less impressive, but as that period include the impact of the GFC I expect the next 10-15 years average annual total return to be more like the past five year period than the past ten year period. Only time will tell.

Subscribe to Enough Wealth. Copyright 2006-2016

A Belated attempt to KISS

When the markets were booming it seemed to make sense having three separate margin loan accounts, plus other broker accounts for training US stocks, options and CFDs with Commsec. Post-GFC the principle of KISS (Keep It Simple, Stupid!) has a lot going for it. So I continue to slowly rationalise my stock and fund portfolio...

Today I sold off my holding of IANG [IAG FINANCE (NZ) LTD] as I'd made a reasonable gain and there were little prospects of further price appreciation with the stock trading around $104 for what is basically a company debenture with a face value of $100. Although the yield is fairly attractive it didn't make sense to keep owning this stock when I'm paying almost 10% margin interest. I also put in an order to sell off the last of my direct US share investments (220 shares of Microsoft), as the potential gains aren't worth the paperwork hassles and account keeping fees of having a US trading account through Commsec. As soon as the trade settles and I transfer the balance of the account back to Australia I close this account down. Again, the dividends flowing from this stock were negligible, so I'm better off using the proceeds to reduce my Australian margin loan balances a bit. I'll also sell of the two varieties of Westfield stock (that resulted from the recent Westfield demerger). I'd also like to get rid of the tiny tranche of AEJ [ALINTA ENERGY GROUP] shares I ended up holding when one of the Babcock & Brown funds was wound up, but the cost of the share trade would be more than the proceeds! So I'll have to wait until I get an offer for some free stock trades from Commsec.

After this pruning is finished, my stock and fund investment portfolio (outside of superannuation) will be:

The total value is around $450,000 which will be about the same as the total outstanding loan amounts (including the $235,000 HELOC used to fund some of the investments that have 0% margin value). As the overall interest rate is about 8%, the total return (dividends plus any capital gains) isn't likely to produce much net return. At best, it produces a modest tax benefit by deferring current income tax (as the amount by which the tax deductible margin loan interest exceeds the dividend income is deductible against my salary income) and creating a long-term capital gain tax liability, with long-term capital gains being taxed at half my marginal income tax rate. The potential benefits hardly outweigh the amount of complication added to my tax returns, so as soon as the OMIP and Macquarie equinox funds reach their maturity date (when their capital guarantees kick in and I can get my initial investment back!) I'll use the proceeds to pay off some of the margin loans rather than reinvest.

Subscribe to Enough Wealth. Copyright 2006-2011

Stagging QR National float

I was wondering why QR National began a TV advertising blitz last month - lots of long, long goods trains shipping mountains of coal around the place. All became clear why the share float/privatisation was announced - the Queensland government is selling off this public asset.

The prospectus won't be issued until next weekend, but from the amount of interest and pre-registration for share allocations it appears that the float will be a "success". And, as it is the Queensland government selling the shares, with Queensland residents getting a higher guaranteed allotment of shares than other Australian residents, I expect the issue price will be set slightly low for political reasons (don't sell voters shares that immediately drop in price!). So, I've pre-registered for a prospectus and guaranteed allotment, although if there is too much interest there is likely to be a scale-back, which reduces the scope for significant stag profits. Once the prospectus is released I'll look into details such as the loyalty bonus and maximum issue price and make a final decision on whether or not to invest in QR National.

With the resources boom likely to continue for a decade or more, a freight rail investment may be worth holding long term - especially if the privatised company makes significant cost savings post-float.

