Market Report - A reversal of fortunes?

Next Tuesday the RBA will meet again and it is almost certain, given the current economic conditions, that the official interest rate will be reduced. It is also likely that we will see further cuts over the next year which is exciting news for those who currently hold high levels of debt.

Reducing interest rates will go a long way to restoring business and consumer confidence, and with the increased confidence we can expect share prices to rise. While this is positive, investors have been hit hard over the past 12 months, and their confidence will take some time to restore. Historically, investors tend to let their emotions override logic, which then affects their ability to make rational decisions in regard to the management of their portfolio. While many investors have rightly exited the market during these volatile times, unfortunately many will wait too long before considering the opportunity to get back in, which is usually after the profits have been taken by the wise and educated.

So what can we expect in the share market?

Last week I indicated that the All Ordinaries Index was displaying signs of indecision, and that it could not continue to stand still as it had done over the previous 4 weeks. This week it appears as though the market has finally decided on a direction and the good news is it is up. But the question on most people’s mind is this just another short term run or is the upward move sustainable?

Today the market has traded to its highest levels in a month; therefore I believe in the short term it will continue to rise for the next 1 to 4 weeks before it moves down again. Right now the longer the move up in both price and time the better. It is still too early to confirm that the low of 4829 points on 5 August is the long term low I have been expecting, but if it is then get ready for a 12 to 18 month bull market. Although I am now more bullish in my outlook, caution still needs to be exercised as it is possible that the current move up is a suckers rally and that the market could fall to my next price target of 4300 points.

This report is from Dale Gillham , chief analyst of share investment company Wealth Within and a regular contributor to Finance ViewPoint.
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Advice for new home buyers and the key questions to ask

Beginner buyer left a comment on a past post written by EH on his journey to successfully buyin a home a few weeks ago. Here was his comment and EH’s response:

Beginner buyer: “My partner and I are in our late 20's and we are thinking about buying a house probably in the next 12-18 months. We have a set a plan so that our saving can get underway however the more I talk to people about buying a house the more things I hear. Is there an oracle for buying a house? A book that will help to explain all the ins and outs of buying a place? You mentioned building inspections etc but what else is there? Any other advice you could offer for a couple who have just decided that they want to buy a house would be great.”

(Response from EH) I think you are already doing the right things. You have a savings plan starting which is a key step. By sticking to a savings plan it will give the two of you a great idea as to how disciplined you both are. While a savings plan sounds great in theory, it is really hard to stick to and you have to work at it all the time. The impulse buys; especially around birthdays and Christmas when you think i've an extra few hundred dollars I can spend really kill a savings plan. It will also really let you both know what your repayments can be, and how you find your lifestyle under these conditions.

You may need to tweak your savings plan as you get used to it. One of your comments also is a great step. You are talking to people. The bad news is that there is no Oracle, though there is plenty of reading material out there. Buying a house is an emotive thing and everyone has their own perspective on what a “great” house is. What one person says is great about their place won’t necessarily fit with your ideals.

While there is no one location for all the answers, I can help with some of the questions I asked friends and relatives. I was told as a kid that age is a high price to pay for experience. I dismissed it at the time but now I understand how true that is. If you can leverage experience and knowledge off someone older without having to learn those lessons yourself, you save a lot of stress and time. So ask questions!

Firstly go into any fact finding with a sense of ruthlessness. If you do not, you could get caught up in the emotion of buying a house and find yourself with a house that does not really reflect what you had as your dream. Some of the questions below are a bit personal and you may have to choose your audience with regards to each question. I've tried to give some reasoning behind each question... there are plenty more that you will want to ask yourself. Try to document some of the key answers that are important to you. A positive and negative list for a suburb, type of house (2 story or single), and location in suburb is also a great help.

Why did you buy here? Pretty easy to start with and if a person has lived in a similar are that you want to live in, they will be able to give you real life experience on what makes that suburb good for them - no book can give you this!. Be careful most people will tell you they got a great deal or a great location. Most people do not want to make themselves look like they made an (sometimes costly) error.

