Gold Stocks Are A Buy
Over the past couple of months, gold has slowly retreated from all-time high prices, losing mainstream media coverage in the process. As veterans of the gold market know, gold makes its major moves when no one is paying attention. I don't know whether gold will explode higher today or 6 months from now, but I believe it is time to accumulate.
U.S. Dollar
Weakness in gold has, not surprisingly, coincided with dollar strength. The dollar is solidly above its 50-day moving average and has just broken through its 200-day moving average. If the dollar can hold above 78.5 on the dollar index, expect to see further strength.
Gold is firming up a bit here at the same time the dollar is showing strength. Gold is sitting in the lower range of a multi-week consolidation pattern, which suggests gold is a buy right now. Until we bust out of this range in either direction, I will use all pullbacks in gold to add to positions.
Gold Stocks
If I were looking to enter the gold space right now, I would turn to gold stocks. Gold stocks have taken a beating along with the general market. Most people are concerned about the effect of potential crash conditions in the stock market on gold stocks.
While these concerns are valid, I believe one should buy when value presents itself. Relative to the value of gold, gold stocks are very cheap. The rising gold:xau ratio demonstrates the relative undervaluation of gold stocks.
In valuing gold stocks, keep in mind that energy costs are likely to remain depressed relative to gold as the global economy weakens. Although gold and oil are lumped together in the general category of commodities, they are driven by different fundamental factors. While both commodities are subject to the rules of supply and demand, only gold shines in an atmosphere of fear. After all, people don't store barrels of crude oil when they mistrust governments or currencies.
Once fear reenters the system, gold stocks will explode.
We are currently at an interesting juncture where both the dollar and gold are showing strength. Perhaps gold and the dollar are close to decoupling for good, which I believe will be the signal that confirms we are now entering the most powerful phase of the gold bull market.
I understand that it is hard for investors right now to pull the trigger on gold stocks, especially given the obvious weakness in the general stock market. However, gold shares will likely decouple from the general market in the same way they did during the Great Depression, and more recently, in the first half of 2009. I will continue to buy on weakness, and hopefully, ride this bull market to its conclusion.
Friday, July 30, 2010
Thursday, July 29, 2010
Michael Jackson Facing Foreclosure
Michael Jackson Facing Foreclosure: What’s Next For Neverland Ranch?
That’s right, not even Michael Jackson, “The King of Pop,” can distance himself from the foreclosure problems facing the country. According to the Associated Press, Michael Jackson will need to come up with $24.5 million by March 19 in order to save his famed Neverland Ranch from being auctioned off.
The starting bid amount will likely exceed $24.5 million, but considering the fame of Neverland ranch and the location outside Santa Barbara California, it might not be a bad investment. I imagine that this ranch could be turned into quite the tourist draw. Michael Jackson is still probably the biggest single name in music worldwide, and people will want to see his famed ranch. Just think of the tourist draw that Graceland has become. Not only is Michael Jackson a bigger name than Elvis, but the property is much more interesting than Graceland. People will pay money to see Neverland. Of that I’m sure. Even people who aren’t Michael Jackson fans would probably still pay to see the ranch just out of curiosity.
The main buildings could be turned into a museum, and much of the rest of the ranch subdivided and sold off, turned into a vineyard (Neverland winery could be an interesting novelty...), or any number of things depending on the investor’s preferences. Seeing as homes in that region, on just a couple acres, are going for $1-5 million a piece, and Neverland ranch is on somewhere between 2,500-2,900 acres (depending on which source you believe), there is substantial value in the land for sure.
That being said I’m not sure if the property will even make it to auction. It is likely that Jackson will figure some way out of this problem, but it is interesting to consider. Who knows? Maybe the next time that I’m in Santa Barbara, I’ll be able to take a full access tour of Neverland ranch, and maybe even a ride on Michael Jackson’s Ferris Wheel.
That’s right, not even Michael Jackson, “The King of Pop,” can distance himself from the foreclosure problems facing the country. According to the Associated Press, Michael Jackson will need to come up with $24.5 million by March 19 in order to save his famed Neverland Ranch from being auctioned off.
The starting bid amount will likely exceed $24.5 million, but considering the fame of Neverland ranch and the location outside Santa Barbara California, it might not be a bad investment. I imagine that this ranch could be turned into quite the tourist draw. Michael Jackson is still probably the biggest single name in music worldwide, and people will want to see his famed ranch. Just think of the tourist draw that Graceland has become. Not only is Michael Jackson a bigger name than Elvis, but the property is much more interesting than Graceland. People will pay money to see Neverland. Of that I’m sure. Even people who aren’t Michael Jackson fans would probably still pay to see the ranch just out of curiosity.
The main buildings could be turned into a museum, and much of the rest of the ranch subdivided and sold off, turned into a vineyard (Neverland winery could be an interesting novelty...), or any number of things depending on the investor’s preferences. Seeing as homes in that region, on just a couple acres, are going for $1-5 million a piece, and Neverland ranch is on somewhere between 2,500-2,900 acres (depending on which source you believe), there is substantial value in the land for sure.
That being said I’m not sure if the property will even make it to auction. It is likely that Jackson will figure some way out of this problem, but it is interesting to consider. Who knows? Maybe the next time that I’m in Santa Barbara, I’ll be able to take a full access tour of Neverland ranch, and maybe even a ride on Michael Jackson’s Ferris Wheel.
Wednesday, July 28, 2010
OECD Employment Very Optimistic
OECD Employment Very Optimistic
The Organization for Economic Co-Operation and Development (OECD) released updated economic projections on several countries late last week, and while some are calling the projections grim, they look extremely optimistic to me. The report projects different economic variables through 2010, but the one I want to specifically focus on is employment. In their report they see the U.S. capping out with an unemployment rate of 7.6 percent in the first quarter of 2010. Considering that we are already at 6.5 percent, and news of mass layoffs keep coming with no end in sight, it is hard to believe that we won’t easily surpass 7.6 percent next year.
The big headline in the papers this morning is the 50,000+ people that are getting laid off by Citigroup, on top of previous layoffs the company has already announced this year. Things certainly are not getting better in the financial industry, and really the outlook is not the great anywhere else, either. If the automakers don’t get a big bailout we will soon see tens--if not hundreds--of thousands more people laid off there, not to mention all the vendors and suppliers who would also be forced to lay off workers. Nearly every industry you can think off, short of medical and a few others, is in belt tightening mode right now, and more layoffs are all but imminent.
The OECD projected the unemployment rate to be 6.5 in Quarter 4 of this year; considering that we are already at 6.5 after October’s announcement, we are sure to beat that number. In addition, we must also remember that the Labor Department has been drastically underreporting jobless claims in initial reports. I blogged about this recently, but if they keep the underreporting ratio intact from the past couple months, we could see up to 200,000 more jobs lost than was originally announced for October. That would be scary, considering that the numbers for November look like they are going to be bad, too. We could very well end up with an unemployment rate over 7 percent by the end of the year, a number the OECD is not projecting us to top until Quarter 2 of 2009. By then we might be over 7.6 percent--who knows?
Really, I don’t see how we won’t top 7.6 percent unemployment before 2010, short of an amazing government intervention orchestrated by President-elect Obama. However, that of course would have its own set of ramifications for us to deal with. This problem isn’t going to get better any time soon, and this recession will be deep and hard felt. We can hope for the best, but just make sure to prepare for the worst. The way people have been talking about this OECD report as being overly grim, I just don’t think enough people truly see the big picture.
The Organization for Economic Co-Operation and Development (OECD) released updated economic projections on several countries late last week, and while some are calling the projections grim, they look extremely optimistic to me. The report projects different economic variables through 2010, but the one I want to specifically focus on is employment. In their report they see the U.S. capping out with an unemployment rate of 7.6 percent in the first quarter of 2010. Considering that we are already at 6.5 percent, and news of mass layoffs keep coming with no end in sight, it is hard to believe that we won’t easily surpass 7.6 percent next year.
The big headline in the papers this morning is the 50,000+ people that are getting laid off by Citigroup, on top of previous layoffs the company has already announced this year. Things certainly are not getting better in the financial industry, and really the outlook is not the great anywhere else, either. If the automakers don’t get a big bailout we will soon see tens--if not hundreds--of thousands more people laid off there, not to mention all the vendors and suppliers who would also be forced to lay off workers. Nearly every industry you can think off, short of medical and a few others, is in belt tightening mode right now, and more layoffs are all but imminent.
