Tuesday, August 31, 2010

Monthly Review - August 2010

August was a poor month for financial progress with losses on the equity portfolio being compounded by adverse currency movements as the USD rose. While these losses were more than offset by positive cash flow on my properties, a reasonable savings rate and a small tax refund, I transferred some money to mrs traineeinvestor which resulted in an overall small decrease in net worth this month.

Here are the details:

1. my Hong Kong equity portfolio declined. I purchased some more shares in CNOOC and some shares in BHP

2. my ETFs declined in line with their respective markets (Hong Kong, Russia, Taiwan and India)

3. my commodities were mixed and netted out for a small loss (ETF, silver, HOGS, NICK)

4. all of my properties are let, are producing a positive cash flow and making a positive contribution to my net worth. Although there were no repair bills this month, I will be hit hard next month as two properties have suffered from leaks and a third requires an air conditioning unit to be replaced. On the positive side, one lease has been renewed for another two years at a slight increase in rent

5. currency movements were adverse, as the AUD and NZD depreciated against the USD

6. savings were positive with income being average and expenses also being average. Net savings were reasonably good

7. I transferred some money to mrs traineeinvestor for tax planning purposes. As this is an outright transfer it represents a reduction in the net worth of the private portfolio

My cash position was reduced due to the equities purchased and the transfer to mrs traineeinvestor and now represents about 9 month's worth of expenses.

For the month, net worth decreased 0.07%. The year to date increase is 11.1%.

My target retirement window remains sometime between early 2012 and the end of 2013

Monday, August 30, 2010

BHP purchased

This morning I added BHP to the private portfolio, paying AUD37.65 per share. No only does it add some further diversification to the portfolio (although, I suspect, still correlated to some extent with the local market here in Hong Kong), it also looks relatively cheap given the very significant free cash flow the company is generating, the relatively controlled capex and the undergeared balance sheet (the company would have net cash next year in the absence of the Potash bid succeding or a similar investment project). In my view, the market is at least partly pricing in the possibility of MRRT being introduced and/or taking a negative view on the Potash bid.

Contrary to some comentators I have, so far, been impressed by both the logic of the bid for Potash and the way in which the bid has been handled. While the possibility of a higher bid being made exists, I do not belive that BHP would pay a price which was not value accretive to BHP shareholders. If the Potash bid fails, the possibility of a share buy back or special dividend exists.

The dividend yield of 2.7% is rather modest by Australian standards.

Thursday, August 26, 2010

Book Review - The Ascent of Money

The Ascent of Money is a brief history of some of the key moments in the development of the business of finance as we currently know it. The author is academic Niall Ferguson.

Ferguson's central theme running through the book is that finance was a key driver of at least a number of key developments and events in human history. In his own words:

"poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions, with the absence of banks, not their presence"

I very much agree with this proposition (but, for all practical purposes, he was preaching to the already converted when I picked up the book).

Ferguson's writing style is pleasant to read and sufficiently lively to make his account of the selected samples of history engaging. It took me about three days to read the book while I was on holiday.

As a whole I enjoyed the read and thought it was an excellent and well presented work on the subject.

However, I do have a few minor quibbles. The first is that, as someone who was already familiar with the subject matter, I would have enjoyed more detail and....well just more. It was very readable. Fortunately, there is a comprehensive list of source material in the book.

The second issue is that while the book is understandably focused on the causes and effects of financial crisis, I felt that insufficient attention was given to the role of politicians, regulators and governments generally in creating or facilitating the conditions in which financial disasters occurred.

The last point is that his attribution to the economic downturn which Hong Kong experienced beginning in 1997 to the resumption of PRC sovereignty over Hong Kong is simply wrong. The Asian crisis and an administrative decision to hugely inflate the supply of land for housing were two of the main factors which caused and exacerbated the downturn. Having lived through the experience, I saw nothing to suggest that changing the flags over government house had any bearing on the economic events at the time in the manner suggested.

Overall a great read and an important point which is well worth remembering when we consider how our financial lives should be regulated.