What don't you like about this area? Be specific, remember be ruthless, this could be a 20 year investment here, at least a 5 year one if you hope not to lose money. Press them on this one, their insight here means you do not make the same mistakes. A pub might be 1km away but on Friday and Saturday nights drunken patrons walk past this area to get to another. Or a sporting field is close by and people park out the front each night for training and on the weekends for games. Instead of being a retreat from the world, your ideal home affords you no peace.

Did they build a house or buy an existing one? This might be help if you are looking for land. Remember, it takes time or a lot of money to do landscaping. Picking out carpets and tiles, door handles, toilets, basins, kitchen appliances. The list goes on. Many of my friends and family who have built their own home are over it and frustrated by the end of it. This is not to say to build yourself isn't rewarding, just that it is a stressful time.

What is it about the house that makes it good/bad ? Do they have a kitchen they love? Why? Is it the bathroom or just the general layout? Again pressing on these points helps you understand what you may like. A place may have a lovely open plan that looks great in a glossy magazine but living in it is a nightmare. If you want to heat or cool a living space you have to heat or cool 5 rooms instead of one. If you have kids, a TV on in one area can be heard in three other rooms. That being said, an open plan in a temperate climate may be the ideal choice.

If you had your time again what would you do differently? Again leveraging experience without having to pay the 'fee' of aging 5 years to get the knowledge. I love the answers I get from this question. Some people may close down and say nothing (yet may have updated the kitchen twice), others, it is a bit of creative freedom and you really get the feel for what they learnt along the way. My brother in law did up his kitchen, what was a wreck is now a lovely room. It almost invites you to come in a cook something. However, he has since had children. The cupboards he picked cannot be locked, the oven is on the floor so small hands can get burnt. The new tiles he had put in are scratched as plastic toys and bikes are run over it.

There is plenty more, one last item though that I would have factored in at the time (see even I am still learning and have a few 'if only’s') is the layout of the block and sun. The place we have (while we love it) is very cold in winter (we are behind a mountain), a factor I didn't do enough research on. Summer I knew would be hot and the layout of the house is designed to keep things cool. However in winter for about 6-8 weeks of each year the sun does not hit the house, the house becomes very cold and heating bills are much higher. I am looking at putting in solar panels to address this!

Keep asking questions. Be patient with one another. If you do the hard yards, it is stressful, but worth it, just be aware of the stress it puts on people. A loving relationship can fall apart so communicate, give each other space and constructive criticism is helpful.

Best of luck to the two of you.
EH.

Related Post : Tips on successfully buying a house

Weekly market report - Market timing myths

With the significant pull backs in the market of late, the managed funds have commenced their old clichés’ of ‘time in the market’ rather than ‘timing the market’ in an attempt to allay investor’s fears. The issue I have with this is that ‘time in the market’ is probably the most perpetuated myth in the industry. The reason why we hear the words ‘buy and hold’ or it is ‘time in the market that yields returns’ is because the industry cannot time the market. The funds are simply too large to manoeuvre with any speed. Consequently, the public is cautioned through advertising slogans about the perils of marketing timing.

Many in the industry claim that ‘market timers’ sell when a market is low and are out of the market when the inevitable rally occurs. They assert that market timers’ run the risk of being out of the market at the trough of a decline when sentiment is at its most negative and potential returns are at their greatest. To substantiate this argument they suggest that if you are out of the market on the 20 biggest days that the market is rising over a 10 year period, your return will fall substantially. However, the inverse of this argument is that if you are out of the market on the 20 biggest days that the market is falling, it stands to reason that your returns would surpass the market average over any 10 year period. After all, markets don’t crash up, they crash down.

So what can we expect in the share market?

Last week I stated that the All Ordinaries Index was displaying signs of indecision, and this week is no different. It is almost as if the market is in a holding pattern until reporting season is over given that the market has opened and closed within a 100 point range in each of the past four weeks.

Something has to give as the market cannot stand still. The institutions have accumulated $100’s of millions of dollars over the past year and they are waiting for the opportunity to enter the market. Once they do, it is highly likely that the market will rise. Before you get too excited, however, it is still possible that the market could fall to my next price target of 4300 points. For the market to indicate it is starting the next bull-run, it needs to hold above 4800 points in the short term and rise to above 5111points over the next few weeks.