The OECD projected the unemployment rate to be 6.5 in Quarter 4 of this year; considering that we are already at 6.5 after October’s announcement, we are sure to beat that number. In addition, we must also remember that the Labor Department has been drastically underreporting jobless claims in initial reports. I blogged about this recently, but if they keep the underreporting ratio intact from the past couple months, we could see up to 200,000 more jobs lost than was originally announced for October. That would be scary, considering that the numbers for November look like they are going to be bad, too. We could very well end up with an unemployment rate over 7 percent by the end of the year, a number the OECD is not projecting us to top until Quarter 2 of 2009. By then we might be over 7.6 percent--who knows?
Really, I don’t see how we won’t top 7.6 percent unemployment before 2010, short of an amazing government intervention orchestrated by President-elect Obama. However, that of course would have its own set of ramifications for us to deal with. This problem isn’t going to get better any time soon, and this recession will be deep and hard felt. We can hope for the best, but just make sure to prepare for the worst. The way people have been talking about this OECD report as being overly grim, I just don’t think enough people truly see the big picture.
Tuesday, July 27, 2010
Washing Machines and The US Economy
What washing machines tell us about the US economy
Many analysts cheered the latest results from Electrolux, the world's second largest manufacturer of electrical appliances. Adjusted operating profits beat targets. But hidden behind that good news was a warning.
Hopeful eyes have been turning east recently as China continues to post strong figures – the latest GDP growth rate clocked in at an impressive 8.9%. As China creates new tiers of wealthy consumers, say the bulls, the global economy will continue to strengthen.
But meanwhile, the primary engine of the boom years – the US consumer – continues to pull back. Electrolux confirmed as much by announcing the closure of two washing machine factories, employing 950 staff, in Iowa. And that's in spite of the chief executive, Hans Straberg, declaring "almost everything went our way this quarter".
And it's US consumers that ultimately matter. The US contributes over 20% of global GDP (source IMF), and generates well over three times the wealth of China in US dollar terms. If they suffer, we all suffer. Sure, one day that balance will change as China continues to power on. But for now, firms like Electrolux remind us that the world's biggest spenders are still in their bunker. And that spells bad news for the raft of highly cyclical consumer stocks that have surged since March.
So, anyone who is cheered by the latest US figures (third quarter GDP rose by an annualised 3.5%) into thinking we are past the worst, should think again. And stick with quality defensive shares.
Many analysts cheered the latest results from Electrolux, the world's second largest manufacturer of electrical appliances. Adjusted operating profits beat targets. But hidden behind that good news was a warning.
Hopeful eyes have been turning east recently as China continues to post strong figures – the latest GDP growth rate clocked in at an impressive 8.9%. As China creates new tiers of wealthy consumers, say the bulls, the global economy will continue to strengthen.
But meanwhile, the primary engine of the boom years – the US consumer – continues to pull back. Electrolux confirmed as much by announcing the closure of two washing machine factories, employing 950 staff, in Iowa. And that's in spite of the chief executive, Hans Straberg, declaring "almost everything went our way this quarter".
And it's US consumers that ultimately matter. The US contributes over 20% of global GDP (source IMF), and generates well over three times the wealth of China in US dollar terms. If they suffer, we all suffer. Sure, one day that balance will change as China continues to power on. But for now, firms like Electrolux remind us that the world's biggest spenders are still in their bunker. And that spells bad news for the raft of highly cyclical consumer stocks that have surged since March.
So, anyone who is cheered by the latest US figures (third quarter GDP rose by an annualised 3.5%) into thinking we are past the worst, should think again. And stick with quality defensive shares.
Monday, July 26, 2010
Investment Tips For Every Age
Investment Tips For Every Age
The Twenties
These are the early years when many people are relatively new to the workforce and are still renters. While some have formed a permanent relationship, many don't have children. Home ownership and family are still in the future.
For this group the main financial focus is usually on saving a deposit for a home, an investment that has particular appeal due to its lifestyle benefits and capital gains tax-free status.
The first step for many will be to get their credit card debt under control and then eliminate it. Only then will they be in a position to start building wealth rather than simply paying for past consumption.
With interest rates having stabilised at relatively low levels and property prices still slipping, this age group stands to gain by saving for a deposit for a home so as to be able to buy when the market is weak.
Their main challenge will be to decide whether or not to try to supercharge their savings growth by diverting funds into a regular savings plan that invests in equity funds.
Callinan says building a deposit through investing in equity funds is a good strategy, but only if you can accept the risk that there could be a few years of flat returns.
"You also have to have a time horizon of at least five years, to give the investments time to perform," she adds.
The Thirties
By their 30s, most people are in a permanent relationship, many have children and most have bought a home. The focus is usually on reducing their mortgage, possibly renovating and, where possible, attempting to upgrade to a better property.
Nash of Tynan Mackenzie says people in this situation should consider taking out income insurance, especially given the increased tendency of companies to respond to setbacks by downsizing.
At the very least they should be careful not to over-extend themselves financially, instead keeping money available for emergencies.
This may well involve delaying renovations. Alternatively, they should ensure their mortgage facility allows them to draw down more money quickly if they need funds in a hurry.
Of course, some people in their 30s will still be both mortgage and family free. This group may decide to try to catch up for lost time by aggressive investing, such as using geared share funds or by taking out a margin loan to finance a portfolio of direct share investments.
A small group will go so far as to use even more aggressive investments such as futures contracts, trading warrants and contracts for difference.
Nash stresses, however, that these should be approached with a great deal of care since, if handled badly, they can generate heavy losses.
The Forties
Your financial comfort in your 40s largely depends on how much spending restraint you showed during the previous decade. If you were reasonably disciplined, there is a good chance you will be able to upgrade to a bigger home or, alternatively, carry out the renovations you deferred in order to finance investments.
However, the 40s is sometimes a financially difficult time for people who have children since they are now costing more than ever, especially if they are at private schools. This group needs to budget carefully. In contrast, those with relatively high incomes, or with few or no family responsibilities, should have the capacity to continue to use gearing to expand their investment portfolio.
The alternative will be to divert more money into superannuation. Unfortunately, while very tax-effective, money invested in super is locked up until you satisfy the various preservation rules.
These mean you can't get your super before you are at least 55 and also retired. Super savings really only equate to financial freedom for people who are already in their early 50s.
The Fifties
This is a time for more sustained wealth creation due to higher salaries and fewer family costs (many children by now will be financially independent). Nash argues that the tax breaks offered by superannuation, plus the fact super savings will be more accessible, make this the preferred investment vehicle.
The other opportunity that often arises in your 50s is the chance to take more control over your life by establishing your own business, perhaps by getting a significant redundancy payment.
Even if the redundancy wasn't voluntary, it can provide a valuable chance to build a new, financially viable life outside the 9 to 5 standard working day. But Nash warns it is particularly important to think very carefully before you use your family home as security for a business loan. "A debt-free home is usually crucial for any sort of financial freedom and should not be put at risk without a lot of thought," he says.
The Sixties and later
For many people in their 60s the main financial challenge is to invest their savings to generate a retirement income, and maximise their age pension. In most cases investments are built around some form of allocated or complying pension, in the process maximising tax and social security efficiency.
James of Investec says that, while there is a tendency for older investors to be extremely conservative, especially when the economic outlook is uncertain, higher life expectancy means a very defensive approach probably will result in your money running out.
This means investors should usually opt for an allocated pension that includes a reasonable exposure to both local and offshore shares, rather than a pension with a very high level of capital security.
While a conservative allocated pension carries less risk of suffering a sudden setback, it can also result in a low annual income and so increasing dependence on the aged pension.
Rules for us all
But whether you are in this, the fifth age of investing, or any of the other ages, all of us have to deal with the same economic and investment climate. We have to make the same range of crucial financial decisions, based on our assessment of the risks and opportunities that exist.
James says all investors need to guard against assuming the next five years will generate the same sort of returns as the last. "Expecting the second half of the decade to be just as good as the first half would be naive," she says. "It may be, but there are plenty of reasons to think overall returns won't be as strong."
Among these facts are:
As noted, the main implications of the shift to an era of lower investment returns is the way that making quick gains from the sharemarket or property is likely to be more difficult than in the previous five years.
