Finance | - Part 2

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Weekly Ramblings of an Australian Stock Trader - incorporating
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Category — Finance

Australia’s Shadow Banking Sector is Collapsing.

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Plenty of amusing stories are making the rounds today. Like the bond salesman who fooled Royal Bank of Scotland into thinking he had access to wealthy clients. After touring their trading floors and meeting clients and executives, it turned out the oddly named KK Ho wasn’t a bond salesman after all. Just an employee facing an imminent layoff.

A false flashy business card and name dropping is all it takes to fool a bank these days. It’s not much of a surprise though. The bankers do work for the government, with RBS 81% government owned.

The funniest part is that Ho’s story only emerged because of a court case brought by a former RBS trader. He alleges he was wrongfully dismissed for manipulating internal pricing systems. (Bankers are only supposed to manipulate external prices.)

With people like these in the finance industry, what can go wrong? The latest addition to our editorial team, Vern Gowdie, has more on that tomorrow. He also has a solution to evading the Australian financial industry’s fee rort. And Vern would know, having steered his clients through the bog when he was one of Australia’s most successful financial advisers himself. Now he’s gone rogue.

In case you missed it, Greg Canavan interviewed Vern here. You’ll also find Dan Denning’s interview in your inbox soon. In it Vern makes a shocking forecast for the Australian dollar. [Read more →]

August 8, 2013   Comments Off

How to Get the Government to Pay for Your Retirement.

How to Get the Government to Pay for Your Retirement

The terms ‘cut the grass’ and ‘mow the lawn’ are different ways of saying the same thing.

So it is with ‘franking credit’ and ‘dividend imputation’. Both describe the tax treatment applied to company dividends paid to shareholders.

Prior to 1987, company dividends were subject to double taxation e.g. Company made a profit of $1,000 and paid 30% company tax ($300). The shareholder received the dividend (after tax profit) of $700.

But then the $700 was subject to the shareholder’s personal income tax rate. Let’s assume their personal tax rate was 40% ($280 tax). Of the initial $1,000 profit, the government received taxes totaling $580 and the shareholder $420.

The introduction of the imputation system (franking credit) lowered the shareholder’s tax burden. In effect shareholders receive a tax credit for the company tax paid on the dividend. Franking credits represent the tax the company has already paid on the earnings it has paid as dividends.

Using the same numbers in the above example, the tax treatment of a fully franked dividend is… [Read more →]

August 6, 2013   Comments Off

That Squeeze You Feel is The Great Credit Contraction (Part II).

That Squeeze You Feel is The Great Credit Contraction (Part II)

Every single secular bear market (dating back to 1870) has started with a high price to earnings (PE) ratio (into the mid-20?s) and finished a decade or two later with a single digit PE.

High PE’s reflect the elevated social mood that accompanies a long period of prosperity. Low PE’s are the end result of markets grinding investor confidence to dust over a sustained period of time.

The current US Secular Bear Market began with the bursting of the Tech Bubble in 2000. At the peak, the S&P 500 index registered a nosebleed PE of 45-times. After 13 years of ‘zigging and zagging’ the S&P 500 index is barely above the high it reached in 2000. The current PE sits around 20x.

Firstly the current average is 25% above the long term average of 16x and well above the single digit PE’s recorded at the bottom of previous secular bear markets.

Whether it’s the mathematical law of ‘reversion to the mean’ or gravity’s law of ‘what goes up must come down’, the US share market has a lot more hard yards left in it yet.

Another question to consider is, ‘Do you think the global share markets would have recovered to present levels if central banks hadn’t intervened to the extent they have over the past four years?’

Based on the recent volatility caused by Bernanke’s thought bubble on ‘tapering’, the answer to the above is, ‘NO.’ [Read more →]

August 5, 2013   Comments Off

That Squeeze You Feel is The Great Credit Contraction (Part 1).

That Squeeze You Feel is The Great Credit Contraction (Part 1)

Sir Isaac Newton’s third Law of Motion states:

When one body exerts a force on a second body, the second body simultaneously exerts a force equal in magnitude and opposite in direction to that of the first body.

This law of physics has been widely interpreted as ‘for every action there is an equal and opposite reaction’.

Newton’s laws of motion have been in existence since 1687. Therefore it’s reasonable to assume they’ve passed the test of time and are in the irrefutable category.

The law of gravity is also irrefutable. Sadly poor old Sir Isaac Newton forgot this one when he invested in the early 18th century South Sea Bubble.

Reports suggest Sir Isaac lost a £20,000 (£268 million in today’s money) fortune in the bursting of the South Sea Company share bubble. Reflecting on the catastrophic loss, he remarked, ‘I can calculate the movement of the stars, but not the madness of men.

Newton was obviously a seriously smart man but the ‘need for greed’ overrode rational thinking. Therein lies the lesson for those of us who have much lesser IQ’s. Don’t think you’re smarter thanthe market and don’t let greed blind your objectivity. [Read more →]

August 1, 2013   Comments Off

How You Can Use Your Super to Earn 257,948 Tax Free

How You Can Use Your Super to Earn 257,948 Tax Free

Of course I am minimising my tax. And if anybody in this country doesn’t minimise their tax, they want their heads read, because as a government, I can tell you you’re not spending it that well that we should be donating extra! –Kerry Packer, comments to the House of Representatives Select Committee on Print Media, 1991

If the big fella thought the Government wasn’t spending your taxes too well in 1991, he would be horrified with the waste taking place today.

Politicians splash around billions of taxpayer dollars on quick fixes. This and the interest costs only add to the mounting federal debt.

If you’re fed up with your taxes going to waste, fortunately for retirees, there is a way to earn up to $257,948 (after July 1, 2014) without having to pay tax. That means you get to keep more of your hard-earned dollars.

