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  Quotations - Invest  
[Quote No.29781] Need Area: Money > Invest
"At the risk of oversimplification, Australian banks raise debt funds internationally by issuing fixed rate bonds, floating rate bonds and short term commercial paper. Fixed rate bonds are issued at a fixed coupon rate involving a fixed credit spread over the government bond rate at the time of issue. The cost of borrowing, the interest bill, is thus fixed over the life of the bond. Floating rate bonds are issued as a fixed credit spread over some variable indicator rate such as Libor [London Inter-Bank Offered Rate], and movements in Libor over the life of the bond affect the interest rate amount paid by the bank. Commercial paper [i.e. ABCP - Asset Backed Commercial Paper which differs from RMBS - Residential Backed Mortgage Securities] is rolled over as it matures and the new interest rate reflects current market rates and credit spreads required by investors." - Kevin Davis
Commonwealth Bank chair of finance, University of Melbourne, and director, Melbourne Centre for Financial Studies.
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[Quote No.29782] Need Area: Money > Invest
"Falling fixed rate loan rates [offered by banks] are a sure sign that funding costs will fall [below the fixed rate] in future." - Tony Boyd
Financial journalist with 'The Business Spectator'.
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[Quote No.29783] Need Area: Money > Invest
"...all four of Australia's big banks were involved in Friday's Lehman Brothers [it went broke in September]credit default swap auction in New York, something that would have come out this week and further eroded confidence in them. Westpac, NAB, ANZ and Commonwealth last week all signed letters adhering to the so-called 'Lehman Protocol'. This is not a Robert Ludlum novel, but a document published last Monday by the International Swaps and Derivatives Association to set out the rules for participating in the settlement of Lehman covered transactions, which took place on Friday. All parties to Lehman Brothers credit default swaps were required to deliver adherence letters to ISDA before the auction. As discussed previously, the average price at the auction was below 10 cents, which means the $US400 billion of Lehman CDS were settled at a discount of more than 90 per cent. It is not clear whether the Australian banks were buyers or sellers of credit default swaps with Lehman Brothers as the reference party, but it is hard to understand why they would be involved in the trade at all. It is possible they bought CDS protection over Lehman because many of their Australian clients – municipal councils and charities – invested in synthetic CDOs (collateralised debt obligations) from the local Lehman subsidiary, Grange Securities and are, themselves, exposed. In that case they will receive cash, not pay it out. Then again it might be simply that like everybody else in the banking world they have been trading derivatives. Certainly if the big four Australian banks have sold CDS protection to others over Lehman, and therefore have to now cough up big payments because of the its default on September 15, that would have been a nasty announcement to make this week..." - Alan Kohler
Highly repected Australian financial journalist. Published in 'The Business Spectator', 13 Oct 2008.
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[Quote No.29784] Need Area: Money > Invest
"PANIC on Wall Street and world sharemarkets has quickly spilled into property, spooking buyers and sellers, pushing Melbourne's weekend auction clearance rate down 4%. In some suburbs less than half the houses and units listed for auction found a buyer. Real estate agents reported that conversations at public auctions and open-for-inspections were dominated by the collapse [crash] of the Australian sharemarket on Friday and fears of worse to come this week. The jitters easily overshadowed the 1% interest rate cut by the Reserve Bank on Tuesday, and turned many auctions into lonely affairs. The clearance rate for metropolitan Melbourne fell to 62% while many private negotiations after the hammer fell failed. 'What we are seeing is a stalemate,' Eric Cohen, of Eric Cohen Real Estate, McKinnon, said. 'Buyers are certainly worried about the sharemarket and they are happy to wait even longer now before buying into property. And not only are they not buying, they are also not even looking, not turning up to open for inspections.' Clearance rates in the inner city, inner east and the west fell below 50%. In the inner east, the rate sped to 37% against 53% for the previous weekend. ANZ [bank's] chief economist Saul Eslake said he believed prices would only fall significantly if owners began panic selling. 'But the more common reaction among vendors who are not selling because they have to is not to sell, and remain in the property for longer,' he said. 'Turnover drops, perhaps sharply; real estate agents' incomes decline, and state governments experience shortfalls in revenue from stamp duty'." - Eli Greenblat
Financial journalist. Published in 'The Age' newspaper, 13th October, 2008.