Subscribe to Enough Wealth. Copyright 2006-2010

Apparently Praying doesn't Boost Investment Returns

I'm guessing that while lots of investors might have resorted to prayer as they watched the value of their life savings plummet during the GFC, it wouldn't have had any material effect (apart from any purely psychological benefits). This story provides some evidence to that effect. The Glebe Administration Board (apparently an Anglican Church body) posted a $160 million loss for the year to December 2008, or a -60% annual return!. Its highly geared share portfolio crashed amid the global share market downturn. Unfortunately they won't be benefiting from the recent strong rally in the equity markets, as the board reduced its bank debts from $140 million to just $14 million between December 2007 and December 2008 as part of an attempt to reduce its gearing and "protect" its assets from further falls. Not very inspired decision making, although if they had attempted to ride out the downturn any longer they would have probably been completely wiped out by the time the market bottomed out in March.

Subscribe to Enough Wealth. Copyright 2006-2009

NAB SPP Scale-back Refund Cheque Received

Unfortunately National Australia Bank decided to limit the recent retail investors SPP offer to the $750m, so out of my $15,000 application for new shares only $4,343 was allotted to purchase 202 shares at the offer price of $21.50. The remaining $10,657 was refunded via a bank cheque which arrived a couple of days ago. With the NAB share price currently around $28.75 the SPP still produced a $1,464.50 paper profit (ignoring any dilution effects on the value of my existing NAB shareholding) but not as much as I'd hoped for when I sent in the full $15,000 for my maximum SPP entitlement. With the market recovering and NAB shares trading well above the issue price, most retail investors took up the offer in full it seems. It's a bit annoying that NAB scaled back the offer so severely (the pro-rata issue was 28.82%), especially since they have already diluted the retail investors ownership via the quite large institutional offer. NAB included an explanatory letter trying to justify why they did an SPP rather than a rights offer, and also why they chose to scale back the SPP. They bank's excuse for scaling back the offer rather than accepting the full amount provided by their shareholders ("... the depressing effect doing so can have on return on equity, dividends and the share price") is unconvincing given the dilution effect of the large institutional share placement and the fact that they'd done a previous SPP last December. If they seek to raise any more capital in the next one or two years it will prove that they have little regard for their "mum and dad" retail investors.

ps. It's also annoying that the NAB "bank cheque" still hasn't been cleared in my credit union account several days after I deposited it. I have a 0% balance transfer offer that expires today that I want to pay off in full - every extra day until the cheque clears and I can pay off the CC balance will cost me around $10.

Subscribe to Enough Wealth. Copyright 2006-2009

CDF wind-up payment arrived

As announced last month, the wind-up of the Commonwealth Diversified Share Fund (CDF) was completed yesterday, with payment of $1.0387 per share made to all remaining shareholders. I'm glad that I borrowed some money to meet the margin call that resulted from Comsec Margin Lending reducing the margin value of this share to 0% on 17 May, otherwise I would have only received around $0.96 per share selling the shares on-market during late May.

By maintaining my shareholding until the termination date (1 June) and getting paid out the full NAV on 18 June, I received an extra 8% or so - around $5,136 - compared with having the shares sold out by Comsec in late May to meet the margin call.

Some smart operators made a killing by buying up CDF shares in late May. For example, Weiss Capital made around $200,000 by buying CDF shares for around $0.96 in the last two weeks of May and receiving $1.0387 per share yesterday. 8% ROI in one month with minimal risk is a pretty canny investment. If I'd had spare cash I would have bought some CDF shares as well.

I am less impressed that CBA also became a substantial shareholder during late May. Their share transactions notification shows a lot of buying and selling by Value Nominees (ie. Comsec Margin Lending) which I suspect was mostly due to Comsec cutting the Margin Lending Value of CDF shares from 70% to 0% on 17 May. However, CBA ended up with a net increase in CDF shares of around 2.5m shares, which also gave them a nice profit when the fund was wound up. Perhaps I should ask ASIC to look into the behaviour of CBA Bank, Comsec and CDF Fund regarding possible conflict of interest issues regarding these related parties and their clients/shareholders?

Subscribe to Enough Wealth. Copyright 2006-2008

ANZ SPP - a windfall?