One thing that won't change, however, is the need for most people to adopt a suitable investment strategy and then resist the temptation to chop and change when a particular investment sector generates disappointing returns.
As already stressed, it is also crucial to avoid thinking you will be able to make big gains quickly. "Everyone wants to be rich tomorrow, but the risks aren't worth it," says Thornhill of Motivated Money. Impatience is our biggest barrier to serous and sustainable wealth creation."
Stick with a strategy
Callinan of Tandem stresses that, while a few investors make a lot of money by timing markets, they are the exception. She points out that even the professional managers who handle the investments for Australia's huge superannuation funds often struggle to add value through timing.
Instead, they develop strict investment strategies and stick with them. "If you give yourself plenty of time and patiently stick with a well-designed investment strategy, you will almost certainly be a lot better off in 10 years time than those who don't," she says.
The Twenties
These are the early years when many people are relatively new to the workforce and are still renters. While some have formed a permanent relationship, many don't have children. Home ownership and family are still in the future.
For this group the main financial focus is usually on saving a deposit for a home, an investment that has particular appeal due to its lifestyle benefits and capital gains tax-free status.
The first step for many will be to get their credit card debt under control and then eliminate it. Only then will they be in a position to start building wealth rather than simply paying for past consumption.
With interest rates having stabilised at relatively low levels and property prices still slipping, this age group stands to gain by saving for a deposit for a home so as to be able to buy when the market is weak.
Their main challenge will be to decide whether or not to try to supercharge their savings growth by diverting funds into a regular savings plan that invests in equity funds.
Callinan says building a deposit through investing in equity funds is a good strategy, but only if you can accept the risk that there could be a few years of flat returns.
"You also have to have a time horizon of at least five years, to give the investments time to perform," she adds.
The Thirties
By their 30s, most people are in a permanent relationship, many have children and most have bought a home. The focus is usually on reducing their mortgage, possibly renovating and, where possible, attempting to upgrade to a better property.
Nash of Tynan Mackenzie says people in this situation should consider taking out income insurance, especially given the increased tendency of companies to respond to setbacks by downsizing.
At the very least they should be careful not to over-extend themselves financially, instead keeping money available for emergencies.
This may well involve delaying renovations. Alternatively, they should ensure their mortgage facility allows them to draw down more money quickly if they need funds in a hurry.
Of course, some people in their 30s will still be both mortgage and family free. This group may decide to try to catch up for lost time by aggressive investing, such as using geared share funds or by taking out a margin loan to finance a portfolio of direct share investments.
A small group will go so far as to use even more aggressive investments such as futures contracts, trading warrants and contracts for difference.
Nash stresses, however, that these should be approached with a great deal of care since, if handled badly, they can generate heavy losses.
The Forties
Your financial comfort in your 40s largely depends on how much spending restraint you showed during the previous decade. If you were reasonably disciplined, there is a good chance you will be able to upgrade to a bigger home or, alternatively, carry out the renovations you deferred in order to finance investments.
However, the 40s is sometimes a financially difficult time for people who have children since they are now costing more than ever, especially if they are at private schools. This group needs to budget carefully. In contrast, those with relatively high incomes, or with few or no family responsibilities, should have the capacity to continue to use gearing to expand their investment portfolio.
The alternative will be to divert more money into superannuation. Unfortunately, while very tax-effective, money invested in super is locked up until you satisfy the various preservation rules.
These mean you can't get your super before you are at least 55 and also retired. Super savings really only equate to financial freedom for people who are already in their early 50s.
The Fifties
This is a time for more sustained wealth creation due to higher salaries and fewer family costs (many children by now will be financially independent). Nash argues that the tax breaks offered by superannuation, plus the fact super savings will be more accessible, make this the preferred investment vehicle.
The other opportunity that often arises in your 50s is the chance to take more control over your life by establishing your own business, perhaps by getting a significant redundancy payment.
Even if the redundancy wasn't voluntary, it can provide a valuable chance to build a new, financially viable life outside the 9 to 5 standard working day. But Nash warns it is particularly important to think very carefully before you use your family home as security for a business loan. "A debt-free home is usually crucial for any sort of financial freedom and should not be put at risk without a lot of thought," he says.
The Sixties and later
For many people in their 60s the main financial challenge is to invest their savings to generate a retirement income, and maximise their age pension. In most cases investments are built around some form of allocated or complying pension, in the process maximising tax and social security efficiency.
James of Investec says that, while there is a tendency for older investors to be extremely conservative, especially when the economic outlook is uncertain, higher life expectancy means a very defensive approach probably will result in your money running out.
This means investors should usually opt for an allocated pension that includes a reasonable exposure to both local and offshore shares, rather than a pension with a very high level of capital security.
While a conservative allocated pension carries less risk of suffering a sudden setback, it can also result in a low annual income and so increasing dependence on the aged pension.
Rules for us all
But whether you are in this, the fifth age of investing, or any of the other ages, all of us have to deal with the same economic and investment climate. We have to make the same range of crucial financial decisions, based on our assessment of the risks and opportunities that exist.
James says all investors need to guard against assuming the next five years will generate the same sort of returns as the last. "Expecting the second half of the decade to be just as good as the first half would be naive," she says. "It may be, but there are plenty of reasons to think overall returns won't be as strong."
Among these facts are:
- Returns over the previous five years or so from Australian shares have been so strong that, as has already happened with real estate, some correction at some stage is virtually inevitable.
- There is no guarantee that one of the main drivers of local sharemarket confidence — the strong Chinese economy — won't hit some adjustment problems, in the process dragging down local stocks.
- The surge in oil prices could continue, squeezing consumers and slowing economic growth.
- The $A could well remain at around current levels, rather than the much lower exchange rate that applied at the start of the decade, in the process maintaining the pressure on exporters.
As noted, the main implications of the shift to an era of lower investment returns is the way that making quick gains from the sharemarket or property is likely to be more difficult than in the previous five years.
One thing that won't change, however, is the need for most people to adopt a suitable investment strategy and then resist the temptation to chop and change when a particular investment sector generates disappointing returns.
As already stressed, it is also crucial to avoid thinking you will be able to make big gains quickly. "Everyone wants to be rich tomorrow, but the risks aren't worth it," says Thornhill of Motivated Money. Impatience is our biggest barrier to serous and sustainable wealth creation."
Stick with a strategy
Callinan of Tandem stresses that, while a few investors make a lot of money by timing markets, they are the exception. She points out that even the professional managers who handle the investments for Australia's huge superannuation funds often struggle to add value through timing.
Instead, they develop strict investment strategies and stick with them. "If you give yourself plenty of time and patiently stick with a well-designed investment strategy, you will almost certainly be a lot better off in 10 years time than those who don't," she says.
Sunday, July 25, 2010
Expatriate Tax Saving Advice
Expatriate Tax Saving Advice
The idea of moving abroad and expanding your physical and spiritual horizons is one that appeals to many people but it takes a special kind of individual to actually make the move a reality. These special people fall into the category of ‘expatriate’ and it’s a pretty exclusive club to be a member of!
If you’ve already expatriated – congratulations - and welcome to a world of opportunity and adventure. If on the other hand you’re toying with the idea of international relocation, chances are the experience will be hugely rewarding for you on many levels. At Shelter Offshore we impart advice that we have learned ourselves – and one of the most important pieces of advice that we can give is expatriate tax saving advice. As an expat it’s the first thing you should know about but usually one of the last things you think about!
Ask any expatriate to their face if they find their time abroad to be fun, fascinating, challenging and of value - or read expat forums around the subject and you’re bound to find that the vast majority of those who have chosen to relocate find that having done so, they get so many more rewards and so much more fun from life. There’s simply something amazing about setting yourself such a huge and fascinating challenge and then rising to, and meeting that challenge. After all, if you can change your whole way of life, adapt to another culture, learn another language and make a house away from home really feel like home, then you have to be a special person and chances are, you will personally be rewarded and fulfilled by meeting the goals and challenges that come along with being an expat.
Not everything about being an expat is such challenging hard work though – after all, if it were, why would so many of us stick it?! The reality is that the expatriate world is often one of working hard and playing harder, of meeting new friends, having domestic staff take the strain, of being able to afford an international school education for your children and possibly earning a more impressive salary with greater benefits than if you’d remained ‘back home.’ So, is being an expatriate all about building great memories, amassing fabulous photos of new friends and new horizons and of realising long held dreams of exploration and mind expanding travel?
