BHP-RIO, Round 1 over for now

For over a year BHP has been aggressively pursuing a takeover of RIO, however, it surprised the market this week by calling it off. Whilst the announcement was enough to cause a rally in the price of BHP, the same cannot be said for RIO as its shares fell around 35%. RIO has now been left to battle with its significant debt, which has brought into question whether a capital rising is likely in the near future.

Overall I think the decision was a good one as it will maintain competitive tension in commodity prices between the two players, which will potentially result in lower steel prices. That said I don’t believe BHP is finished with RIO. Rather the recent announcement is more like half time at the football, with the game likely to resume sometime in the future. Given the current share price of RIO, it is likely that BHP will reconsider the idea of a merger when the economic clouds start to clear– perhaps next time they may only need to offer 1.5 shares for each RIO share!

So what can we expect from the market this week?

After falling to lows last Friday morning (21 Nov) not seen since August 2003, the All Ordinaries recovered to close higher for the day. The recovery has continued this week with the gains providing encouragement that we may have seen the bottom but we won’t have confirmation of this for at least another month.

The hot question on most people’s lips over the past 6 months has been are we at the bottom? Trying to second guess the inevitable bottom on a share or market, for that matter, is high risk and has cost many people a lot of money over the past 6 months. Remember smart investing is not about getting the cheapest price rather it is about getting in at the safest price.

It is for this reason why I continue to say that it is better to wait for confirmation that a market or share is rising before buying. While I do believe it is possible that we may have seen the bottom last week, it is still too early to tell. That said once the bottom is confirmed, my expectation is that the market will rally for at least two months and possibly up to eight months. For now I still encourage all investors to sit tight as you will be rewarded for your patience.

This was a weekly report by Dale Gillham, a best-selling author, share market expert/educator and the chief analyst for share investment firm Wealth Within.

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Tips to Pay off your Mortgage Sooner

Anyone who has ever had to pay off a mortgage will tell you they would love to pay it off before the term, but most people will continue to chip away at their loan on autopilot. A proactive strategy can cut your loan term from 30 years to less than half in some cases. Australian Mortgage Options managing director Robert Projeski offers ways to own your home sooner.

1. Pay your mortgage as you receive your income eg. fortnightly or even weekly. Doing this cuts down on interest payable and will save you a lot of money over the course of your home loan. If you are super focused, pay your mortgage weekly which will reduce interest further again.

2. Set up an automated recurring payment for your mortgage payments. This is usually free of charge and means that you are always on-time and can’t over-spend on other things leaving you short to meet your payment obligations.

3. Park the large lump sum into your mortgage account eg. if you get $2000 back from your tax return, receive dividends from other investments or get bonus payments from your job, make a large payment towards your mortgage. These large lump sums can cut years worth of interest off the loan.

4. List your regular expenses and you will find 1 or 2 items that you can do without. This will make a big difference to either your cash flow, freeing up disposable income to park in your mortgage account.

5. Increase your repayments while rates are coming down. You can cut up to 2 years off the life-span of your loan by paying an extra $20 to $50 on each payment. This may just mean cutting out an extra cup of coffee here or there or once a week taking lunch to work rather than buying it occasionally.

6. Have your wages paid directly into your home-loan account - you will need a loan with re-draw or line-of-credit type of facility so you can have unlimited access the funds for living expenses etc. This will greatly reduce the interest that you pay as the interest is debited at the end of the month and usually calculated daily.

7. Offset your loans with a savings account. This is called mortgage offsetting, where as the amount in your savings account (earning interest) is calculated/subtracted against the actual interest charge against the loan amount, then the interest is calculated only on the balance. For example, if your loan is $400 000 and you have $100 000 in savings, this equate to $300 000 on which you actually pay interest. This of course greatly reduces the amount of interest you effectively pay and will save you years on your home loan.

