Tuesday, March 19, 2013

Cyprus Deposit Levy - as dumb as it gets

The proposal to levy a tax steal 6.5% of the first EUR100,000 and 9.9% of amounts over that threshold on all deposits held in banks in Cyprus has to be one of the dumbest political moves in history. Leaving aside the moral implications of arbitrary confiscation of savers' wealth, the practical implications are pretty clear:

1. never put money on deposit with any bank in any country which has anything but the most robust of banking systems, a freely convertible currency and strong recognition of personal property rights. It is a given that all Cypriot banks are now insolvent - no sane person would put anything into them and whatever deposits they hold will be leaving Cyprus at the first opportunity. Further, if I was a depositor with a Cypriot bank, I would withdraw my money as soon as they reopen and then max my credit card to the extent of the amount stolen and refuse to pay it back. Sue me and we can fight it out in court;

2. the Euro is believed by many to have largely held together because money has been fleeing the troubled economies of Greece, Spain Portugal, Italy etc for northern EU members - in particular Germany. The Cypriot bank heist sends a clear message that nationals of countries facing financial difficulties cannot be assured that their money will be safe from confiscation even if parked in German banks in Germany. The negative real return being accepted from German deposits/bonds in exchange for perceived safety of principal now looks like an increasingly bad judgement call. Not only would I expect more money to leave fiscally troubled countries but more money to leave the Euro altogether;

3. people will look for ways to hide their wealth. The loss of confidence in the European banks and the Euro generally will not only accelerate economic contraction/retard economic recovery but will result in more business being done for cash which traditionally is less likely to be reported on tax returns. In effect, tax receipts will be likely to shrink even more than the weak state of the economy would suggest;

4. it goes without saying that Cyprus is finished as an offshore banking centre. I don't know how many jobs will be lost but the loss is likely to be permanent.

Even if the Cyprus parliament decides not to steal depositors' money, the damage is done. The proposal has been raised and the fear that they may try again will linger.

If I had money with any bank in the EU, most of it would be leaving at this stage.

Monday, March 18, 2013

The downside of property ownership

Property has been a wonderful asset class for us. Cash comes in on a regular basis. Values go up. Mortgages amortise. Of course, there is no such thing as a free lunch. In addition to the high capital cost, periodic vacancies and the regular outgoings (rates running repairs), from time to time there will more substantial outgoings either for a major interior redecoration or a levy for building upgrades.

I have recently been hit with three such bills:

1. a building upgrade levy of HK$72,000

2. a building upgrade levy of HKD221,000

3. a bill for rectifying an illegal non-compliant structure (same property as #2): HKD18,000

As far as the building levys are concerned, these are to be expected from time to time and are a necessary cost of maintaining the properties in good condition. Based on previous experience, a building levy will tend to enhance both the capital value and the rental income of a property (but will not outweigh movements in the market generally). Although I may bemoan the disruption to cash flow and the expense generally, I am fully aware that I am better off with the upgrade being done than not having an upgrade. However, I wish that building managers would add a little bit more to the monthly management fee and create a sinking fund for this type of work rather than hit us with these large one off bills.

The non-compliant structure came as a surprise. The structure concerned is the same for a number of flats in the building and pre-dates my purchase. It was discovered when the quotes for the building upgrade project were being obtained.

Financial news detox

I spend too much time following the financial, economic and political news, hanging out at Internet forums etc. Way too much. I also had some non-finance things that needed to be taken care of, some overdue reading to catch up on and a week in New York during which I hoped (when not working) to be spending my time on enjoying one of the world's great cities.

So for the last couple of weeks, I have been limiting my time spent on financial, economic and political websites, news sources and forums. Quite frankly, I don't feel like I have missed anything important. Washington is still playing partisan politics while the future burns, the EU is still asking the German taxpayers to issue blank cheques and the HKSAR government still has no clue how the property market works.

The only two things of any importance that happened (or didn't happen) were (i) CMR (HK:773) has failed to give any updates on its response to the fraud allegations) and (ii) Cyprus will propose a levy on depositors to fund a bank bailout. The former is of more concern to me than the latter.

I should do this more often.

Sunday, March 03, 2013

Challenger Financial purchased

On Friday I purchased some shares in Challenger Financial (ASX:CGF).  This is one of several companies listed in Australia and New Zealand that I have been looking at. Their most recent results have removed uncertainty that I had regarding their future capital needs. While CGF is viewed by the market as a company with limited growth prospects, that is already reflected in the low valuation (both in absolute terms and when compared with other companies such as AMP which operate in the same industry).

I paid AUD3.79 per share.

Friday, March 01, 2013

Monthy Review - February 2013

February was a month where the investments largely went sideways while a high savings rate and positive cash flow from the properties contributed to a modest net gain. While my Hong Kong equities were largely unchanged for the month, my Australian and New Zealand equities rose strongly.  Commodity prices deteriorated (especially silver). Currency movements were slight adverse (in particular the AUD). Cash flow from the properties was positive with all properties fully occupied. Income was high and there were no major expenses. The result was a modest increase in net worth.

Here are the details:

1. my Hong Kong equity portfolio was largely unchanged. There were no new investments this month. I hold shares in CMR which is currently suspended following an attack by a short seller alleging fraud. I have arbitrarily assumed that the shares will fall by a third when the suspension is lifted;

2. my AU/NZ equities appreciated sharply;

3.my ETFs went sideways in line with the local markets;

4. my commodities fell sharply, with silver the biggest loser;

5. all of my properties were occupied with all tenants paying on time. There were no major bills this month but I will have two major bills in March - one repair job which is semi-structural and a levy for building refurbishment;

6. currency movements were negative, with the NZD largely unchanged while the AUD fell against the HKD/USD;

7. my position in bonds remains small;

8. there were no open derivative contracts at month end;

9. savings were very high with good income and expenses were low;

10. I transferred some money to Mrs Traineeinvestor.

My cash position rose with more money coming in than going out due to new investments. I transferred some money to Mrs Traineeinvestor which is treated as an expense. I currently hold 52.3 months of expenses in HKD cash or equivalents. This is above my target floor of 24 months.

For the month, my net worth increased by 1.6%. The year to date increase is 8.0%. My retirement date has been fixed for the middle of this year for reasons that have nothing to do with finance - financially, I am past the point where I can afford to retire.