For some of us it is – but for others who choose only to focus on the fun side of life and who fail to plan properly for the future or who fail to seize their expatriate tax saving advantage, it can be about accruing a financial hangover and wasting an opportunity.
When you leave your country of birth behind and move to live abroad you ‘expatriate’. When you expatriate you gain a certain fiscal advantage that is, to a lesser or greater extent, of benefit to you in the form of legitimate taxation savings presenting themselves and/or of greater and more interesting financial opportunities presenting themselves to you. However, most expats are so focused on the relocation and the experience of living abroad that they fail to embrace the opportunities presented to them and they waste a chance to get ahead financially speaking.
If you want to be in the elite minority and ensure that you embrace all financial and taxation opportunities available to you and you proceed with best advice towards achieving your financial goals and possibilities, our advice to you is that you take time out, explore your new status from a fiscal point of view. To do this you should consider drawing on the services and advice of an international independent financial adviser who can help you discover how you can maximise your expatriate tax saving advantage through the utilisation of offshore services and solutions.
The idea of moving abroad and expanding your physical and spiritual horizons is one that appeals to many people but it takes a special kind of individual to actually make the move a reality. These special people fall into the category of ‘expatriate’ and it’s a pretty exclusive club to be a member of!
If you’ve already expatriated – congratulations - and welcome to a world of opportunity and adventure. If on the other hand you’re toying with the idea of international relocation, chances are the experience will be hugely rewarding for you on many levels. At Shelter Offshore we impart advice that we have learned ourselves – and one of the most important pieces of advice that we can give is expatriate tax saving advice. As an expat it’s the first thing you should know about but usually one of the last things you think about!
Ask any expatriate to their face if they find their time abroad to be fun, fascinating, challenging and of value - or read expat forums around the subject and you’re bound to find that the vast majority of those who have chosen to relocate find that having done so, they get so many more rewards and so much more fun from life. There’s simply something amazing about setting yourself such a huge and fascinating challenge and then rising to, and meeting that challenge. After all, if you can change your whole way of life, adapt to another culture, learn another language and make a house away from home really feel like home, then you have to be a special person and chances are, you will personally be rewarded and fulfilled by meeting the goals and challenges that come along with being an expat.
Not everything about being an expat is such challenging hard work though – after all, if it were, why would so many of us stick it?! The reality is that the expatriate world is often one of working hard and playing harder, of meeting new friends, having domestic staff take the strain, of being able to afford an international school education for your children and possibly earning a more impressive salary with greater benefits than if you’d remained ‘back home.’ So, is being an expatriate all about building great memories, amassing fabulous photos of new friends and new horizons and of realising long held dreams of exploration and mind expanding travel?
For some of us it is – but for others who choose only to focus on the fun side of life and who fail to plan properly for the future or who fail to seize their expatriate tax saving advantage, it can be about accruing a financial hangover and wasting an opportunity.
When you leave your country of birth behind and move to live abroad you ‘expatriate’. When you expatriate you gain a certain fiscal advantage that is, to a lesser or greater extent, of benefit to you in the form of legitimate taxation savings presenting themselves and/or of greater and more interesting financial opportunities presenting themselves to you. However, most expats are so focused on the relocation and the experience of living abroad that they fail to embrace the opportunities presented to them and they waste a chance to get ahead financially speaking.
If you want to be in the elite minority and ensure that you embrace all financial and taxation opportunities available to you and you proceed with best advice towards achieving your financial goals and possibilities, our advice to you is that you take time out, explore your new status from a fiscal point of view. To do this you should consider drawing on the services and advice of an international independent financial adviser who can help you discover how you can maximise your expatriate tax saving advantage through the utilisation of offshore services and solutions.
Saturday, July 24, 2010
Barack Obama Asks Americans For Patience
President-elect Barack Obama Asks Americans For Patience
During his presidential campaign Barack Obama made many promises to the American people, and there will be a lot of pressure to deliver when he takes office. Americans are losing their jobs, and to say that the economy is struggling is an understatement. The voters who showed up in record numbers to select Obama as our next president expect results, and fast. Knowing that he is going to be on the hot seat, Obama has done the smart thing by reminding people that fixing these problems isn’t going to happen overnight. "The economy's likely to get worse before it gets better. Full recovery will not happen immediately," Obama said Monday, according to CNN.
In a society that wants and demands immediate results, this is a hard pill to swallow, but Obama is right. If we want to fix the economy—and by fix I don’t mean slap a band aid on—it is going to take time and things will get worse before they get better. Americans need to understand this and give Obama a little slack. We need to look at the big picture, not at what will just get us through the next year.
However, though Obama is saying the right things right now, whether he will actually do the right things is an entirely different matter. I don’t agree with many of Obama’s plans to correct the financial crisis, but no one on this planet knows for certain how to fix this thing. There are various and potentially valid opinions on the best course of action, and I don’t intend to sit here and say that I have the perfect plan. I also don’t envy the position Obama is in. He will listen to plan after plan from top economic experts, and then choose the one that will either save us or sink us, and forever bear the weight of that decision on his legacy. Not a pleasant task. I think Obama is a very smart man, and I think that it is important that we give him a chance. This is the man that America selected to get us out of the current crisis and we need to accept that. It is scary to think that one man will have such a huge role in deciding our future, but Obama is the man chosen for the job.
So, President-elect Obama: Even though I might not agree with all of your decisions, this blogger promises to give you the time that you’ve requested. Just do your best to make the right decisions, because my daughter’s future is in your hands.
During his presidential campaign Barack Obama made many promises to the American people, and there will be a lot of pressure to deliver when he takes office. Americans are losing their jobs, and to say that the economy is struggling is an understatement. The voters who showed up in record numbers to select Obama as our next president expect results, and fast. Knowing that he is going to be on the hot seat, Obama has done the smart thing by reminding people that fixing these problems isn’t going to happen overnight. "The economy's likely to get worse before it gets better. Full recovery will not happen immediately," Obama said Monday, according to CNN.
In a society that wants and demands immediate results, this is a hard pill to swallow, but Obama is right. If we want to fix the economy—and by fix I don’t mean slap a band aid on—it is going to take time and things will get worse before they get better. Americans need to understand this and give Obama a little slack. We need to look at the big picture, not at what will just get us through the next year.
However, though Obama is saying the right things right now, whether he will actually do the right things is an entirely different matter. I don’t agree with many of Obama’s plans to correct the financial crisis, but no one on this planet knows for certain how to fix this thing. There are various and potentially valid opinions on the best course of action, and I don’t intend to sit here and say that I have the perfect plan. I also don’t envy the position Obama is in. He will listen to plan after plan from top economic experts, and then choose the one that will either save us or sink us, and forever bear the weight of that decision on his legacy. Not a pleasant task. I think Obama is a very smart man, and I think that it is important that we give him a chance. This is the man that America selected to get us out of the current crisis and we need to accept that. It is scary to think that one man will have such a huge role in deciding our future, but Obama is the man chosen for the job.
So, President-elect Obama: Even though I might not agree with all of your decisions, this blogger promises to give you the time that you’ve requested. Just do your best to make the right decisions, because my daughter’s future is in your hands.
Friday, July 23, 2010
Old Banknotes
What Happens to Old Banknotes?
From 1 July, £20 notes featuring the composer Sir Edward Elgar will no longer be valid currency. Until 30 June, you can take these notes to banks or building societies to be exchanged for legal tender - new £20 notes featuring economist Adam Smith. But what will happen to the old notes?
830 million bank notes worth around £11.4bn are destroyed in the UK every year. Notes are usually destroyed because they are of poor quality, or because they are no longer legal tender.
They are pulped, compressed into bricks and sent to an official government incinerator where they are burned alongside any illegal tobacco that has been seized by HM Revenue & Customs.
Typically, £5 notes have the shortest life expectancy – they are usually removed from circulation due to damage after just one year. But £50 notes can survive for over five years.
But if you have some old currency, don't worry - it isn't worthless. "Genuine Bank of England notes that have been withdrawn from circulation retain their face value for all time," says the Bank of England website.
In practice, this means that you can take any old Bank of England note to the Bank in Threadneedle Street, London and staff there will exchange it for the equivalent value in legal currency. Last year, 3,526 people did just that. You can also post your notes - but obviously, you do that at your own risk.