Don’t Ignore This Asset Class

Superannuation – in spite of the constant meddling by cash strapped governments – is still the most tax effective method of saving and generating a retirement income in Australia.

But the very thing that makes super attractive – tax savings – is the reason many people think it’s complex.

The government wants to encourage people to save and build a nest egg to reduce reliance on the welfare system. In theory it’s a worthy aim.

Unfortunately the old rule of what the ‘Government giveth, the Government can taketh away’ applies to super. That’s especially so when they’re in search of some much-needed dollars.

The constant fiddling with the contribution rules (to minimise the amount claimed as a tax deduction) and withdrawal taxes, leaves most people scratching their heads on whether super is really that super after all. [Read more →]

July 30, 2013   Comments Off

Don’t Get Caught in the Market Crossfire.

Don’t Get Caught in the Market Crossfire

Markets are all in a flurry – Dow down, gold down, AUD down, government bond interest rates up. The only safe place in the last month has been in cash, term deposits and USD.

But remember, it will not always be so. There will be a time to exit cash – that time isn’t just yet.

So what is causing the great sell off in non-cash investments?

  • Is it China’s central bank refusing to supply liquidity to its cash strapped shadow banking system?
  • Is it Bernanke hinting at merely tapering (not stopping) the Fed’s $85 billion per month bond and mortgage purchases?
  • Is it Japan’s print and be damned policy?
  • Is it rising unemployment in Europe?
  • Is it social unrest in Turkey, Brazil and Syria?

Certainly one or more of the above global issues are having a negative impact on market sentiment. [Read more →]

July 1, 2013   Comments Off

Buyer Beware: Japanese Government Bonds are Moving.

Buyer Beware: Japanese Government Bonds are Moving

Last week I gave a clear warning that Japan was at the epicentre of market moves world-wide. I gave that warning before the large fall in their stock market.

Of course I had no idea that on the very day I wrote my article we would see huge gyrations in their stock market. But I have followed the immense moves occurring in Japanese government bonds (JGB’s) and knew we weren’t far away from some fireworks.

And it seems to me the worst is far from over…

The falling bond market is a completely sensible reaction by investors to the Bank of Japan’s (BoJ) threat of seeking 2% inflation. Most are of course sceptical that the BoJ can achieve a 2% inflation rate. But it’s hard to see anyone buying bonds at a 0.5% yield when the central bank is doing all in its power to ensure investors ultimately receive a negative real yield.

Kuroda, the BoJ governor, has even met with large holders of JGB’s begging them not to sell out. That course of action won’t work. The first man out the door is better off. Who wants to be left holding the bag if Japanese government bond’s collapse further?

Even though the Bank of Japan is soaking up 70% of all new issuance, Japanese government bonds are still selling off. I’m sure they still have tricks up their sleeves (they always do), but I think we are still in the early stages of a large exodus out of Japanese bonds. [Read more →]

May 30, 2013   Comments Off

Why Bank Stocks have Outperformed Resource Stocks…

Why Bank Stocks have Outperformed Resource Stocks…

It’s not often we agree with US Federal Reserve chairman, Dr Ben S Bernanke.

But over the weekend, Dr Bernanke claimed, ‘Both humanity’s capacity to innovate and the incentives to innovate are greater today than at any other time in history.

We couldn’t agree more. It’s why we’ve hired a specialist analyst – Sam Volkering – to help us launch a new technology investment service. While others preach doom and gloom, and fear modern technology, we look forward to it. Why? Because we believe technology improves the quality of life.

We’ll reveal more on this new service in the coming weeks.

Of course, we’re not about to give Dr Bernanke a free kick on his running of US (and indirectly, global) monetary policy. It has been a total disaster. Despite that, it has opened up a lot of opportunities for investors to make money, and that’s set to continue… [Read more →]

May 21, 2013   Comments Off

What The Latest Interest Rate Cut Could Mean For You.

Can you feel that?

Sure you can, right between the shoulder blades.

That’s the Reserve Bank of Australia (RBA) lowering interest rates to a record low. And if the banks cut savings rates by the same amount as the RBA rate cut, it could mean a big cut to your savings income.

A word of warning: don’t relax yet. The odds are the RBA will keep hold of that knife and give it a twist within the next couple of months as it sends interest rates even lower.

So, this is bad news right? It is. But it’s also an opportunity. I’ll explain more below…

Central bank interest rates don’t just impact savings rates. It impacts mortgage rates and dividend yields too.

In fact for many people the impact on mortgage rates is more important than the impact on savings rates.

Even though Australia supposedly has a positive private savings rate (I don’t entirely trust the official numbers; even the RBA says the savings rate isn’t accurate), about a third of the population has a mortgage and many more have investment property loans. [Read more →]

May 13, 2013   Comments Off

The Next Wall Street Financial Scandal Has Arrived.

The Next Wall Street Financial Scandal Has Arrived

Well, it looks like the major financial institutions can’t learn a lesson. They’re neck deep in yet another financial scandal of global proportions.

U.S. and international securities regulators investigating manipulation of LIBOR, the world’s most important set of benchmark interest rates, have uncovered another price-rigging scheme, this one in the $379 trillion market for interest rate swaps.

$379 Trillion, not Billion. Trillion.

The Commodity Futures Trading Commission (CFTC) has already issued subpoenas to Wall Street’s biggest banks and is interviewing a dozen former and current brokers from the Jersey City, NJ, offices of ICAP Plc.

For investors in the big banks, new revelations may put an end to the upward push to the groups’ stock prices, whose earnings of late have been helped by reductions in reserves meant as a cushion against future asset hits and litigation expenses. [Read more →]

May 6, 2013   Comments Off