Tuesday, August 24, 2010

Equity put option written

This afternoon I wrote some put options against Hutchison Whampoa (13). HWL is a stock I already own (in fact it is my largest individual stock holding) and am happy to acquire more of with a view to expecting continued turn around in 3G and continued growth in the other core businesses.

Here are the details:

Underlying: Hutchison Whampoa (13)
Strike: $59.55
Market: $60.40
Maturity: 21/09/2010
Annualised yield: 25.2%
Effective purchase price if exercised: $58.28
Effective discount to market price if exercised: 3.5%

Monday, August 23, 2010

More proposals to cool the property market

The latest discussion on ways to cool Hong Kong's property market has now turned to limiting foreign ownership - in particular by requiring that buyers of Hong Kong residential properties hold Hong Kong permanent ID cards. A more watered down version of the proposal would impose the restriction on smaller flats only (possibly those under some arbitrary threshold such as 800 or 1000 square feet (gross)).

While not as silly as the suggestion to impose a short term capital gains tax, this is still a bad idea:

1. it takes seven years of residence to be eligible to apply for a permanent ID card. It is unreasonable to expect people to have to wait 7+ years to buy their own home

2. the proposal is blatantly inconsistent with the governments immigration scheme based on capital investment

3. the proposal is inconsistent with Hong Kong's free market approach to regulation (as far as I am aware only entities licensed under the Broadcasting Ordinance have a foreign ownership restriction)

4. it ignores the real problem - a lack of supply of smaller and medium sized homes. Recent proposals to increase the supply of land are a better solution (but it will take time before the new supply of land translates into new homes for people to move into)

5. given that a lot of people buy their properties through companies, enforcing such a requirement would be a nightmare - given the volume of transactions a regime similar to the Broadcasting Ordinance is not a realistic proposition.

Friday, August 20, 2010

A bad idea to cool the property market

Following the Hong Kong government's second batch of measures to cool Hong Kong's (allegedly) over heated property market there have been suggestions that Hong Kong should further cool the market by introducing a capital gains tax on non-owner occupied properties which are sold within a relatively short period of time after being purchased. The theory is that it will discourage speculators from pushing up prices.

This ranks as one of the silliest suggestions have I heard for a long time. The most immediate effect is that owners of properties who would be hit by the tax will simply keep their properties off the market until the holding period has expired. In effect, the tax would reduce supply. If I understand basic economics correctly, reduced supply should (all other things being equal) result in higher prices.

History has shown that capital gains taxes tend to push prices higher: as an example, share and property prices in Australia both increased when capital gains tax was first introduced.

Conceptually the idea will also have the effect of further concentrating an already overly narrow tax base - the bulk of the tax would fall on the same middle class which already contributes a disproportionate amount of Hong Kong's tax base.

Friday, August 13, 2010

New measures to cool the Hong Kong property market

The Hong Kong government and the Hong Kong Monetary Authority announced measures to cool the local property market.

As background, property prices in Hong Kong have appreciated to levels which are approaching the 1997 highs on the back of (i) cheap money (interest rates have dropped below 1% again), (ii) plentiful supply of credit (Hong Kong banks are awash with funds), (iii) limited supply (iv) demand from wealthy mainland buyers and (v) confidence that the government will not repeat the policy errors that exacerbated the post-1997 decline in property values.

The total value of outstanding mortgages has risen from HK$587.6 billion at the end of 2008 to HK$679.5 billion at the end of June 2009.

While affordability ratios are still attractive (and much better than in 1997), the extremely low interest rates are a major contributor to housing affordability. Affordability is highly vulnerable to any substantial increase in interest rates.

The new measures:

1. the deposit requirement for a property costing HK$12 million or more is increased from 30% to 40%

2. for properties worth less than HK$12 million, the maximum mortgage will be the lesser of 70% or HK$7.2 million. In effect the minimum deposit requirement will increase for properties costing HK$10.3 million

3. banks will be required to stress test borrowers' ability to service loans - based on a 2% increase in the mortgage rate, a maximum of 60% of household income may be used to service mortgages

4. the government will release additional land plots for sale to developers next year

5. buyers of unfinished units will be banned from reselling before completion and will lose a 10% deposit if they fail to complete

Today's announcement follows earlier measures aimed at the luxury sector by increasing the deposit requirement for and the stamp duty payable on properties valued at HK$20 million or more.