So whether it's a £20 note featuring Elgar or a £1 note from 1694, you can exchange it – although the latter might be worth more at the auction houses.
From 1 July, £20 notes featuring the composer Sir Edward Elgar will no longer be valid currency. Until 30 June, you can take these notes to banks or building societies to be exchanged for legal tender - new £20 notes featuring economist Adam Smith. But what will happen to the old notes?
830 million bank notes worth around £11.4bn are destroyed in the UK every year. Notes are usually destroyed because they are of poor quality, or because they are no longer legal tender.
They are pulped, compressed into bricks and sent to an official government incinerator where they are burned alongside any illegal tobacco that has been seized by HM Revenue & Customs.
Typically, £5 notes have the shortest life expectancy – they are usually removed from circulation due to damage after just one year. But £50 notes can survive for over five years.
But if you have some old currency, don't worry - it isn't worthless. "Genuine Bank of England notes that have been withdrawn from circulation retain their face value for all time," says the Bank of England website.
In practice, this means that you can take any old Bank of England note to the Bank in Threadneedle Street, London and staff there will exchange it for the equivalent value in legal currency. Last year, 3,526 people did just that. You can also post your notes - but obviously, you do that at your own risk.
So whether it's a £20 note featuring Elgar or a £1 note from 1694, you can exchange it – although the latter might be worth more at the auction houses.
Thursday, July 22, 2010
Fed Preparing For Another Interest Rate Cut
Fed Preparing For Another Interest Rate Cut
US consumer prices dropped 1 percent last month, taking the annualized pace of growth to 3.7 percent, which is the lowest level since October 2007. Falling oil prices takes the credit for lower inflationary pressures with gasoline prices tracking the 50 percent decline in crude. Gas station receipts fell a whopping 14 percent and commodity prices have fallen in general, which has helped to push down transportation costs.
Although the core PPI numbers accelerated, core CPI dropped 0.1 percent and we expect it to head even lower. Less price pressure will give the Federal Reserve more room to cut interest rates. We expect the Fed to cut by another 50bp in December, but it is important to note that Fed Fund futures are pricing in a tiny chance of a 75bp rate cut next month.
The housing market continues to be one of the weakest links in the US economy. Housing starts fell to a record low while building permits dropped to the lowest level in close to 50 years. When you have an environment where foreclosures are rising at a very rapid pace, there is no desire by builders to break new ground.
This afternoon, we have the minutes from the latest FOMC meeting at which the Fed cut interest rates by 50bp to 1 percent. Given the continued concern reflected in Bernanke’s testimony to the House Financial Services Committee on Tuesday, the Fed is likely to support further easing. All of the major currency pairs have been consolidating since the middle of last week and the FOMC minutes could be the trigger for a major breakout.
US consumer prices dropped 1 percent last month, taking the annualized pace of growth to 3.7 percent, which is the lowest level since October 2007. Falling oil prices takes the credit for lower inflationary pressures with gasoline prices tracking the 50 percent decline in crude. Gas station receipts fell a whopping 14 percent and commodity prices have fallen in general, which has helped to push down transportation costs.
Although the core PPI numbers accelerated, core CPI dropped 0.1 percent and we expect it to head even lower. Less price pressure will give the Federal Reserve more room to cut interest rates. We expect the Fed to cut by another 50bp in December, but it is important to note that Fed Fund futures are pricing in a tiny chance of a 75bp rate cut next month.
The housing market continues to be one of the weakest links in the US economy. Housing starts fell to a record low while building permits dropped to the lowest level in close to 50 years. When you have an environment where foreclosures are rising at a very rapid pace, there is no desire by builders to break new ground.
This afternoon, we have the minutes from the latest FOMC meeting at which the Fed cut interest rates by 50bp to 1 percent. Given the continued concern reflected in Bernanke’s testimony to the House Financial Services Committee on Tuesday, the Fed is likely to support further easing. All of the major currency pairs have been consolidating since the middle of last week and the FOMC minutes could be the trigger for a major breakout.
Wednesday, July 21, 2010
Funding Down But Still Flowing
Venture capital survey: Funding Down But Still Flowing
For the first time ever, clean-tech investments nationwide cracked the $1 billion mark in a single quarter, and biotech investments were also up.
But overall, venture capital investments slipped 7 percent in the third quarter of 2008, with $7.1 billion going into 907 deals compared with $7.7 billion into 1,033 deals in the previous quarter. Investments in Silicon Valley were similarly down, with $2.77 billion going into 297 deals compared with $3.1 billion going into 318 deals in the previous quarter.
Those were the highlights of the latest MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.
Tracy T. Lefteroff, who oversees the venture industry for PricewaterhouseCoopers, predicted "a dip in investing over the next several quarters" as the full effects of the global financial crisis take hold. "We also do not see venture funding drying up, " he added. "Venture capitalists have slugged through difficult times before."
In Silicon Valley, biotechnology firms received most of the larger investments during the third quarter. More than $600 million went into 27 deals, pushing the year's tally to $1.16 billion — just shy of the $1.17 billion invested in valley biotech in all of 2007.
Nationwide, the life sciences industry, combining biotech and medical devices, had a 10 percent increase with $2.2 billion going into 207 deals. Life sciences
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represented 31 percent of dollars and 23 percent of deals in the third quarter. Software was also a bustling sector, with $1.34 billion invested in 214 companies.
One closely watched statistic is first-time deals. In the third quarter, $1.5 billion went into 259 first-time deals, a decline of 12 percent in dollars and 20 percent in deals from the previous quarter.
"We will be watching the mix of first-time vs. follow-on rounds closely in the coming months for any notable decline," said National Venture Capital Association President Mark Heesen. If venture-backed companies can't cash out their investors through mergers and acquisitions or public stock offerings, Heesen said, VC firms may channel more money away from early-stage deals.
For the first time ever, clean-tech investments nationwide cracked the $1 billion mark in a single quarter, and biotech investments were also up.
But overall, venture capital investments slipped 7 percent in the third quarter of 2008, with $7.1 billion going into 907 deals compared with $7.7 billion into 1,033 deals in the previous quarter. Investments in Silicon Valley were similarly down, with $2.77 billion going into 297 deals compared with $3.1 billion going into 318 deals in the previous quarter.
Those were the highlights of the latest MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.
Tracy T. Lefteroff, who oversees the venture industry for PricewaterhouseCoopers, predicted "a dip in investing over the next several quarters" as the full effects of the global financial crisis take hold. "We also do not see venture funding drying up, " he added. "Venture capitalists have slugged through difficult times before."
In Silicon Valley, biotechnology firms received most of the larger investments during the third quarter. More than $600 million went into 27 deals, pushing the year's tally to $1.16 billion — just shy of the $1.17 billion invested in valley biotech in all of 2007.
Nationwide, the life sciences industry, combining biotech and medical devices, had a 10 percent increase with $2.2 billion going into 207 deals. Life sciences
Advertisement
represented 31 percent of dollars and 23 percent of deals in the third quarter. Software was also a bustling sector, with $1.34 billion invested in 214 companies.
One closely watched statistic is first-time deals. In the third quarter, $1.5 billion went into 259 first-time deals, a decline of 12 percent in dollars and 20 percent in deals from the previous quarter.
"We will be watching the mix of first-time vs. follow-on rounds closely in the coming months for any notable decline," said National Venture Capital Association President Mark Heesen. If venture-backed companies can't cash out their investors through mergers and acquisitions or public stock offerings, Heesen said, VC firms may channel more money away from early-stage deals.
Tuesday, July 20, 2010
Yamana - Thinking Trades in Gold
Yamana - Thinking Trades in Gold
Investing is not only about finding the right stock or asset class, but also finding good entry points. This is especially true of a volatile asset such as gold. Knowing what timeframe you want to invest in is also critical, as gold often shakes out weak hands in the short-term right before huge upside moves.
For Yamana Gold Inc. (AUY), notice how MACD has been a good indicator of both uptrends and downtrends. Currently, MACD is approaching the signal line and is suggesting a potential trend change. Wait for confirmation of a cross between MACD and the signal line before entering this trade.
Ultimately, AUY will track the price of gold. Looking at the chart of gold, in addition to a bullish inverse head and shoulders pattern, a cup and handle pattern is forming. The convergence of these two indicators adds to the bullish case for gold. Furthermore, gold has found good support in the 30 day moving average. The short-term outlook for gold will change if this is breached.