DS1 and I both received the paperwork for the ANZ Bank's Share Purchase Plan. The maximum application amount is $15,000 and the share price is a maximum of $14.40 per share (it's unlikely to be less than this as the current share price is 20% above that level). I have around $20,000 worth of ANZ in my leveraged equities portfolio and will use the cash realised by the wind-up of the Commonwealth Diversified Fund (CDF) to apply for the maximum amount. If there isn't any scale-back, and the share price remains close to it's current level, that will produce an immediate windfall profit of $3,000.

DS1 is likely to do even better from this SPP. He currently has $4,750 worth of ANZ shares, and has $1,000 spare cash sitting in his St George Happy Dragon account (earned from busking) that he wants to use to buy some more ANZ shares via the SPP. I think I'll lend him another $14,000 as a short-term loan so he can also apply for the maximum allotment. If he's lucky and gets the full $15,000 worth of ANZ SPP shares issued at $14.40 he can sell enough surplus shares to repay my $14,000 loan a few weeks later. Depending on how the price moves between now and when the SPP shares are sold, he may end up with an extra $3,000 of 'free' ANZ shares in his portfolio.

I'll borrow the $14,000 to lend DS1 from my St George Portfolio loan account (5.10% current interest rate).

Subscribe to Enough Wealth. Copyright 2006-2008

A margin call from Comsec Margin Lending

As feared, the wind-up of the Commonwealth Diversified Share Fund has resulted in me getting a margin call on my Comsec margin lending account. I had expected it might happen when the CDF shares ceased trading on 18 May, and had phoned the Comsec help desk about this last week. They didn't call me back as they had promised, and yesterday they changed the margin value of CDF shares from 70% to 0% without any warning, resulting in a $30,000 margin call.

I managed to get through to Comsec this morning (after being on hold for ten minutes) and they confirmed that I had to meet the $30,000 margin call by 2pm or they *could* sell off some of my shares, although they couldn't even confirm which of my share holdings would sold (apparently it is "random" - although I find that hard to believe). I don't want to sell my CDF shares as they are trading very thinly and at a 10% discount to NAV since the announcement of the fund termination. I also don't have the required amount of cash sitting in my credit union savings account so I had to hunt around for a quick solution.

I initially thought I could take advantage of the 6.9% balance transfer offer Citibank sent me last week, but the funds transfer into my margin loan account could take up to five business days, so it wouldn't prevent Comsec selling off my shares. Instead I had to redraw $30,000 from our home loan account and transfer it into my St George Portfolio loan account, from where I could BPay the funds to Comsec. It took another two phone calls to Comsec to get the BPay details to make the payment, and then to provide them with the St George BPay receipt number to prove that I had met the margin call before 2pm.

I then applied for a Citibank Redicredit $50,000 balance transfer into my St George portfolio loan account. When the funds arrive I'll repay the $30,000 into our home loan account (after checking there are no excess repayment penalties on that account), and the remaining $20,000 will reduce my Portfolio Loan balance. I'll keep those funds available for future investments.

When the CDF fund pays out the realised NAV amount to unit holders on 18 June I'll use the money to pay off the Citibank Redicredit debt. As I'll only be using the Citibank loan for about four weeks, the interest cost will end up being around 0.53% of the total amount borrowed. That is a lot less than the 10% NAV discount if I sold the CDF shares. Of course that calculation ignores any gain or loss in NAV from now until the fund termination date of 1 June.

Since both Commonwealth Diversified Share Fund and Comsec Margin Lending are owned by Commonwealth Bank, I'm extremely unimpressed by the level of customer service provided by Comsec. Providing me with the information I requested last week, or at least providing some advance notice that CDF margin value was going to be changed to 0% on 11/5, should have been the minimum level of customer support.

