There is no doubt about it, 2008 was a shocking year for investors. Equity markets tumbled globally, in some markets property prices fell dramatically and safe havens such as gold and even treasury bonds (which returned NEGATIVE yields in the US!!!) didn’t seem so safe anymore. All over the world Governments tried to appease people by offering guarantees on deposits, in Australia this guarantee spread to deposits of up to one million dollars. With everyone so spooked, the catch phrase of 2008 became “cash is king!”
Why wouldn’t it be? Nobody knew when the equity markets would stop tumbling (heck, even Warren Buffett was wrong as evidenced with his premature buying into of Goldman Sachs) and with interest rates so high, the return on deposits in Australia were actually decent. Coupled with the fact that cash reserves offered investors a chance to re-enter the equity markets on the cheap, and you could see its appeal.
Now let’s fast forward to 2009. Equity markets are still tumbling globally. Governments around the world are fumbling through various stimulus packages, previously unheard of GDP falls are occurring in Japan, and consumers are still completely spooked and there is no sign that the end is near. With interest rates cut in every major economy, the return for cash in Australia is now practically non-existent. Money sitting in the bank will be dead money, making next to nothing.
For some people this is fine. A dollar in the bank is better than a dollar down the drain one may rightly argue. The equity markets are so screwed that anyone considering a re-entry in the near future as their key investment strategy should consult their Doctor and have their brain checked, or alternatively go to an ATM, withdraw all their money and flush it down the toilet (it will have the same effect.)
So in this terrible economic climate, what is the best course of action? In my opinion, it is property. Not just any property, but lower end property, generally <450k.
Yes, it may seem crazy to enter the property market when all we can see overseas is capital values plunging, and closer to home it is much harder to get credit than it once was. However, one must consider the facts. With interest rates falling so rapidly and rental yields still remaining strong, positive cash flow properties are becoming more common. Rental is still strong due to the lack of supply in the market and the lack of development which has been taking part in this market to ease this lack of supply. The cheap end of town is still in demand while the Government’s first home buyer’s grants continue and there is all the upside for rental properties of negative gearing/depreciation, and in the future the upside capital growth potential.
Consider for a moment the worst case scenarios. The economy continues to spiral out of control and people continue to lose jobs. Due to the lack of supply, unless we enter a depression where people start living on the streets, rental will still remain solid. It is the top end of the market which in my opinion should be avoided, as poor rental yields and not much demand means the floor for prices is quite a way down.
Positive cashflow properties or properties close to positive cashflow – they are out there!
DS
Monday, February 23, 2009
Sunday, February 8, 2009
Rudd stimulus package
People seem to have an extremely narrow view of the Rudd Government's recently announced stimulus package. The item that is undoubtedly capturing the most attention and attracting the most debate is the one off 950 dollar payment to those earning under 100k per annum. Rudd has said the Government is willing to spend over 200 BILLION DOLLARS to get out of this mess.
Consider that for a moment...200 billion dollars, from where?
This is a debt that I will be paying off for years, my children will be paying off, and even their children will be paying off. Where is the sense in stimulating the economy in giving spooked consumers more cash which they will likely stash away?
In my opinion money should be invested in business and jobs, reducing ridiculous red tape and draconian taxes such as payroll tax (which penalise employers for employing people...wut?) and land tax (which was supposed to go out with the GST). Get those unemployed working again, they will start spending again, deposits will be made into the banking system and we will finally have consumption again. This current method proposed by Rudd is like resuscitating a dying man by massaging his foot. Stimulate the heart of the economy - business.
DS
Consider that for a moment...200 billion dollars, from where?
This is a debt that I will be paying off for years, my children will be paying off, and even their children will be paying off. Where is the sense in stimulating the economy in giving spooked consumers more cash which they will likely stash away?
In my opinion money should be invested in business and jobs, reducing ridiculous red tape and draconian taxes such as payroll tax (which penalise employers for employing people...wut?) and land tax (which was supposed to go out with the GST). Get those unemployed working again, they will start spending again, deposits will be made into the banking system and we will finally have consumption again. This current method proposed by Rudd is like resuscitating a dying man by massaging his foot. Stimulate the heart of the economy - business.
DS
Monday, February 2, 2009
Making money in a falling market
It seems almost impossible to make money in the current equity markets; constantly in the red and few signs of positivity. However money can be made by recognising these weaknesses and shorting the stock. Below are some key points I have picked up from some recent reading.
So what needs to be considered before shorting a stock?
When trading stocks, you need to go in full force or don’t bother going in at all; don’t dabble.
Shorting is great as it can reduce portfolio risk by including inverse positions.
When looking to short a stock, look for:
● High Price Earning ratios
● Low to no earnings and a flawed business plan
● Look for companies with low product depth, ie – one major product (croc shoes)
● Ask to speak to top customers
● Look for low barriers to entry
● Just plain bad products
● A company diversifying away from the fundamentals
● Lots of management changes, and changes in auditing procedures
● High receivables
●Revenue and earning deceleration
● High inventories
Also, look for a catalyst. A major one is a company with slowing revenue growth which have kept their earnings looking good by cutting expenses.
Stock, even if fundamentally flawed, should not be shorted unless it has started showing signs of weakness.
When looking at earnings reports, make sure to focus on GAAP rather than Pro Forma earnings. This is VERY IMPORTANT! GAAP (Generally Accepted Accounting Principles) are the guidelines that all companies must adhere to, whereas Pro Forma earnings can leave out valuable information such as depreciation, goodwill, amortization, interests and taxes and one time expenses.
So what needs to be considered before shorting a stock?
When trading stocks, you need to go in full force or don’t bother going in at all; don’t dabble.
Shorting is great as it can reduce portfolio risk by including inverse positions.
When looking to short a stock, look for:
● High Price Earning ratios
● Low to no earnings and a flawed business plan
● Look for companies with low product depth, ie – one major product (croc shoes)
● Ask to speak to top customers
● Look for low barriers to entry
● Just plain bad products
● A company diversifying away from the fundamentals
● Lots of management changes, and changes in auditing procedures
● High receivables
●Revenue and earning deceleration
● High inventories
Also, look for a catalyst. A major one is a company with slowing revenue growth which have kept their earnings looking good by cutting expenses.
Stock, even if fundamentally flawed, should not be shorted unless it has started showing signs of weakness.
When looking at earnings reports, make sure to focus on GAAP rather than Pro Forma earnings. This is VERY IMPORTANT! GAAP (Generally Accepted Accounting Principles) are the guidelines that all companies must adhere to, whereas Pro Forma earnings can leave out valuable information such as depreciation, goodwill, amortization, interests and taxes and one time expenses.
Subscribe to:
Comments (Atom)