New investments

While on the road in the US, I made two additions to the portfolio:

1. I brought into the current market rally last week by adding to my position in the HK Tracker fund at HK$13.80 per unit;

2. I rolled over a maturing USD/NZD FX contract at NZD1.00 = USD0.5765 for one month. The notional annualised yield is 24%. The previous contract was profitable, but given the rise in the NZD during the life of the contract, I would have been better off simply buying the NZD outright.

I still hold a very conservative 3.5 years of living expenses in cash (not including the money tied up in FX or equity linked deposits).

AIG bonuses - a distraction from the real issues

I'm currently on a business trip in the US and have been bemused and confused by all the attention given to the US$165 million in bonuses paid to a relatively small group of AIG employees. The amount of attention given to the issue has been far out of proportion to what it deserves and far greater than several more significant issues that those attempting to deal with the economic problems should be giving greater attention.

A few random thoughts on the issue:

1. it is hypocritical for the politicians to be pretending to be angry over the issue: they knew there would be incentive type payments and approved the bailout payments with that knowledge. Attempting to impose an unconstitutional tax on recipients only makes them look stupid (as well as wasting more taxpayer money);

2. there is a near complete lack of granularity on what the payments were for. There has been close to zero coverage on this issue. It is likely that even within something as bad as AIG, there will be recipients who genuinely deserve to receive a level of remuneration that is reflected in their bonus payments;

3. the bonus issue is immaterial to the greater scandal of the billions that went to bail out counterparties - many of which had connections to the same regulators/political appointees who approved the payments;

4. the AIG bonus payment issue is insignificant compared to the Madoff scandal and the outrageous and complete failings of the SEC in relation to Madoff;

5. the AIG bonus payments are trivial sums compared to the amount of taxpayer money going to overpaid autoworkers (and retired autoworkers);

6. the AIG bonus payments are a complete irrelevancy compared to the failure of the regulators (including the Senate and Congress) to adequately regulate the mortgage industry, the investment banks and other intermediaries in the first place;

7. the unconstitutional punitive taxes imposed by the Senate and Congress on the AIG bonus payments (among others) are a clear demonstration that political considerations are more important to the elected representatives of the people than the notion that they should actually be expected to focus on addressing important issues - McCarthyism is alive and well;

8. it is puzzling that the AIG bonus payments have received far more attention than the fact that the White House's forecast deficits for the next few years are optimistic by truly staggering amounts (estimates vary, but all the ones I have seen exceed, in aggregate, a trillion dollars. How can the crew of the largest and most sophisticated economic ship in the world get it so wrong?

Lease renewals in difficult times

In the period from December 2008 to March 2009 four of the leases on our properties either came up for renewal or entered the period when the tenant had the right to break the lease without penalty. In the current market, this was always going to be a tough time for my portfolio. Having been through a few downturns, I kn0w that the key to minimising the pain is minimising the vacancy period and the key to minimising the vacancy period is being willing to accept less than ideal rent levels and, to a lesser extent, being more flexible on negotiating lease terms. I expected to take a significant fall in rental income.

In terms of progress:

1. I have rolled over one lease for two more years with a nominal increase in rent;

2. I have an oral agreement to renew one lease for a further period of one year at the same rent and I am waiting for the tenant to sign the new lease;

3. one tenant exercised his option for early termination. This was no surprise given that the only lease was struck right at the top of the market. It was a little disappointing that the tenant was not willing to even try to negotiate a new rental level. However, a provisional agreement for a new lease has been signed with a new tenant. The rent is 22% below the previous rent. I could have held out for a higher rent but risked a longer vacancy period than the two weeks which this deal will result in. In any case, the new rent is fairly close to recent deals for similar units in the same development;

4. one tenant has said he is willing to renew the lease if we will give him a substantial reduction in rent and agree that he can terminate on one month's notice if he loses his job.

Assuming that I can agree the new rent with tenant #4, I will have managed to get through a period of potential pain with only a two week vacancy on one property (compared to a worse case scenario of having four properties vacant for months).

Also, with the assumption that #4 is renewed, I will still have the luxury of positive cash flow on our investment properties in spite of the net decrease in rental levels.

Definitely too soon to be car buying

I have no idea how representative this article on the build up of new car stocks is, but it sends an obvious message that, unless you really really need to buy a car now, it will pay to wait until the prices start dropping to levels which reflect the amount of unsold inventory. There is no evidence of material discounting in Hong Kong yet.

One of the commentators suggested avoiding cars built in 2009. He/she has a point - if the cars are left sitting outside for a considerable period of time, I would expect that there would be an element of deterioration and, with at least some of the manufacturers in dire financial condition, I would also expect that both maintenance and the ability to stand behind a warranty would be questionable.

I have no serious intention of buying a car, but if I did I would be waiting until we see serious discounting to clear the build up of stocks. In addition I would only buy from a manufacturuer with a solid reputation for reliability and post-sale support (i.e. BMW, Toyota/Lexus, Honda, Mercedes).