December was the a very positive month in for my investments. Just about everything appreciated in value, savings were positive and I continued to enjoy full rental income from my properties. However, the fact remains that my mark to market investments collectively lost a considerable amount of money in 2008.
Here are the details:
1. my actively managed funds all gained during the month. I am still holding losses on many of them. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam;
2. my equity ETFs all appreciated. I currently have exposure to Hong Kong, India and Taiwan;
3. my residual equity portfolio appreciated;
4. my commodity investments went sideways. I opened a small position in the Lyxor Commodities ETF during December. My other positions (also small) are in nickel and lean hogs;
5. all my properties are all fully rented and the tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). One lease has expired and has been renewed at a slightly higher rental;
6. currency movements were marginally favourable as the USD weakened against a number of currencies.
One portfolio investment was made near the beginning of the month (Lyxor Commodities ETF).
Contrary to expectations, my income rose during the month but this was largely a timing difference and is not expected to be sustainable. My spending was high due to the family holiday (fully provided for). For the month, my net worth increased by 3.01%. The year to date decrease is 1.37%.
A separate post reviewing my finances for 2008 will follow shortly.
Wednesday, December 31, 2008
Saturday, December 06, 2008
Book Review: The Panic of 1907
The Panic of 1907 is a short (177 pages excluding appendices) history of the stock market crash of 1907, the events that led up to the crash and the lessons learned as a result. As short as the book is, it provides a concise and easily read history of the crash and is sufficient to understand the causes and consequences of the crisis. The authors (Robert F Bruner and Sean D Carr) are academics who refer to extensive source materials for further or more detailed reading.
The events of 1907 were essentially a monetary crisis rather than a general economic downturn. Some of the more interesting points related to the the contribution of the gold standard to the crisis, the inability of governments to intervene effectively (or at all) and the nature of the banking systems without the equivalent of a central bank (the US Federal Reserve could be argued to be a consequence of the crisis).
It certainly lead me to consider what would have happened in the current crisis (which is also a monetary crisis) in the absence of things that we take for granted in today's banking system: prudential oversight, uniform audited accounting reports, capital adequacy requirements, deposit insurance and transparency/equality of information for investors and depositors.
One area in which I felt that the books was deficient is that it did not bring out the personalities and personal histories of the individual characters, such as Charles T Barney and J P Morgan, who played prominent roles in the crisis and the events that preceded it. A second area is that I did not really feel that my understanding of the historical time in which the events took place was improved by reading this book.
On the whole a good read that is clearly relevant to the crisis we are experiencing today but one that could have benefited from greater depth (in particular on the leading characters).
The events of 1907 were essentially a monetary crisis rather than a general economic downturn. Some of the more interesting points related to the the contribution of the gold standard to the crisis, the inability of governments to intervene effectively (or at all) and the nature of the banking systems without the equivalent of a central bank (the US Federal Reserve could be argued to be a consequence of the crisis).
It certainly lead me to consider what would have happened in the current crisis (which is also a monetary crisis) in the absence of things that we take for granted in today's banking system: prudential oversight, uniform audited accounting reports, capital adequacy requirements, deposit insurance and transparency/equality of information for investors and depositors.
One area in which I felt that the books was deficient is that it did not bring out the personalities and personal histories of the individual characters, such as Charles T Barney and J P Morgan, who played prominent roles in the crisis and the events that preceded it. A second area is that I did not really feel that my understanding of the historical time in which the events took place was improved by reading this book.
On the whole a good read that is clearly relevant to the crisis we are experiencing today but one that could have benefited from greater depth (in particular on the leading characters).
Tuesday, December 02, 2008
Have we seen the end of cheap mortgages?
HSBC became the latest bank in Hong Kong to raise its interest rates for new mortgage loans. The new rates will be between 1% and 1.5% below HSBC's prime lending rate. This represents an increase of about 75 basis points. New borrowers will be paying between 3.5% and 4.0% on their home loans.
The stated reason for the increase is to reflect the higher risk premium of lending to home buyers. HSBC is not alone as other banks have also raised their lending rates for much the same reason.