As a slight bearish factor, declining open interest in gold implies we may be in for some whipshaw before gold really takes off. Also, stocks are showing weakness, which recently has precipitated a "safe haven" trade to the dollar. My firm belief is that money will start flowing to gold instead of the dollar in the next downturn, but only time will tell. Nonetheless, by keeping an eye on key indicators and waiting for confirmation to enter trades, you can be assured of being on the right side of the trade more times than not.
Investing is not only about finding the right stock or asset class, but also finding good entry points. This is especially true of a volatile asset such as gold. Knowing what timeframe you want to invest in is also critical, as gold often shakes out weak hands in the short-term right before huge upside moves.
For Yamana Gold Inc. (AUY), notice how MACD has been a good indicator of both uptrends and downtrends. Currently, MACD is approaching the signal line and is suggesting a potential trend change. Wait for confirmation of a cross between MACD and the signal line before entering this trade.
Ultimately, AUY will track the price of gold. Looking at the chart of gold, in addition to a bullish inverse head and shoulders pattern, a cup and handle pattern is forming. The convergence of these two indicators adds to the bullish case for gold. Furthermore, gold has found good support in the 30 day moving average. The short-term outlook for gold will change if this is breached.
As a slight bearish factor, declining open interest in gold implies we may be in for some whipshaw before gold really takes off. Also, stocks are showing weakness, which recently has precipitated a "safe haven" trade to the dollar. My firm belief is that money will start flowing to gold instead of the dollar in the next downturn, but only time will tell. Nonetheless, by keeping an eye on key indicators and waiting for confirmation to enter trades, you can be assured of being on the right side of the trade more times than not.
Monday, July 19, 2010
Buy Firms With Big Moats
Investment Strategy: Buy Firms With Big Moats
Moats are there to make castles difficult to attack. The same goes for companies, according to Warren Buffett. In 1999 he said "the key to investing is… determining the competitive advantage of any given company and, above all, the durability of that advantage". So one of the keys to picking winners is to find firms with strong defences - a wide 'economic moat'. But what does that mean?
Why moats matter
Advantages don't last. That's especially true in the corporate world. As soon as a business looks to be gaining a lead, making decent margins and expanding, other firms will try and break into their market. What stops them is the size of the economic moat enjoyed by an incumbent. Fair or not, long-lasting firms have an edge - something that makes them difficult to imitate quickly. Here are four traits to watch out for, as identified by Harvard professor Michael Porter.
1. Low-cost production
Given enough time, I could probably make a car and sell it. But could I do it on a large scale and at a low price? Firms with wide moats can. How? They can use their size to cut deals with suppliers and workers to keep production costs down. And their scale gives them the distribution clout to keep delivery costs to the end customer low, too. Getting to this sort of scale and negotiating these deals takes time and money - so new entrants have their work cut out trying to compete.
2. High switching costs
A firm with a wide economic moat often has a 'sticky' product. In short, it's not easy for a customer to find an alternative. For example a large drug-making firm may be the only producer of a particular drug. Even if it isn't, patients or doctors may not trust cheaper imitation products.
Equally, many IT firms are able to lock clients into multi-year contracts. Certainly a client - perhaps in the public sector - can pull out of a contract, and with the government planning to cut spending we're likely to see this happen in the near future. But doing so may cost a fortune. As Labour MP Geoffrey Robinson has pointed out, the NHS has wasted billions on IT thanks to being held hostage by several large consultants on long-term contracts. This is bad news for the taxpayer - but it certainly provides such consultants with a strong competitive advantage.
3. Intangible assets
Many firms hold patents or licences that make it tough for a rival to break in. For example, drug firms have exclusive rights to make their products for a number of years before competitors are allowed to produce copies. And getting through the regulatory process also requires scale and expertise. This makes it very hard for smaller rivals to grow and get new drugs approved without finding larger partners to work with. Equally an oil firm such as BP with a licence to drill in, say, Russia has a natural competitive advantage (assuming they have chosen their target country correctly).
Strong brands also create a moat. You might have invented a drink that tastes as good as Coca Cola. But challenging a brand which has been built over years of advertising spending and consumer trust requires huge clout and would take a long time to achieve. Shaving giant Gillette is a good example of a firm which continues to thrive, despite the fact that its products are usually more expensive than the competition's. Much of that is down to years of expensive brand building using celebrities such as David Beckham to promote the product.
4. The network effect
Sometimes firms can become almost too big to fail commercially. For example, the sheer numbers of people now using online auction site eBay make it very hard for anyone else to take it on - and the value of the service increases in turn as more and more people use it. After all, if you're going to sell something, you want to go to the auction site with the most potential customers. So copying the company's business model would be tough, let alone persuading its customers that your version is better. And it gets even harder the faster it expands.
What to buy
One sector that still enjoys a very wide economic moat is big pharma. There are fears about the impact of patents being removed from certain key drugs over the next few years - but rivals will still find it difficult to compete with the product pipelines that drug majors enjoy thanks to their hefty research and development spending, plus their ability to buy in new drugs from smaller rivals.
More to the point, many of the bigger firms in the sector are just plain cheap. At this time, in the UK, we like AstraZeneca (LSE: AZN), on a forward p/e of just over seven, and GlaxoSmithKline (LSE: GSK) on a forward p/e of around 9.5. The stocks pay out current year dividend yields of 5.4% and 5.2% respectively.
Moats are there to make castles difficult to attack. The same goes for companies, according to Warren Buffett. In 1999 he said "the key to investing is… determining the competitive advantage of any given company and, above all, the durability of that advantage". So one of the keys to picking winners is to find firms with strong defences - a wide 'economic moat'. But what does that mean?
Why moats matter
Advantages don't last. That's especially true in the corporate world. As soon as a business looks to be gaining a lead, making decent margins and expanding, other firms will try and break into their market. What stops them is the size of the economic moat enjoyed by an incumbent. Fair or not, long-lasting firms have an edge - something that makes them difficult to imitate quickly. Here are four traits to watch out for, as identified by Harvard professor Michael Porter.
1. Low-cost production
Given enough time, I could probably make a car and sell it. But could I do it on a large scale and at a low price? Firms with wide moats can. How? They can use their size to cut deals with suppliers and workers to keep production costs down. And their scale gives them the distribution clout to keep delivery costs to the end customer low, too. Getting to this sort of scale and negotiating these deals takes time and money - so new entrants have their work cut out trying to compete.
2. High switching costs
A firm with a wide economic moat often has a 'sticky' product. In short, it's not easy for a customer to find an alternative. For example a large drug-making firm may be the only producer of a particular drug. Even if it isn't, patients or doctors may not trust cheaper imitation products.
Equally, many IT firms are able to lock clients into multi-year contracts. Certainly a client - perhaps in the public sector - can pull out of a contract, and with the government planning to cut spending we're likely to see this happen in the near future. But doing so may cost a fortune. As Labour MP Geoffrey Robinson has pointed out, the NHS has wasted billions on IT thanks to being held hostage by several large consultants on long-term contracts. This is bad news for the taxpayer - but it certainly provides such consultants with a strong competitive advantage.
3. Intangible assets
Many firms hold patents or licences that make it tough for a rival to break in. For example, drug firms have exclusive rights to make their products for a number of years before competitors are allowed to produce copies. And getting through the regulatory process also requires scale and expertise. This makes it very hard for smaller rivals to grow and get new drugs approved without finding larger partners to work with. Equally an oil firm such as BP with a licence to drill in, say, Russia has a natural competitive advantage (assuming they have chosen their target country correctly).
Strong brands also create a moat. You might have invented a drink that tastes as good as Coca Cola. But challenging a brand which has been built over years of advertising spending and consumer trust requires huge clout and would take a long time to achieve. Shaving giant Gillette is a good example of a firm which continues to thrive, despite the fact that its products are usually more expensive than the competition's. Much of that is down to years of expensive brand building using celebrities such as David Beckham to promote the product.
4. The network effect
Sometimes firms can become almost too big to fail commercially. For example, the sheer numbers of people now using online auction site eBay make it very hard for anyone else to take it on - and the value of the service increases in turn as more and more people use it. After all, if you're going to sell something, you want to go to the auction site with the most potential customers. So copying the company's business model would be tough, let alone persuading its customers that your version is better. And it gets even harder the faster it expands.
