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Scary stuff

Discussion in 'General Investing Discussion' started by Tropo, 16th Aug, 2007.

  1. Tropo

    Tropo Well-Known Member

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  2. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Thanks Tropo,

    Very scary stuff indeed. Actually makes me consider trading out of my MF holdings completely on the back of the current bounce from the fed cutting commercial rates by 0.5%.

    Might be time to be out of the game for a while and let the market settle where it will before even thinking about borrowing to get back in again.

    I'd have to pay my margin lender some bucks to clear my debt, but I can do that readily out of my cash reserves. I'm currently at -$80K in negative equity. Would take my PPOR back from paid off as the cash reserves are in the mortgage offset account, but right now I'm starting to feel very risk averse.

    I reckon this is much bigger than painted and that the current level at even 5700 is probably unsustainable. I could foresee 5000 or even 4500 before this is ended. Would hate to have to sell the IP in a fire sale to fund my managed fund margin calls...

    Cheers,
    Michael.
     
    Last edited by a moderator: 22nd Aug, 2007
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Why on earth would you do that ? Unless you were so highly geared that a sharp drop in the market took you beyond 100% geared on your margin loan ? The lender is unlikely to let you get that far unless we were talking about a real crash (20%+ in a day such that someone already at 80% LVR hit 100% very quickly).

    Why not just progressively sell down the managed funds as required ?
     
  4. voigtstr

    voigtstr Well-Known Member

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    +199.4 up around 5850 currently
     
  5. Glebe

    Glebe Well-Known Member

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    Michael,

    I'm no smarter or insightful than anyone else, but if I were in your shoes, rather than doing something (selling down), I'd do nothing except take a step back from all the emotion and noise surrounding the markets at present. Then, in a clearer mood and market, make a decision based on the information at hand.
     
    Last edited by a moderator: 20th Aug, 2007
  6. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Glebe,

    Good advice, except that the "clearer market" might be at 4500...

    My intent is to hold through this and rely on the strength of the global economy to overcome the global credit squeeze. At the end of the day they are the two main contending factors at the moment. One will win and decide the level at which global markets trade for a while. I was backing the strength of the global economy, but this credit squeeze is big and could be enough to tip the balance.

    But for now I'll hold and hope that the global economy has strength.

    Just wondering whether we're seeing the beginning of the cash cycle. We've seen property and then equities. Maybe the smart money has already moved to cash, and not because its just playing the cycle game but because that is the place you'll get the best returns for the next few years. Some times equity preservation is more important than trying to deliver equity growth.

    Cheers,
    Michael.
     
  7. voigtstr

    voigtstr Well-Known Member

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  8. MichaelWhyte

    MichaelWhyte Well-Known Member

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    All just noise...

    Of course we were going to have a strong day on the back of the US rate cut. Time will tell whether its sustainable though. Its all a question of whether a 0.5% cut in rates in the US is enough to halt the dissolution of the yen carry trade and the global credit squeeze. Personally I don't think it is and I believe when a few more big lenders collapse all these short-lived gains will dissappear and then some.

    I still reckon 5000 is looking more likely than 6400. But only time will tell, and I'm probably too chicken to make that call and bail completely from the market. Basically, like many, I'm rolling the dice that the economy is strong enough to pull us through this squeeze. But quietly I have my doubts.

    Cheers,
    Michael.
     
  9. Tropo

    Tropo Well-Known Member

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    Michael,

    I would take Sim&Glebe suggestions.
    Sure...we are not off the hook yet, but there is no drama as I am concerned.
    Current pull back is very nasty indeed, but that's what markets do from time to time.
    Stay :cool:
     
  10. Tim

    Tim Well-Known Member

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    Michael,

    I personally have been very suprised at how much emotion is involved in 'losing' money on paper, and how quickly I myself turned from being optimistic to pessimistic on seeing red on my position statement.

    However, maybe it is worth you imagining that you have absolutely no shares or MF at all and you have been sitting on the sidelines for the past 3 months - would you dive in and buy now or figure the worst is yet to come?

    Might help to think about...

    Tim
     
  11. Rickson

    Rickson Well-Known Member

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    Tim

    From a number of years of using margin loans, I have found that there is nothing "on paper" about losses in a margin loan.

    Much has been written about losses in share investing being "on paper" until you sell and realise the losses. Some conventional wisdom says stick them in a bottom drawer and you have not experienced a loss until you sell them.

    However, when you are using a margin loan to fund share or managed fund ownership, these funds are marked to market every day (or every few days when managed funds prices catch up). The realities of losses in a margin loan account are:

    1 You pay interest every day - for every day you choose to stick the problem in the bottom drawer, you are exacerbating your losses due to the interest charges. You are also paying interest if you have used "equity" in property to fund the investment via the margin loan.

    2 Dividends or fund distributions can further reduce the balance/LVR of your funds. There is a lag in receipting these, and there is also related tax obligations. Interest accrues through this time.

    3 Losses are magnified - eg for shares/funds which the margin lender loans 75% (which I found were increasing until recently)a loss of 5% will decrease the equity relating to this by 20%.

    4 Even for investments with an LVR of 50%, a 10% fall in prices causes a 20% equity loss.

    5 When all of the funds are borrowed, as with using an LOC to fund the equity in the margin loan account, losses effectively reduce the equity that has been hard won from property (for example). Timing can be critical, but only knowable after the fact.

    Having said all this, property and margin loans have been a good vehicle for me - but extreme caution is needed for people using the combination (especially funding the investment in equities with property equity).

    Obviously, less is at risk if cash or other resources are used to fund the margin loan, rather than equity.
     
  12. Rob G.

    Rob G. Well-Known Member

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    Isn't this thread just saying that volatility has just changed your valuation of the investment ?