I find this a very odd explanation for the interest rate increase and a very odd method of reducing the risks which banks face in advancing mortgage loans:
1. the banks have already adopted lower valuations (generally below market) as a risk management measure. This has the effect of requiring a higher deposit from borrowers;
2. for luxury properties banks have reduced the maximum loan to value ratio that they will accept. Again, this requires a higher deposit which reduces the banks' risk;
3. in a market where borrowers are competing for funding, higher risk borrowers would have to pay more for their loans - in effect a risk premium. The mortgage market is not such a market as (i) bank deposits are still rising faster than banks can lend money out (ii) generally speaking banks are not charging higher risks premiums for different customers (except at the extreme ends of the lending spectrum - preferred customers and those who need mortgage insurance). The argument that banks need to charge a higher risk premium to home buyers simply does not stand up to the facts;
4. higher interest costs actually increase the risk of default by borrowers. While this is largely irrelevant to the risk premium argument, it is still a true statement;
5. inter bank rates in Hong Kong have fallen over the last few months. Three month HIBOR currently stands at around 2.04%. Deposit rates remain close to zero for small short term deposits. This makes the decision to increase lending rates odd;
6. there is no regulatory pressure on Hong Kong banks to increase the capital needed to support mortgage lending.
A more likely explanation is that the banks are simply attempting to increase their lending margins. In a free and competitive market there is nothing wrong with this - if supply side competition kicks in the increases will not last long. If supply side pressure does not push interest rates back down, then the increases are no more than a reflection of supply and demand for mortgage loans.
On the latter point, the build up of bank deposits and the multi-year fall in the loan to deposit ratios have been cited as reasons why mortgage rates have been pushed as low as they went in the the last few years. The latest data from the HKMA may suggest that this trend is reversing. The rate of increase in HK$ and US$ deposits has been slowing for about a year now and the HK$ deposit level fell in absolute terms in September. US$ deposits and deposits in other currencies (mainly RMB) continue to rise (at a slower rate) but the net effect is that the decline in the loan to deposit ratio has reversed its trend and has been rising steadily during 2008. If this trend continues it may be some time before we again see the relatively cheap mortgages that we have enjoyed for the last few years.
The stated reason for the increase is to reflect the higher risk premium of lending to home buyers. HSBC is not alone as other banks have also raised their lending rates for much the same reason.
I find this a very odd explanation for the interest rate increase and a very odd method of reducing the risks which banks face in advancing mortgage loans:
1. the banks have already adopted lower valuations (generally below market) as a risk management measure. This has the effect of requiring a higher deposit from borrowers;
2. for luxury properties banks have reduced the maximum loan to value ratio that they will accept. Again, this requires a higher deposit which reduces the banks' risk;
3. in a market where borrowers are competing for funding, higher risk borrowers would have to pay more for their loans - in effect a risk premium. The mortgage market is not such a market as (i) bank deposits are still rising faster than banks can lend money out (ii) generally speaking banks are not charging higher risks premiums for different customers (except at the extreme ends of the lending spectrum - preferred customers and those who need mortgage insurance). The argument that banks need to charge a higher risk premium to home buyers simply does not stand up to the facts;
4. higher interest costs actually increase the risk of default by borrowers. While this is largely irrelevant to the risk premium argument, it is still a true statement;
5. inter bank rates in Hong Kong have fallen over the last few months. Three month HIBOR currently stands at around 2.04%. Deposit rates remain close to zero for small short term deposits. This makes the decision to increase lending rates odd;
6. there is no regulatory pressure on Hong Kong banks to increase the capital needed to support mortgage lending.
A more likely explanation is that the banks are simply attempting to increase their lending margins. In a free and competitive market there is nothing wrong with this - if supply side competition kicks in the increases will not last long. If supply side pressure does not push interest rates back down, then the increases are no more than a reflection of supply and demand for mortgage loans.
On the latter point, the build up of bank deposits and the multi-year fall in the loan to deposit ratios have been cited as reasons why mortgage rates have been pushed as low as they went in the the last few years. The latest data from the HKMA may suggest that this trend is reversing. The rate of increase in HK$ and US$ deposits has been slowing for about a year now and the HK$ deposit level fell in absolute terms in September. US$ deposits and deposits in other currencies (mainly RMB) continue to rise (at a slower rate) but the net effect is that the decline in the loan to deposit ratio has reversed its trend and has been rising steadily during 2008. If this trend continues it may be some time before we again see the relatively cheap mortgages that we have enjoyed for the last few years.
Subscribe to:
Posts (Atom)