Don't worry be happy

On Tuesday the 3rd of February 2009 the Reserve Bank of Australia (RBA) lowered the Official Cash Rate (OCR) by 100 basis points or 1% to 3.25%; it’s lowest level since the 1960’s. The RBA’s fundamental objective in easing monetary policy is to assisting the economy to achieve & maintain full employment, expanding of REAL Gross Domestic Product (GDP) & increasing the availability of bank credit.

In the last Blog, “A common interest” is stated,
“With the fall in the RBA OCR we should see bond prices increase but with that yields falling, share prices should increase as investors move to higher risk and better returns away from bonds, and the Australian dollar should fall. That’s what the economic text books will tell you.”

At close of the day on the 3rd of February 2009, the Australian dollar increased almost by half a cent against the US, spiking from US 63.50 cents to US 64.20 cents, but the day before fell to a 2 month low to US62 cents.
The 30 day Bank Bills continued to fall, 90 day are showing signs of matching 30 day, indicating a flattening of GDP/inflation over a 30 to 90 day period. The 180 day is only 0.30 lower to the 30 day indicating a flattening of GDP in the near future, but the 2 year Treasury Bond is at 2.82%, lower than the 180 indicating there is still further to fall in GDP/inflation for the next 2 years.
The Australian Bond market has been affected by the AFG’s policy of the cash deposit guarantee, in the pass months and investors flee the bond market for the security of cash deposits. The AUS$75 billion AFG cap on the stock of commonwealth bonds introduced by the previous AFG will be lifted to at least AUS$120 billion – equivalent to the combined projected deficits till the year 2012.

Bank-accepted Bills----------------------------Treasury Bonds
Date(D/M/Y)-30 day---90 day---180 day-------2 year----5yr------10yr
2/2/9-----------3.53-----3.07-----2.82----------2.52-------3.26-----4.10
3/2/9-----------3.44-----3.18-----2.93----------2.63-------3.39-----4.22
4/2/9-----------3.39-----3.24-----3.03----------2.71-------3.50-----4.31
5/2/9-----------3.36-----3.24-----3.06----------2.82-------3.60-----4.37

The Australian S&P/ASX 200 index increased by 0.32% with a sharp increased in morning trade then followed by a solid fall all afternoon matched to the timing of a RBA OCR decrease. Interest rate sensitive stocks such as banks, infrastructure & property were the beneficiaries, but the biggest mover was the financial sector. With the announcement of the AFG economic stimulus it potential distorted the equity, bond, money & currency market. Below is a graph taken from the AUSTRALIAN FINANCIAL REVIEW illustrating the S&P/ASX200 intraday moment on 3rd of February 2009



Below is a graph taken from the AUSTRALIAN FINANCIAL REVIEW illustrating the S&P/ASX200 weekly movement from the 2nd to the 6th of February.




On the 28th of January 2009 the International Monitory Fund (IMF), released a media statement titled, “Global Economic Slump Challenges Policies”. The 6 page release is a very bleak read on the forecast for the global economy, starting off with the statement,
“World growth is projected to fall to ½ percent in 2009, its lowest rate since World War II. Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy. A sustained economic recovery will not be possible until the financial sector’s functionality is restored and credit markets are unclogged.”

Trust me don’t worry be happy.

A common interest?

On the 27th of January 2009, the Reserve Bank of New Zealand (RBNZ) lowered its official cash rate (OCR) to a 6 year low by 1.5% to a record low of 3.5% from 5%.
The New Zealand dollar ($NZ) dropped from US$ 53.03 to US$51.90 immediately following the decision.
Analysts & experts had been accepting/tipping a 1% cut, but how did they get to this figure?
On the 26th of January 2009 the following New Zealand (NZ) Wholesale Interest Rates were as follows.

4.61 % 30 Day Bank Bill
4.33 % 60 Day Bank Bill
4.14 % 90 Day Bank Bill

3.33% 1 year Government Bond
3.43% 2 year Government Bond
3.71% 5 year Government Bond
4.25% 10 year Government Bond

As you can see the 30, 60 & 90 day bank bills are indicating growth/inflation for the NZ economy to fall but on a lighter side the 1, 2, 5 & 10 indicate growth/inflation will increase between 1 to 10 years time. Remember the OCR was 5% above ALL wholesale interest rates.
The RBNZ objective is to ease monetary policy to increase the ability of the banks credit to expand gross domestic product (GDP) .
Thus the RBNZ would have wanted the OCR below the 4.14% 90 Day Bank Bill.