    Also your cost of capital has been changed where loans are secured against those same investments ?

    I guess at times like this I would look more to fundamentals for valuation rather than market sentiment, but that is my style.

    If your price is just what someone else might pay for your investment then these are troubling times.

    Rob
     
  13. DaveJ

    DaveJ Well-Known Member

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    It's always been about 'how others value your investment'... Why is gold or diamonds so valuable? They are just rocks, yet are the cornerstone of many currencies? Simplistic yes but $$ are $$...

    'Elder' mentions in some of his books that there is no such thing as a paper-profit. If you lose 'paper' profits then you are losing/gaining REAL money... Just my opinion

    DaveJ

    P.S. Pun intended :p
     
  14. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Hi Tim,

    That's exactly what I'm doing. I'm thinking from a sunk cost perspective. i.e. Are they fair value today, and I believe the global credit squeeze that is ensuing on the back of the subprime issues in the US makes the Australian more expensive than it was previously. I used to think 6400 represented the top end of fair value based on future earnings, but that it would run beyond fair value due to bull market euphoria. The global credit squeeze means the cost of borrowing just went up worldwide which will adversely effect corporate profits and by extension their share prices. This makes 6400 seem expensive but the true "fair value" range won't really be known until profit projections start to suffer and revised share prices / PERs can be calculated.

    I guess I'm saying that something like 6000 now feels more like fair value and where the market is trading now could be at the top of the fair value range. Given more shocks are set to ensue, maybe the sidelines is the more profitable place to be for the next 6 months.

    So, would I buy them now at the current price? Hell NO! Should I sell and realise an $80K loss... well that's a much harder question to answer. As I said, I'm a bit chicken and might just ride this thing to 5000 instead of making the hard call now.

    And as Rickson points out, its costing me just to be in the market when it goes nowhere, let alone when it falls. I use an LOC on my property as my equity funds and margin up with a margin loan, currently at 70%. Every penny of my invested $800K (pre-pullback, now $720K) is borrowed money at a weighted cost of capital of around 8% pa.

    Having said all that, I'm now going to wait and see how the market absorbs the US rate cut and some positive reports on the ASX this week from the likes of BHP. That might be enough to lift us back into 6200 odd territory.

    Cheers,
    Michael.
     
  15. Tropo

    Tropo Well-Known Member

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    'Elder' mentions in some of his books that there is no such thing as a paper-profit. If you lose 'paper' profits then you are losing/gaining REAL money... Just my opinion'

    Same here!;)
     
  16. Tropo

    Tropo Well-Known Member

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    Still the big question mark...

    "There's been a greater sense of calm today and there is some tentative interest to reestablish short yen positions," said Nick Bennenbroek, chief FX strategist at Wells Fargo in New York.

    But he said the jury's still out on whether the Fed's attempt to stimulate lending will succeed or fail to loosen up the credit market, and that was keeping investor risk-taking in check.

    "People are still wondering about the effectiveness of the Fed's actions," he said. "That's still the big question mark."

    The Australian dollar <AUD=>, a favored high-yielding target of carry traders, put in its best day in seven weeks, rising more than 1 percent to $0.8093.

    The Fed on Friday cut the discount rate it charges on direct loans to banks by half a percentage point to 5.75 percent, saying credit market tightening could slow U.S. growth.

    The move halted a global sell-off in stocks, a rally in government bonds and the rush to dump high-yielding currencies in favor of the yen.

    It also got Wall Street gearing up for the Fed to cut by year end its benchmark federal funds rate, which it has held at 5.25 percent since June 2006.

    High-yield "currencies are probably off to the races again, as the Japanese won't raise rates rapidly and the Fed is going to have to cut rates," said Monty Guild, principal of Guild Investment Management in Los Angeles.

    Bennenbroek said investors remain wary of a sharp carry unwind and in the absence of U.S. data are looking to equity markets for their cue.

    "I believe what the Fed did last Friday was just a symbolic gesture," said Joe Francomano, vice president of foreign exchange at Erste Bank in New York.

    "Markets are still skeptical of equities and carry trades in general and they will be looking to buy back the yen and sell high-yielding currencies once this euphoria about the Fed wanes."
     
  17. MichaelWhyte

    MichaelWhyte Well-Known Member

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  18. Tim

    Tim Well-Known Member

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    I alway find Shane Oliver optimistic - dunno whether his is realistic but I hope so.

    Tim
     
  19. MichaelWhyte

    MichaelWhyte Well-Known Member

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  20. Tropo

    Tropo Well-Known Member

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    Interesting....

    Interesting....

    Aussie Home Loans Chief Claims Australian Society ‘Maxed Out’ on Debt
    Aug 20th, 2007
    It’s all about debt these days. “We’re maxed out as a society. We’ve got too much debt. So every quarter per cent increase hurts so much more than it used to and that’s the risk,” said Aussie Home Loans chief John Symonds this weekend. You can see Symonds trying to get out in front of the coming discussion on ‘predatory lending’.

    It’s funny how markets make opinions. A few years ago non-bank lenders and low interest rates were lauded as “the democratisation of credit”. On the back side of the credit bust, the politicians will trot them in front of the cameras and denounce them as crooks and fraudsters. It’s a good public spectacle.

    In the meantime, don’t expect banks to issue fewer margin calls because of what the Fed did.
    If banks aren’t lending money for individuals and institutions to buy shares, shares will probably go down. “Borrowing to buy shares has more than doubled to AU$36.2 billion in the past two years, accounting for AU$88.8 billion worth of Australian stocks and helping to exacerbate the sharp falls on a highly geared market,” reports Lisa Macnamara in The Australian.

    We know one or two investors who got margin calls last week as the ASX fell. They were forced to either sell stocks or contribute cash. It’s easier on the nerves to sell.