This report is from Dale Gillham , chief analyst of share investment company Wealth Within

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Compare grocery prices across the country

The federal government has launched a new website to allow shoppers to compare national grocery prices, in a bid to ease the pressure on family budgets. The GROCERYchoice website will give consumers a snapshot of the price of a typical basket of goods in supermarkets across the country.

The new website comes after the consumer watchdog released its report into grocery prices, which found there was not enough competition among supermarkets. The Australian Competition and Consumer Commission (ACCC) recommended introducing unit pricing, changing some anti-competitive impacts of zoning and planning laws, and amending the Horticulture Act.

Federal Opposition Leader Brendan Nelson has warned that the government's moves on grocery prices are nothing but a "stunt" and will not help consumers.

The government's website is at www.GROCERYchoice.gov.au. I had a quick look at it and from discussions with other people it is a good start, but not very accurate. Still it is a good guide worth considering.

Beautiful Sydney, Australia

Even though it was ranked tenth in a business week survey of best places to live, I think it is the number one. The harbor, sunshine and people are what I miss the most about Sydney! The picture says it all. Cheers, Andy.

More vacant US properties for sale than entire housing stock of Australia

Compare shares brings us comments from National Australia Bank's (NAB) chief executive John Stewart, who says the bank has no more exposure to the troubled housing market in the United States but expects the situation in the US will worsen. On Friday, the National booked a $830 million write-down on risky US mortgages, which sent the bank's share price plummeting.

"This is the bottom for us for housing in the US because we are now cleared out," Mr Stewart told ABC TV. Mr Stewart said the situation for the US housing market would probably worsen. "Things are going to get worse," he said. "There are more than 18 million vacant properties for sale in the United States just now. That's more than the whole housing stock of Australia."

Mr Stewart said that even before the US housing crisis started, house prices were dropping as a result of over-stocking. "They had just built too many houses, so the market was soft," he said. "Then you got the crisis that started with sub-prime that has now moved into different asset classes". He said it was a worrying time for the US economy and it would be some time before it recovered.

NAB may have no exposure, but if the US goes into a prolonged recession, then so will Australia and the rest of the world. In fact if it wasn't for the resource boom, Australia would already be in a recession. The other side of this argument is that the US market could be bottoming at the end of the year and it may be a good time to invest in US related equities. The best way to do this via a managed fund.

Using extra cash flow to reduce debt levels

This week the Reserve Bank has hinted at a possible rate cut in the near future, and with oil prices falling heavily over the past few weeks, it appears as though the table may be turning for consumers. While it is still too early to determine whether the worst is over, any reduction in the cost of living has to be beneficial for the economy and the share market.

That said it is important to understand that high levels of borrowing has fuelled the subprime mortgage meltdown and over the past two decades Australians have taken on increasingly high levels of debt to the point that we are now in a negative savings pattern. Given this, it is possible that we as a country may have our own mortgage meltdown not unlike what occurred in the US sometime in the future. I would highly recommend consumers use extra cash flow to reduce debt levels in the coming years and be more conservative in the future when using leverage.

This report is from Dale Gillham , chief analyst of share investment company Wealth Within

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Financial considerations when buying a house from a tax consultant and accountants perspective (Part 1)

This edited article has been provided to Finance ViewPoint by Raj Kuckreja CA, of Kuckreja Accounting and Taxation Services Pty Ltd (Phone: 02-9708-6978). The information in this article is general in nature and DOES not represent individual financial or taxation advice. Liability limited by a scheme approved under the Professional Standards Legislation.