What to buy
One sector that still enjoys a very wide economic moat is big pharma. There are fears about the impact of patents being removed from certain key drugs over the next few years - but rivals will still find it difficult to compete with the product pipelines that drug majors enjoy thanks to their hefty research and development spending, plus their ability to buy in new drugs from smaller rivals.
More to the point, many of the bigger firms in the sector are just plain cheap. At this time, in the UK, we like AstraZeneca (LSE: AZN), on a forward p/e of just over seven, and GlaxoSmithKline (LSE: GSK) on a forward p/e of around 9.5. The stocks pay out current year dividend yields of 5.4% and 5.2% respectively.
Sunday, July 18, 2010
Bank Lending Could Still Shrink Next Year
Bank Lending Could Still Shrink Next Year
As our regular columnist James Ferguson is always pointing out, you can't have a healthily growing economy if your banks are contracting lending. So Alistair Darling's Budget promise to force RBS and Lloyds to lend £94bn in total to small businesses in the coming financial year sounds like it might be a good thing. And that target sounds bold, when you compare it to the targets of £16bn for RBS and £11bn for Lloyds that were put in place last year. Especially when you realise that the banks in question didn't manage to hit those targets.
There's just one problem. The earlier targets were for net lending. In other words, the banks had to lend out more than they recouped in repayments. But the £94bn target is for gross lending.
In other words, the banks could be shrinking loans, and still hit the targets. How? Because if businesses pay back more than £94bn, then net lending could end up shrinking.Now, I don't have any problem with the banks shrinking lending. If they don't believe businesses are creditworthy, and their own balance sheets are in a mess, then that's just what has to happen.
But the fact that we have to unpick this target and explain it to you just goes to show what a lot of dishonest window dressing Budgets consist of. And I'm sure there's plenty more where that came from.
As our regular columnist James Ferguson is always pointing out, you can't have a healthily growing economy if your banks are contracting lending. So Alistair Darling's Budget promise to force RBS and Lloyds to lend £94bn in total to small businesses in the coming financial year sounds like it might be a good thing. And that target sounds bold, when you compare it to the targets of £16bn for RBS and £11bn for Lloyds that were put in place last year. Especially when you realise that the banks in question didn't manage to hit those targets.
There's just one problem. The earlier targets were for net lending. In other words, the banks had to lend out more than they recouped in repayments. But the £94bn target is for gross lending.
In other words, the banks could be shrinking loans, and still hit the targets. How? Because if businesses pay back more than £94bn, then net lending could end up shrinking.Now, I don't have any problem with the banks shrinking lending. If they don't believe businesses are creditworthy, and their own balance sheets are in a mess, then that's just what has to happen.
But the fact that we have to unpick this target and explain it to you just goes to show what a lot of dishonest window dressing Budgets consist of. And I'm sure there's plenty more where that came from.
Saturday, July 17, 2010
Ignore the Theories and Buy Bargains
Ignore the Theories and Buy Bargains
Everything you learn at business school is wrong," says GMO's James Montier in his latest collection of essays, Value Investing: Tools and Techniques for Intelligent Investing.
I didn't go to business school but I think I learnt much the same muck as my husband (who did) on the Swiss Bank Corp (SBC) graduate training course.
There we were taught about 'modern portfolio theory', listened to endless, boring lectures on the 'capital asset pricing model' (CAPM), stared blankly at mathematical explanations of option pricing models and occasionally had to take turns doing incomprehensible sums on the white board at the front of the lecture hall.
I remember it through a haze of confusion. But I did at least come out of the whole thing with a rough understanding of modern portfolio theory – as well as a vague sense that its assumptions (that markets are efficient, that investors are rational and that there is a mathematically definable trade-off between risk and return) didn't really make much sense.
Even then, I knew that nothing much was ever efficient (even SBC – it later turned out I was enrolled on the wrong course). And while I didn't yet know much about the irrationality of investors, the following five years working in Japan's manic-depressive market soon sorted that out.
The truth, as Montier points out, is that the efficient market hypothesis looks completely wrong. The prima facie evidence of this? The existence of bubbles.
The events of the last few years should have made it clear that there is no such thing as an efficient market. But for those still thinking that efficiency might be more resting than dead, Montier points out that there have been 30-plus bubbles since 1925 (a bubble being defined as at least two standard deviations away from a trend). Not much sign of rational investor behavior in that. More like 30-plus signs of gross inefficiency.
The theory being wrong would, in itself, be just fine (it would join a large pile of totally wrong academic theories) but the problem with the efficient market hypothesis is that it has burdened us with a terrible investment legacy.
I haven't space to spell out Montier's entire argument (although I recommend getting the book and reading it), but he blames it – I think, rightly – for pretty much every bad investment experience any of us have ever had with a fund manager. These range from index hugging to ludicrously over-precise forecasting and the industry's obsession with diversification and risk at the expense of what should be the real point of investing – making "maximum real returns after tax".
For bored business school students, this should be excellent news. It means they can chuck out their 1,093-page copies of Principles of Corporate Finance (the business school bible) and start looking for real value in investments instead. And it means that they might actually make some proper money over the long term. Why? Because while most investment strategies show no sign of being able to offer very long-term out performance for investors, value does.
There is plenty of evidence for this but Montier adds to it with a look (from 2008) at global value investing. Here, too, he finds that buying bargains works. If you'd bought the cheapest 20% of all stocks, regardless of industry or geographical location, between 1985 and 2007, he says you would have generated an average return of 18% – a 7% out performance against the index.
Value can even be shown to have worked in Japan: there, post-bubble value strategies have returned around 3% a year (not bad in a deflationary environment) even as the market as a whole has returned -4% a year. Those who have operated a "long value/short glamour" strategy have apparently done even better (12% a year).
So why don't we all invest like this? Fund managers like to say they do. Their marketing material tells us of their propensity to swim against the crowd; their contrarian outlook; their ability to seek out value in sectors that more conventional peers aren't looking at properly. Type "next Warren Buffett" into Google and you'll see what I mean.
It is all nonsense, of course. They just say it because they assume we don't understand how the CAPM works (which we mostly don't). In fact, fund management is generally nothing more than financial groupthink: managers in thrall to the theories they learnt at business school, to the idea that they should be properly diversified, and to the career risk of investing differently to everyone else tend to ignore value and benchmark themselves to everyone else instead.
And the rest of us? Mostly, our failure to buy value and sit on it has got nothing to do with investment theory. We're just impatient and want to see returns now, now, now. So if something doesn't move, we dump it (incurring the fees that doom our portfolios to long- term underperformance). No wonder we never make any money.
Everything you learn at business school is wrong," says GMO's James Montier in his latest collection of essays, Value Investing: Tools and Techniques for Intelligent Investing.
I didn't go to business school but I think I learnt much the same muck as my husband (who did) on the Swiss Bank Corp (SBC) graduate training course.
There we were taught about 'modern portfolio theory', listened to endless, boring lectures on the 'capital asset pricing model' (CAPM), stared blankly at mathematical explanations of option pricing models and occasionally had to take turns doing incomprehensible sums on the white board at the front of the lecture hall.
I remember it through a haze of confusion. But I did at least come out of the whole thing with a rough understanding of modern portfolio theory – as well as a vague sense that its assumptions (that markets are efficient, that investors are rational and that there is a mathematically definable trade-off between risk and return) didn't really make much sense.
Even then, I knew that nothing much was ever efficient (even SBC – it later turned out I was enrolled on the wrong course). And while I didn't yet know much about the irrationality of investors, the following five years working in Japan's manic-depressive market soon sorted that out.
The truth, as Montier points out, is that the efficient market hypothesis looks completely wrong. The prima facie evidence of this? The existence of bubbles.
The events of the last few years should have made it clear that there is no such thing as an efficient market. But for those still thinking that efficiency might be more resting than dead, Montier points out that there have been 30-plus bubbles since 1925 (a bubble being defined as at least two standard deviations away from a trend). Not much sign of rational investor behavior in that. More like 30-plus signs of gross inefficiency.
The theory being wrong would, in itself, be just fine (it would join a large pile of totally wrong academic theories) but the problem with the efficient market hypothesis is that it has burdened us with a terrible investment legacy.
I haven't space to spell out Montier's entire argument (although I recommend getting the book and reading it), but he blames it – I think, rightly – for pretty much every bad investment experience any of us have ever had with a fund manager. These range from index hugging to ludicrously over-precise forecasting and the industry's obsession with diversification and risk at the expense of what should be the real point of investing – making "maximum real returns after tax".