Subscribe to Enough Wealth. Copyright 2006-2008

My fortunes rise and fall with the market

Having pulled the daily market closing data to update my EW Timing Indicator I plotted the daily market movements so far for 2009 against my daily net worth figures. As expected, my NW moves in lock-step with market movements, and a plot of net worth against the Australian All Ords index shows a linear relationship with a correlation coefficient of around 0.89 - I suspect the correlation would be even higher except that I sold off about 25% of my stock portfolio a couple of weeks ago. That change is visible in the second chart which plots both the All Ords Index and my Net Worth over time. The NW slope back up during the past two weeks has been less than the market, which means that unless I reinvest in the market as it recovers (and my gearing levels drop to more reasonable levels) I wouldn't get back to my previous maximum net worth if the market reaches it's previous peak.




According to the fitted linear relationship, each one point increase in the All Ords index boosts my net worth by around $175. Which explains why it was a lot more enjoyable watching the market rise from 2003-2007, than it has been watching the "Great Recession" take it's toll over the past 18 months.

Subscribe to Enough Wealth. Copyright 2006-2008

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.

Subscribe to Enough Wealth. Copyright 2006-2008

Insanity is repeating the same thing time and again and expecting a different outcome...

I just couldn't resist it. IPE dropped from $0.40 to $0.35 today, so I decided to place an after-hours order to buy 10,000 of them. If the order is filled on Monday it will increase my current block of IPE to 100,000 shares (the current 90,000 I hold were bought at $1.00 each). The company announces NTA figures each month, and they reported an NTA of around $1.04 at the end of October and $0.99 at the end of November. The 31 December NTA figure should be released around the 12th, and I expect it will still be in the high 90c region, given the overall stock market movement last month. Of course "Mr Market" must consider the NTA figures to be completely unbelievable for the price of IPE to be where it is, but I'm gambling that if the market recovers somewhat during 2009 the NTA figures will stay around $1.00 per share. In 2007 the NTA was around $1.35 when the shares traded around $1.05-$1.20, so if market confidence is restored the current NTA would indicate a possible market valuation of around 75c. Then again, the fact that the NTA has only dropped around 35% when the overall stock market has dropped by about 45% suggests there's something fishy about the NTA figures. The one good thing with my IPE investment is that Comsec has a 0% margin valuation for this stock - so my margin utilisation isn't affected by fluctuations in the price of my IPE holding. If the trade goes through on Monday I'll have to transfer $3,520 from my St George Portfolio Loan into my Comsec margin lending account to cover the settlement.

Subscribe to Enough Wealth. Copyright 2006-2008

That was a year to remember

Well, the Australian stock market has ceased trading for the year (it closed early today so everyone can get a good vantage point for tonight's fireworks and/or partying). The All Ordinaries index had its worst calendar year on record, plummeting 43%, compared to the 32% slump during the oil shock of 1974 and the 34% fall in 1930, during the Great Depression. The drop in 1987 calendar year doesn't even rate a mention.

Hopefully I'll still be around in twenty or thirty years to be telling my grand kids "I remember the Great Stock Market Meltdown of '08"...

Subscribe to Enough Wealth. Copyright 2006-2008

Displaying the All Ordinaries Index on Desktop

At work we're still using Windows 2000, so I have loaded the Sydney Morning Herald's All Ordinaries chart onto my Active Desktop. This also works with XP, but active desktop isn't available in Vista so I use a sidebar gadget at home. Monitoring the market serves no useful purpose (for me anyhow - but if you are day trading using your mobile phone it *might* be helpful), but on volatile days I can glance at it and go "Ooh, Aaah" as the market plummets or takes off. A bit like watching a fireworks display.



At home I now have Vista, so I've loaded the Stocks 3.3 sidebar gadget and set the options to only display the All Ordinaries Index (data from Yahoo!, code ^AORD). If you want to track your portfolio live you can add up to 30 symbols, such as BHP.AX, and you can specify the number bought and (average) cost so it displays current profit/loss. Unfortunately it doesn't seem to allow a portfolio total to be displayed, which would be fun (you could see your net worth going up and down minute by minute).

Subscribe to Enough Wealth. Copyright 2006-2008

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.

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%

Subscribe to Enough Wealth. Copyright 2006-2008