On February the 3rd 2009, the Reserve bank of Australia (RBA) will reduce its OCR.
On the 30th of January 2009 the Domestic Rate for dealer bills was:

3.41% 90 day
3.11% 180 day

3.35% 5 year bond
4.1% 10 year bond

Currently the RBA cash rate is 4.25% as with wholesale interest rates of NZ, thus there is a very high chance as seen with the NZRB we will see the cash rate move below the 3.11% 180 day bill to increase/stimulate GDP. That is a different of 1.14% so you could view a RBA OCR at 3%, a decrease of 1.25%, which is a very reasonable assumption.
With the fall in the RBA OCR we should see bond prices increase but with that yields falling, share prices should increase as investors move to higher risk and better returns away from bonds, and the Australian dollar should fall. That’s what the economic text books will tell you. With international banks retreating from the Australian market, local banks tightening credit standards and property and equity investors on the side lines waiting for a green flag to drop to start investing again.

Some may say going by the book may not be the way to go in this climate of nerves, but l would rather the book than flipping a coin or tips from a friend.

Australian All Ordinaries Average Monthly Gains

This blog post is an update my first blog posted on the 10th of January 2009, “Out with the old in with the new”.
Stated: “Historically the Australian share market around August, September, October, and November falls. This period often makes Equities the best time of year to purchase.”

Below is graphed the Australian All Ordinaries average monthly gains from 1985 to 2008 by percentage obtained from the Australian Financial Review.





The graph below depicts the All Ordinaries Performance Pattern since 1980 to 1987. The graph shows average monthly percentage movement, there is a difference due to the over 40% fall in the Australian All Ordinaries in 2008.

Poor Mr Fulder.

America Express reports that profit dropped 72% from a year earlier as more customers fell behind & defaulted on loans. At its U.S. card unit, loan defaults surged to 6.7% of loans from 3.4% a year earlier.
Macquarie Capital in New York has rate the company as “underperform”, America Express sought US$3.9 Billion from the US Treasury to boost capital as surging consumers defaults forced it to set aside more reserves as the market for bond backed by credit-card debt seized up.
Discover the 4th largest credit network in the US, reported fiscal 4th quarter profit - more than double to US$444 million. But Discover boosted its provision for losses by 89% or US$521 million, as loans overdue rose by 30 days or more to 4.56% from 3.59% a year earlier.

On Monday Iceland’s coalition Government collapsed, the first Government to fall as direct result of the global credit crisis. The economic crash has been greatly felt by its people as the island of just over 300,000 have had their personal savings wiped out & and the jobless rate soaring.
Consumer confidence for January plunges to its lowest since measurements began in 2001, falling 23% from the prior month and 83% from a year earlier.
Iceland secured US$10 Billion in financial aid from the International Monetary Fund (IMF) and several European countries. But trade in the currency is effectively frozen.

There has been strong information to support a fall in the high-end of the property market in Australia – but this sets a new low.
A seaside mansion in Florida U.S. sold for US$10 (AUS$15) that was bought for more the US$13.74 million in March 2004. Sounds to good to be true or only in America I hear you say!
Well you might not know Richard Fuld by name but you would know about the investment bank Lehman Brothers that collapsed in 2008. Mr Fuld was the former chairman & chief executive of Lehman Brothers & the buyer you ask, is wife.
Most likely he is transferring property due to the fear of lawsuits or possible bankruptcy.

Poor Mr Fulder, let’s hope…. or hope not that his wife doesn’t run off with a younger man.

It's as simple as GDP=C+I+G+XN !!

The Australian Governments planned initiative will only prolong Australia’s economic recovery.
In the 4th quarter of 2008 the Australian Government announced a $10.4 Billion spending program to stimulate the economy, but in reality this was only a policy to buy votes and the confidence of Australian that don’t know better.
Evidence to date by the Australian National Retailer Association (ANRA) indicates that consumers used the bulk of their one-off payments to paydown debt, with little on Christmas spending. Executives of retail chains are stating that the stimulus only provided a short term boost to the economy. A similar stimulus package was used by the USA Government in 2008 in the form of a tax rebate individuals – having the same economic effect of only short term stimulus.

The reasons for failure in the lack of policy and efficiency targeting in the governments policy can be backed by simple 2nd year University economics.
Aggregate expenditure & Multipliers are not the economic theory to end all theories, as they ask us to assume a closed economy, laissez-faire capitalism & price-wage inflexibility – but asked to simplify our assumptions.

Low income earners such as people on welfare have limited ability to save, but as income increases the option to save or pay off debt increases.