I have no idea whether these measures will be effective or not - hopefully they will. Even as an investor in Hong Kong property, I have no wish to see an unsustainable bubble develop.

CNOOC purchased

This afternoon I purchased some additional shares in CNOOC (883) paying HK$12.74 per share. This compares with my original purchase in June 2009 at HK$9.72. As with the original purchase, I view CNOOC as a relatively low risk entry into the upstream oil industry.

The trailing ratios are a PE of 17.0 and a yield of 3.2%. Analysts expectations are for reasonable growth in both earnings and dividends. The company currently carries no net debt.

Monday, August 09, 2010

China Zhongwang - loss taken

I sold my shares in China Zhongwang (1333) on Friday. The stock has been a consistent disappointment - allegations of irregularities, botched handling of those allegations, inadequate communications with shareholders generally and (on my part) a growing belief that the company will suffer from greater competition than in the past. The high dividend yield and solid looking balance sheet is not sufficient to keep me in an investment when my confidence in management has been eroded.

It's time to move on - the question I am asking myself is why I didn't sell sooner?

I sold at $5.01, taking a loss of 27% against my original purchase price (after allowing for the dividend).

Saturday, August 07, 2010

Book Review: How To Be Rich

"How to be rich" was written by J. Paul Getty and published in 1961. At the time Getty was regarded as one of, if not the, richest men in the world. He was also regarded as something of an eccentric, a miser (somewhat unfairly) and a serious art collector.

How to be rich reads like a collection of articles covering topics such as:

  • what Getty looked for in successful company executives
  • his approach to selecting investments
  • art as a form of investment
  • the growth of big government
  • the increase in the administrative functions within large corporations
  • dealing with your mistakes

On investments, he clearly advocates value based investing, investing in what you know (many of his investments were in the oil industry), long term investing (he slams get rich quick schemes), not buying when the market is expensive and being willing to jump in when everyone else is selling. In may respects, he sounds a lot like Warren Buffet.

One of the more interesting aspects of the book is the way it reflects the times it was written in - pre-oil crisis inflation, communist fears, a drift towards more left wing governments and relatively limited participation of women in the work force.

With or without the social context in which the book was written, it is well written and contains a lot of simple common sense (particularly on the subject of investing) and was well worth reading.

Tuesday, August 03, 2010

Monthly Review - July 2010

July was an outstanding month for financial progress with strong gains on the equity portfolio being supplemented by positive cash flow on my properties and increases in commodities. All these gains were compounded by positive currency movements as the AUD and NZD rose against the USD. A reasonable savings rate was achieved.

Here are the details:

1. my Hong Kong equity portfolio appreciated significantly. There were no trades this month

2. my ETFs appreciated in line with their respective markets to record very solid gains (Hong Kong, Russia, Taiwan and India)

3. my commodities all appreciated (ETF, silver, HOGS, NICK)

4. all of my properties are let producing a positive cash flow and making a positive contribution to my net worth. I had two repair bill due (for an air conditioning unit and a washing machine)

5. currency movements were positive, as the AUD and NZD appreciated against the USD

6. savings were positive with income being above average and expenses being on the high side due to a short family holiday (which was in the budget), a visit to a relative (which was not in the budget) and paying for this year's en primeur wine purchases - in spite of which, net savings were reasonably good

My low cash position continues to improve and now represents more than a year's worth of expenses.

For the month, net worth increased 4.9%. The year to date increase is 11.1%.

The gains on investments this month were similar in absolute terms to the losses incurred in May and my target retirement window is now looking quite good.

Note: due to holiday travel, the review for July is based on prices etc as at close of business Hong Kong time on Tuesday 3rd August.