8. Perform a mortgage health check. Sometimes you just have to admit your loan might not be the best for you anymore. Your loan may have been superseded as a product. Interest rates may have changed drastically, leaving you better off with a variable rate than a fixed one. In that case, look at re-financing whether it is with your existing lender or a different one. Go to a home loan lender or broker to make sure you do get the best deal. Don’t just go to one provider as usually they will only offer you their products. To get a full scope of available options talk to a specialist who has access to various funders and lenders. They are in a competitive market and will try to gain your custom – let them earn it.

9. When re-financing, consider pooling or consolidating any other loans eg. (car or personal) and credit cards (of a much higher interest rate) into the one loan as the savings often will outweigh the slightly higher loan amount.

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Be Grateful for your Job

At times, like most people, I find myself exhibiting signs of losing interest in my job. I even find myself browsing job sites (while at work!) to see what is out there with the hope that the "grass is greener" on the other side. However, in this tough economy with thousands of people losing their jobs, I should instead be grateful that I have mine and appreciate the associated benefits. Here are five things to remind myself as to how lucky I am to have a job for now:

1. I get a paycheck which allows my family and I to live and and have fun outside of work. We all wish for a higher paycheck, but having a steady paycheck is better than none at all.

2. I can afford private health insurance and unlike millions of others, don't have to worry about waiting times, financial hardship and treatments if I get sick. This piece of mind is priceless.

3. I work with people who have the same struggles as me and everyone goes through highs and lows. I should be happy that I am a valued member of my team/company and if I wasn't, I wouldn't have this job now. In some way I directly or indirectly help people and thereby make a difference.

4. I have access to resources, facilities and people. which means with a little bit of effort I can learn something new every day. Also, the free coffee is a nice perk!

5. I do not have to deal with recruiters, the job searching process and inefficient government unemployment agencies.

[Feel free to suggest some more]

So when you are feeling low or having a down day, make a list. I know lots of people are looking for "fulfillment" from their jobs, but remember it is called work for a reason. In fact I would argue that if your job defines you and it is the only way you can find happiness then most likely you are not focusing enough on the important things in life - family, health, learning - which should be the real sources of your fulfillment.

However, if you cannot make a list of at least 5 things you like about your current job, then maybe it is time to move on. Just ensure you take into account all the factors associated with changing jobs. Gotta get back to work.....

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Australian business' doing it tough

With a tough economy, weakening dollar and lower consumer spending, Australian businesses are finding the going tough. Business confidence fell to a record low in October, according to a National Australia Bank survey. The bank's confidence index fell to minus 29, down 21 points from September, its lowest reading in the survey's 19-year history. So it is not a surprise to see the S&P/ASX Index of stocks down 2% today, extending this year's decline to 38%. Similarly the Australian dollar has plunged 32% since reaching a 25-year high of 98.49 cents on July 16 (US dollar parity is now a pipe dream). With one in four businesses finding it harder to borrow, expansion and hiring plans are also on hold for a number of companies.

"Fear reigns supreme,'' said Alan Oster, chief economist at National Australia in Melbourne (via Bloomberg) "Continuing volatility in global equity markets, emergency financial packages, falling commodity prices and continuing talk of a global recession have finally broken business optimism. Most concerning is a drop in forward [manufacturing and retail] orders to near recessionary levels."

This story is similar all over the world as the global recession spreads. Talking to business owners back in Australia, there is a definitely a sense of apprehension in getting through these tough times and no doubt some won't make it through. However the ones that do will be much stronger and be able reap the benefits of lower competition when the economy starts to improve.

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America: Where all things are possible. President Barack Obama

Even if you live outside of America, it is worth listening to Barack Obama's victory's speech (25 mins). I watched it live and even wathcing a replay is moving.



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Interest Rates and the Economy

The economist brings a good summary on the outlook for the Australian economy and interest rates:

Australia's central bank, the Reserve Bank of Australia (RBA), has made its second drastic interest-rate cut in the space of a month. The move is a further sign that, despite still-high inflation, the RBA's overriding concern now is to do as much as possible to limit the economic impact of the global financial crisis by loosening credit. The move comes amid growing fears about weakening domestic demand, falling commodity prices and recession in key export markets.