Australia would have been better place to recover from the down turn in the economy with an additional Federal Government Budget surplus had it dropped the additional bonus paid to families and pensioners. The government should have focused on paying additional money to people on welfare in the form on increased rental assistance.
The additional rental assistance has the benefit of a payment policy that can be for filled its objective of assisting low income earner with high rental price throughout Australia. Secondly this policy of increase rental assistance can be reduced further into the future.

But at the end of the day what would I know, I didn't study politics.

Graduates paid not to work ?

With the 30 day at 4.29% and the 180 day Bank Bill swap reference rate at 3.51% - still indicating Gross Domestic Product (GDP) /inflation decreasing over the next 6 months.
The 1 year Swap rate at 3.313% and the 5 year 4.030% - still indicating growth from 1 year ahead to 5 years at moderate yearly growth.
The domestic 5 year Bond yield at 3.49% and the 10 year at 3.975% could give conflicting signals to the market, but still show subdued GDP growth from 5 year to 10 years ahead.

The Oliver Job Index has stabilised but recorded a decrease of 1.81% in December, seasonally adjusted. An interesting observation was news at several large companies and firms were reneging on graduate positions to cut costs. The Australian law firm Middletons has paid AUS$10,000 to 9 of its 36 graduates to defer their spots until next year. Not to be out done Price Waterhouse Coppers (PwC) has encouraged graduates to defer their start date and has offers AUS$4000 cash payments to those who begin in July. The law firm Coors Chambers Westgarth had deferred the start date for its 55 graduates to April 21, with each graduate paid $2300 to make up for the inconvenience.

Industrial Property development and planning substantially decreased in the 4th quarter of 2008. Current information indicates planning and development forecast for 2009 to dropping back to a 5 year annual average (approx. 1,900,000 sqm) by information sourced by Jones Lang Lasalle. Over the past 5 year in Australia there has been a record supply of industrial property. 2007 & 2008 saw a record amount of industrial complete by square meter. With this decrease in development, property yields should increase due to reduced supply, but with the downturn in the economy over the next year, this could counterbalanced by the increase in vacancies. Reports indicate a small number of commercial and industrial tenants for a number of reasons are subleasing their property, adding to the speculation the there will be little rental growth in 2009.

With housing rental in Australian capital cities so unaffordable for graduates that have been asked to wait until next year to commence work, maybe shifting into an industrial property could be a cheap alternative to shifting out of home.

Out with the old in with the new

With 30 day at 4.39% & 180 at 3.73% day bank bill swap rates indicating GDP to decrease in the next 6 months.
1 year domestic Bond rates are at 3.35% and 5yr at 4.245% indicating GDP growth (inflation) over approximately at the start of 2010 to 2015. The trend of the capital markets over the past weeks have seen interest rates increase as bond prices fall as they are sold off.
Historically the Australian share market around August September, October, and November falls. This period often makes Equities the best time of year to purchase.

Currently unemployment is at 4.4% seasonally adjusted but at 4.3% trend this is would mean approximately 250,000 people. With declining GDP in 2009 Australia will see increased unemployment due to Australia increasing becoming a service providing economy. As in other economy’s full-time workers will be moved to part-time thus the real unemployment figure may slightly be underestimated. Unemployment could easily reach 9% at the end of 2009 due to additional 250,000 unemployed.

Real estate prices in America have fallen on average 30% throughout, with some areas falling to 50%. This is due to oversupply of new housing estates on the outskirts of towns and cities, but inner city apartments have on averages fall but still maintain value due to the demands for city living. Spain has seen the same scenario. Costal provinces that set up apartments with beautiful costal views stand uncompleted due to the oversupply and the decline in credit markets. The same real-estate scenario can be seen throughout the world.

Australia is not immune to the global price decline in real estate – we are only lagging behind. The Equity markets throughout the world had seen huge falls, Hard & soft commodity prices have fall with the next asset class to fall (by text book) would be real estate. That would mean we would see property prices in Australia fall between 30% to 50%, this is not unrealistic. Australia will see an increase in unemployment in 2009, investors have left the market with only new home buyers (young couples) using the Federal and State handouts to venture into the market in the last quarter of 2008.
Australian’s are in first place (or second depending where you get your information) as the most in debit households in the world. An indication of the Residential real estate market is the Commercial real estate. In December 2008 The Commonwealth Office Property Trust a publicly listed entity revalued its $1.1 Billion commercial
portfolio down 5%.
Save your money as you are going to need it this year more than most. To get back to buying equities in the second half of 2009 or to see you thought to your period of unemployment.