For bored business school students, this should be excellent news. It means they can chuck out their 1,093-page copies of Principles of Corporate Finance (the business school bible) and start looking for real value in investments instead. And it means that they might actually make some proper money over the long term. Why? Because while most investment strategies show no sign of being able to offer very long-term out performance for investors, value does.
There is plenty of evidence for this but Montier adds to it with a look (from 2008) at global value investing. Here, too, he finds that buying bargains works. If you'd bought the cheapest 20% of all stocks, regardless of industry or geographical location, between 1985 and 2007, he says you would have generated an average return of 18% – a 7% out performance against the index.
Value can even be shown to have worked in Japan: there, post-bubble value strategies have returned around 3% a year (not bad in a deflationary environment) even as the market as a whole has returned -4% a year. Those who have operated a "long value/short glamour" strategy have apparently done even better (12% a year).
So why don't we all invest like this? Fund managers like to say they do. Their marketing material tells us of their propensity to swim against the crowd; their contrarian outlook; their ability to seek out value in sectors that more conventional peers aren't looking at properly. Type "next Warren Buffett" into Google and you'll see what I mean.
It is all nonsense, of course. They just say it because they assume we don't understand how the CAPM works (which we mostly don't). In fact, fund management is generally nothing more than financial groupthink: managers in thrall to the theories they learnt at business school, to the idea that they should be properly diversified, and to the career risk of investing differently to everyone else tend to ignore value and benchmark themselves to everyone else instead.
And the rest of us? Mostly, our failure to buy value and sit on it has got nothing to do with investment theory. We're just impatient and want to see returns now, now, now. So if something doesn't move, we dump it (incurring the fees that doom our portfolios to long- term underperformance). No wonder we never make any money.
Monday, July 12, 2010
Stagflation
What Is Stagflation?
There is a lot of talk going around about stagflation, but many people have no idea what stagflation is. The term has only been around for about 40 years and is not used all that much, but suddenly it is being thrown around everywhere.
Stagflation is a blend of the words stagnation and inflation. It is used to describe an economy which is stagnating (or not growing) while also facing high inflation.
Typically, the Fed deals with economic stagnation by lowering key interest rates or adding to the money supply. These actions usually work to get the economy growing again.
On the flipside, when an economy is booming and people are making money left and right, inflation begins to rise. When this happens, the Fed typically raises interest rates thus making money harder to get. This slows the economy and inflation with it. So back to Stagflation…
In a period of stagflation, the Fed doesn’t know what to do. The economy is slow, so they want to lower interest rates and get it moving, but making money easier to get only makes inflation worse. The Fed has to decide what is more important: economic growth or inflation.
Right now, the U.S. economy is grinding to a halt, and very likely heading into a recession. Unfortunately we are also facing strong inflationary pressure as prices continue to rise. If we aren’t already in a period of stagflation, then it appears that we are headed straight for it. The last time the U.S. dealt with stagflation was in the 1970’s and it was not a fun experience.
Though the way we run are economy now is different than it was back then, some would argue that our current situation (housing and credit crisis) is far worse then the situation was in the 70’s leading up to that period of stagflation. I don’t know how bad it can get, but something worse than the 15 percent inflation and 9 percent unemployment seen during the past episode of stagflation doesn’t sound the least bit exciting to me. Personally, I will be heavily diversifying into foreign markets and things like gold and silver to protect myself, just in case.
There is a lot of talk going around about stagflation, but many people have no idea what stagflation is. The term has only been around for about 40 years and is not used all that much, but suddenly it is being thrown around everywhere.
Stagflation is a blend of the words stagnation and inflation. It is used to describe an economy which is stagnating (or not growing) while also facing high inflation.
Typically, the Fed deals with economic stagnation by lowering key interest rates or adding to the money supply. These actions usually work to get the economy growing again.
On the flipside, when an economy is booming and people are making money left and right, inflation begins to rise. When this happens, the Fed typically raises interest rates thus making money harder to get. This slows the economy and inflation with it. So back to Stagflation…
In a period of stagflation, the Fed doesn’t know what to do. The economy is slow, so they want to lower interest rates and get it moving, but making money easier to get only makes inflation worse. The Fed has to decide what is more important: economic growth or inflation.
Right now, the U.S. economy is grinding to a halt, and very likely heading into a recession. Unfortunately we are also facing strong inflationary pressure as prices continue to rise. If we aren’t already in a period of stagflation, then it appears that we are headed straight for it. The last time the U.S. dealt with stagflation was in the 1970’s and it was not a fun experience.
Though the way we run are economy now is different than it was back then, some would argue that our current situation (housing and credit crisis) is far worse then the situation was in the 70’s leading up to that period of stagflation. I don’t know how bad it can get, but something worse than the 15 percent inflation and 9 percent unemployment seen during the past episode of stagflation doesn’t sound the least bit exciting to me. Personally, I will be heavily diversifying into foreign markets and things like gold and silver to protect myself, just in case.
Saturday, July 10, 2010
Obama Is Taking Shots
Barack Obama Is Taking Shots From The Left And The Right
Barack Obama is getting attacked from all sides now, and it appears that no place is safe for him. On the left he is being attacked by Hillary Clinton, with accusations of plagiarism among other things. On the right he is being bombarded by supporters of John McCain, who are setting him up as a supporter of terrorists. I sincerely feel bad for the guy right now.
I’m not a big supporter of Obama, but I’m also not a supporter of low blows (I don’t support Obama because of his huge spending proposals and other polices, not personal issues). The latest blow coming from McCain supporters at a recent rally was especially distasteful. There the speaker who introduced Obama repeatedly called out his full name Barack Hussein Obama, and suggested that he was being friendly with our terrorist enemies. I was upset with Clinton’s plagiarism accusations, but this is 100 times worse. It would be one thing if they had proof that he is working with terrorists. But to accuse him of what amounts to treason just because the guy was born into a Muslim family (although it is debated whether they were even practicing) and has the middle name Hussein...give me a break. Not that religion even matters, but they guy is a renowned Christian now, not Muslim. All this does is make the McCain campaign look like an ignorant bunch of bigots, which is not exactly the image one wants to portray in a campaign.
To his credit, McCain did repeatedly apologize for the remarks made by his supporters, and he said that he expects that it won’t happen again. I certainly hope that is the case.
In every election, things eventually turn nasty, and it has been one of the biggest turn-offs to me for politics. For once, I would like to see the candidates fight a nice, clean fight and stick to the issues. If you have a problem with a candidate’s proposals...great, let’s debate them. Topics involving religion, race, and family...lets keep those out of it. Here’s hoping for a good clean Presidential race, whichever candidates it may involve.
Barack Obama is getting attacked from all sides now, and it appears that no place is safe for him. On the left he is being attacked by Hillary Clinton, with accusations of plagiarism among other things. On the right he is being bombarded by supporters of John McCain, who are setting him up as a supporter of terrorists. I sincerely feel bad for the guy right now.
I’m not a big supporter of Obama, but I’m also not a supporter of low blows (I don’t support Obama because of his huge spending proposals and other polices, not personal issues). The latest blow coming from McCain supporters at a recent rally was especially distasteful. There the speaker who introduced Obama repeatedly called out his full name Barack Hussein Obama, and suggested that he was being friendly with our terrorist enemies. I was upset with Clinton’s plagiarism accusations, but this is 100 times worse. It would be one thing if they had proof that he is working with terrorists. But to accuse him of what amounts to treason just because the guy was born into a Muslim family (although it is debated whether they were even practicing) and has the middle name Hussein...give me a break. Not that religion even matters, but they guy is a renowned Christian now, not Muslim. All this does is make the McCain campaign look like an ignorant bunch of bigots, which is not exactly the image one wants to portray in a campaign.
To his credit, McCain did repeatedly apologize for the remarks made by his supporters, and he said that he expects that it won’t happen again. I certainly hope that is the case.
In every election, things eventually turn nasty, and it has been one of the biggest turn-offs to me for politics. For once, I would like to see the candidates fight a nice, clean fight and stick to the issues. If you have a problem with a candidate’s proposals...great, let’s debate them. Topics involving religion, race, and family...lets keep those out of it. Here’s hoping for a good clean Presidential race, whichever candidates it may involve.
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