Purchasing a house has to be thought of from firstly from a financial perspective. The rest will come from there. Before even deciding on a location or any other issue, you need to consider financing. This will be the driving factor on how much you are willing to pay. Important financing considerations:

1. NEVER view this as how much the financial institution is willing to lend, rather go online, and work out your monthly repayments for different borrowing amounts. Consider how much you can afford to repay with one salary and an absolute worst case scenario interest rate (for example 4% higher than current rates or a 50% increase in your repayments)
   
   
2. Try and avoid paying mortgage insurance whenever possible. This insurance does nothing for you; rather it is to cover the bank’s risk – which you are charged (paying) for. The best way to avoid this is either:
1. Ensure you have saved 20% of the purchase price (which is the deposit you want to aim for) plus stamp duty and legal costs; or
2. Borrow the 20% plus on-costs using security of another property (e.g. parents property if they have surplus or full equity in their home).
   
   
3. The combination of factors described in points one and two will then determine how much you can afford , which will help determine if it is the right time to buy
   
   
4. If the above factors limit your choice too much, consider purchasing the property as a rental investment first and then eventually moving into it. There are taxation implications to consider, for which you should consult a taxation advisor. This strategy can be very effective in helping you afford the property you want. (In the interim period consider living with parents or renting a much cheaper place).
   
   
5. If your choices are limited try NOT to think of buying a house for a short term. Having seen many clients and friends do this, it makes no sense from a financial perspective in most cases. The cost of buying and selling can easily get up to the $40k mark (when you consider stamp duty, legal fees, borrowing costs and agent fees on sale).
   
   
6. In most cases purchasing a house makes no sense for a short term investment. Especially when you consider how cheap it is to rent in comparison to loan repayments. There are studies showing mortgage repayments are often close to double rental payments. When you consider how little principle you actually repay in the first two years of a loan – I am sure a financial consultant will be very wary of this strategy.
   
   
7. With this in mind obtain loan approval before you start and be patient. Also consider reviewing your budget / strategy with an appropriate advisor (e.g. you accountant or financial advisor).

This concludes part one of the article. Look for more taxation, financing and loan related items to consider in Part 2 (to be published shortly)

World's Top 10 places to Be An Expat

If you are thinking of relocating overseas for the expat lifestyle then this article could be just the start of your journey. If you are already overseas, what do you think of the findings? I was surprised with some of the destinations that came up, though overall it is a pretty fair assessment,

Forbes brings us the story of the World's Best Places to be an expat. according to a HSBC Bank International study surveying 2,155 expats around the world. Here is the list:

1. Singapore - The tiny island country is the best place to live if you're an expatriate. If you can withstand the scorching summers and drenching humidity, you can have a life that is far more luxurious than the one you currently enjoy at home, including everything from a nanny for your children to a swanky central accommodation complete with a swimming pool.

2. The United Arab Emirates (UAE)/Dubai is tied for second place. The UAE, with no income tax, perhaps unsurprisingly does very well when it comes to saving and freeing you up to enjoy its swanky hotels and shopping centers--all reasons why it's the best place for luxurious living, according to the survey. See my piece on the pro's and con's of moving to Dubai, the main draw in the UAE for expats.

2. USA (tied) - Expats often get posted to corporate headquarters and command high salaries. Especially for Europeans, who are used to the high cost of living within the euro zone, life can get a lot more luxurious in the U.S.

4. Belgium - Capital city Brussels, home of the European Union headquarters, tends to attract expats for long periods of time, while decent accommodations are available and affordable.

5. Hong Kong. Attracts the biggest earners, with almost half of expats earning more than 200,000 U.S. dollars a year

6. Canada, Germany and Netherlands (tied). Like the US, these countries have a number of multinational headquarters.

9. India. When it comes to saving the pennies, there's no place like India. The low cost of labor, private health care and dining out all compensate for accommodations, which can be extraordinarily pricey, but below the standards found in other top expatriate destinations. "We were surprised by earnings in India. The huge demand for human capital and people with experience in management, financial services and the IT (information technology) sector means that expats have been able to demand increasingly higher salaries," says Aaron Le Cornu, deputy chief executive of HSBC Bank International.

10. China and Australia tied for 10th place.

Overall, it is a good time for those who get the opportunity to be posted abroad. More than half of expatriates are not only able to invest and save more, they can also spend more on shopping and socializing while abroad. The global expat population has continued to boom--according to the World Bank's Global Links Report 2007, the number of people living outside their home country has more than doubled since 1980 to 190 million!