The RBA cut its policy rate, the overnight cash rate, by 75 basis points from 6% to 5.25% on Tuesday (with effect from November 5th). In line with a succession of very large emergency rate cuts by central banks around the world, the RBA's decision comes only a month after a previous rate cut of 100 basis points. The RBA had started its monetary loosening in early September, with a 25-basis-point cut. As a result the overnight cash rate has fallen by a cumulative 200 basis points in two months, to its lowest level since December 2003.
Consumer price inflation is at a multiyear high of 5%, according to data published only two weeks ago. Moreover, the currency has weakened dramatically against the US dollar in the past several months, falling by 28% since the end of July. Both conditions—high inflation and a weak currency—would normally discourage rate cuts. Yet the RBA's willingness, nonetheless, to loosen monetary policy aggressively reflects the extent of official concern about the fall-out from the global crisis. Australia is in a similar position, in this respect, to South Korea, which has also recently slashed interest rates despite still-high inflation and a sharp fall in the US-dollar exchange rate since the start of the year.

Although inflation appears to be far above the RBA's comfort level, as defined by its target range of 2-3%, the actual or expected impact of the global financial crisis on domestic demand, commodity prices and exports will lessen inflation risks. As the RBA admits, the depreciation of the Australian dollar means that the inflation rate is likely to take longer to fall to within the target range than would otherwise be the case. But what it calls "global disinflationary forces" will naturally cause inflation to ease.

Certainly, the sharp fall in many commodity prices since the onset of the crisis will have a moderating impact on inflation. So too will a softening of domestic demand, as anxiety over the financial crisis causes highly indebted households—already feeling poorer as a result of lower equity prices—to try to save more. Lenders will remain extremely cautious about credit risks, given the salutary recent experiences of overextended US and European banks. With salvation from the external sector looking increasingly unlikely—Australia is even worried about a slowdown in Chinese demand for its exports—economic growth looks set to slow sharply. This is despite lower interest rates and the recent announcement of an A$10.4bn (US$7bn) stimulus package. The Economist Intelligence Unit forecasts real GDP growth of 2.4% in 2008 and 1% in 2009, down from 4.2% last year. We expect inflation to ease to an annual average of 3.5% in 2009, from 4.7% in 2008.

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Is Cash really a good investment?

During the past month investors have sold investments and moved their funds into cash following the announcement by the government to guarantee cash deposits in an attempt to allay fears from the fallout of the credit crunch. But you have to ask whether moving funds into cash is really a smart move for investors? In my opinion cash is not a good investment vehicle for building wealth, rather it is a vehicle for holding liquid assets while you wait for opportunities to invest. In my book, a good investment must deliver capital gains and income, with shares and property being the ideal investment for individuals wanting to build wealth.

Currently the inflation rate is around 5 per cent, and with cash deposits earning between 6 and 7 per cent investors are really only treading water by placing their assets in cash. If we add in the fact that investors will pay tax on the interest they earn on their cash you can see why I believe there is very little validity for considering cash as an investment. For investors with a long term view, it makes more sense to buy and hold solid blue chip shares such as Commonwealth Bank that pay a dividend yield of 6 per cent tax paid. After all, if the banks are safe enough to deposit your cash with, surely owning the bank is just as safe.

So what can we expect in the markets? November 1st was exactly one year since the all time high of 6873 points was achieved on our market, and since then it has fallen an unprecedented 3179 points or 46.25% making the past year one of the worst in history. Over this period we have had 33 weeks in which the market closed lower than it opened and if this week closes higher only 15 weeks that it has closed up, with 4 weeks closing roughly around where it opened.

This week, the market has rebounded a little over 7 per cent since forming a low on Tuesday, and although this is promising it is not enough to convince me that we have seen the long term low in our market. It is likely this is a false move up and that we will get one more move down over the next week with the market falling to a low of between 3400 and 3500 points. Once this occurs I believe the All Ordinaries Index will trade up until late January or early February 2009. A word of caution for those looking to invest and that is to only buy shares in the top 100 as these will be much safer and more profitable.

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