The full article with more information can be found at Forbes.com

Related Post:
- Is Dubai the place to be? A review.

My super is down 15%

I recently received my Colonial first state superannuation half yearly statement and it showed the value of my portfolio is down almost 15% from January 2008 to July 1st 2008. Ouch. What was more annoying was the $500 or so in fees charged! Unfortunately there is little I can do about it, other than change fund managers. However given how bad markets have been this year I don't think switching now would make much of a difference. Here is what they had to say for justifying the poor results. Provides a good recap of events to date, but doesn't sound like a very optimistic or convincing outlook going forward. I will definitely be taking the time to review my superannuation investment strategy and allocation going forward. Have you?
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Your June statement and your investment performance

Since January of this year share markets have fallen dramatically. You may be disappointed by the current value of your investment and this is understandable, however it may reassure you that over the long term the general trend of share markets to date has been up and many investors would have received some healthy returns over the last five years. Over the past 20 years to May 2008 the Australian share market has returned 10.99% pa1 and the property market has returned 10.32% pa2. This long time period includes many significant events which severely impacted the market at the time, however those who had the courage to stay invested through the inevitable downturns have been rewarded for their patience.

With markets considerably lower than their previous highs, this may not be the most ideal time to make changes to your investment strategy. Although it may be tempting to switch your investment to something that has delivered better returns over the last 12 months, chasing last year's winner may not be a sensible strategy.

What is happening in the share markets?
From mid-March to mid-May, share markets began to recover, largely due to a series of aggressive interest rate cuts in the US and cash injections into financial markets by central banks around the world. Strong commodity prices, particularly coal and iron ore, and takeover activity also helped the markets to recover. Bidders believed that the takeover premiums included in the current prices offered long-term value. This type of activity was building confidence and suggested that these companies were optimistic about the future.

From mid-May to the end of June share markets took another turn for the worse. Higher oil prices, higher interest rates and concern over slowing economic growth saw investor nervousness return and share markets fall. Although higher interest rates are slowing activity in Australia the economy is still growing and the resources boom is not over. This should be positive news for the Australian share markets over the remainder of 2008 once investor confidence returns.

Have we seen the bottom of the market?
The immediate crisis appears to be behind us, although volatility does remain. However the problems we still face relate to the pace of economic growth in the US and Australia. If higher interest rates in Australia slow the economy more than expected, companies may issue further profit downgrades or profit warnings. Of particular interest will be the profits of banks. Banks make up a large proportion (around 20%) of the share market and therefore have a significant impact on the performance of the Australian share market. Banks have come under short-term stress due to rising interest rates. Banks have had to pay significantly more for the funds they borrow in global capital markets and this will affect the demand for loans by their customers for at least the remainder of 2008. Over the longer term it is unlikely that the banking sector will dominate the market as much as they have done over the previous decade or so.

The share market should recover over time as US sub-prime and other issues are worked through and focus is placed back on the future earnings capacity of companies.

Does the share market still offer good investment opportunities?
Market sentiment can lead to unpredictable and volatile investment returns. What is important is the need to focus on the underlying fundamentals of the Australian share market. Despite the gloom in the markets we would do well to remember that parts of the Australian economy are still booming. The resources sector has seen the prices of coal and iron ore rise significantly. Share prices in the resources sector have recovered most of the ground lost in the early months of 2008 and although we are still in drought the rains over much of Australia should assist rural incomes and rural exports.

While the market will always have ups and downs Australia remains well placed to grow over the next five to ten years. This means that opportunities are likely to be ahead for those who invest in the share market.

What might the future hold for the rest of 2008?
Current market sentiment is that the outlook for the rest of 2008 is relatively positive for a number of reasons, although it is likely we will continue to see some volatility over the short to medium term. In the medium term, positive drivers such as the resources boom and the Reserve Bank of Australia's commitment to keeping inflation on an even keel should help company profits and support the Australian share market.

On the global front, the global economy is expected to slow, at least for the remainder of 2008, from its fast pace of growth over the last three years. Developing economies such as China continue to report strong economic growth that is not as dependent on the US economy growing.