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[Quote No.29785] Need Area: Money > Invest
"The CBOE Volatility Index (VIX) [sometimes called the 'fear index'] is useful to corroborate your thoughts that a market is getting overpriced as it tends to show greater volatility when large institutional investors are either starting to reduce their levels of equity allocations, selling to the highly optimistic retail investors before a market tops, or starting to increase their levels of equity allocations, buying from the highly pessimistic retail investors before a market bottoms. While this isn't always useful - it didn't show much greater volatility before the one day 20% 1987 crash, it did climb significantly in 2006 until and through the 2007-09 stock market crash. So while it can't be used on its own, in conjunction with a knowledge of the long term trend, stock rotation theory and relative strength, and the Advance:Decline ratio or AD-Line, which charts the ratio of daily advancing to falling company shares, it can help you feel more or less certain that the market is nearing a top or a bottom and help you decide to sell off or buy, a bit at a time, often called dollar cost averaging." - Seymour@imagi-natives.com

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[Quote No.29786] Need Area: Money > Invest
"When markets are topping and then crashing, cash and patience are King and Queen of the investment scene. While some of the more adventurous knightly sort, may even consider gold to hold and shares to short!" - Seymour@imagi-natives.com

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[Quote No.29787] Need Area: Money > Invest
"The Australian economy will not be protected from the worsening global financial [credit and stock market] crisis, with forecasts of 300,000 job losses as sectors of the economy plunge into recession. The meltdown is now deep enough to cause the economy to slow rapidly, with forecasts by NAB showing growth could fall to less than 1 per cent in the next year. The slowdown will be driven by and sharp declines in commodity prices, hammering national export income, and falling wealth levels. The domestic share market yesterday experienced its worst one-day fall since the October 1987 crash, as 8.3 per cent was wiped from the S&P/ASX200. The sell-off was broad, ranging across all sectors, but most evident in resources stocks amid fears the world economy could sink into recession. The market crash cost Australian investors $95 billion yesterday, taking the cost of the bleak week to $190 billion. In yesterday's session, the S&P/ASX200 ended at 3960.7, down 360.2 points, while the All Ordinaries closed at 3939.5, off 351.8. The week's performance -- 15 per cent of share value was lost -- was the worst since the 1987 crash. In Asia, the Tokyo market had its biggest fall in two decades, plunging 9.6 per cent, while Hong Kong dropped 7.2 per cent. London market was down 7.89 per cent, while Paris CAC and German Dax were both off by 8 per cent. And the futures trading indicated a horror night on Wall Street. NAB [National Australia Bank] will revise its growth forecasts next week, with the prediction that the economy will grow by just 1.25 to 1.5 per cent for the 2009 year. The IMF [International Monetary Fund] has maintained its call of 2.25 per cent growth for the year, but NAB believes the crisis is now so bad the economy will be hurt in the wash-up. The unemployment rate will be revised up, from 4.3 per cent now to 6 per cent by the end of next year, meaning that 300,000 jobs will be slashed. 'This is not good for the economy,' NAB's chief economist Alan Oster said last night. 'The way this is going, you would have to think that it's going to take a significant amount of growth out. Commodity prices are down 30 per cent and the secondary wealth effects are very significant.' 'With unemployment at 6 per cent that means about 300,000 jobs could go.' Mr Oster said there was now evidence the economy was in need of fiscal stimulus, which could be delivered through increased public sector spending. 'There's not a lot that can be done about this; hopefully the market will rally,' he said. 'What can be done is, pump up fiscal policy, and I would say rates will be cut a lot,' Mr Oster said. 'I wouldn't encourage tax cuts in this environment because people will put the money under the bed.' 'I would say infrastructure spending ... anything if you can get a productivity gain, then that would be a good long-term investment.' Mr Oster said consumers would be most effected by the downturn and would return to the spending behaviour of the 90s when the economy was in recession. ABN AMRO chief economist Kieran Davies said confidence was down and financial indicators were now in a recessionary phase, which increased the risk of a 'hard landing' for the economy. The Dutch investment bank is now so bearish on the performance of the economy that it has cut the forecast growth to just 0.5 per to 1 per cent in the next year, well down on its initial forecast of 2 per cent. 'This is not far from a recession and we might yet shift our call given that falling financial share prices are now at the point where they foreshadow an outright contraction in the economy,' Mr Davies said. 'A more significant trigger for a hard landing would be if the resources boom suffers a short-term setback.' [since Australia's economy has a high proportion of mining companies, including BHP and RIO.] The future direction of spot commodity prices, and then the effect on the domestic economy, is now under question after sharp falls in commodity price targets by Goldman Sachs. [Australian and New Zealand Bank's] ANZ's chief economist Saul Eslake said he believed the jobless rate of the economy would lift to 5.5 per cent, but part of that increase will come from the abolition of new jobs growth. 'The Australian economy is not in need of a fiscal stimulus, we are not in recession yet,' Mr Eslake said. 'We aren't looking at massive unemployment.' 'There aren't reports of waves of retrenchments, there has been some, but not waves.' 'We also have not seen widespread business failures.' However, Mr Eslake said the ramifications of the market meltdown were not strong enough to begin to effect the federal Government's bottom line. The budget surplus in the next year is predicted to fall from its current estimation of $21.7 billion, as tax revenue declines. The Government will also take a hit on Capital Gains Tax [CGT] collection, which has been one of the fastest growing sources of revenue in the past few years. In the past budget year, CGT amounted to $11.4 billion, which was 64 per cent higher than the previous year. May budget papers forecast CGT collection as high as $17 billion. 'The revenue to the Government will be less, CGT will have to fall, who has made a capital gain?' Mr Eslake said. 'The super funds tax revenue is clearly going to be affected by this ... this is going to allow the automatic stablisers to work.' Mr Eslake said it could be a positive for the Government to allow a budget deficit to increase public spending and restore confidence and economic growth. There were calls in the financial markets for the Government to inject some confidence into the market. Citi yesterday forecast that with lower household spending patterns, despite the front-loaded rate cuts delivered this week, that industrial stocks will take the most hits. The bank said there were clear risks that analyst's earning forecast of 8.7 per cent were still too high and would be marked down [finally as they stopped deluding themselves and the market with overly optimistic growth expectations and price targets] as the market floundered. Citi [bank] chief economist Paul Brennan said a threat to the economy was the direction of commodity prices, where spot prices are now in line with long-term contract prices. 'The outlook for commodity prices is less favourable, after a long period of being bullish across the board,' he said." - Scott Murdoch
Published in 'The Australian' newspaper, October 11, 2008.
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[Quote No.29788] Need Area: Money > Invest
"BIS Shrapnel senior economist Jason Anderson said that if Australia's economy slowed on the back of weakening global [share] markets, the effect would probably be gradual and the Reserve Bank would respond by cutting interest rates - making it a good time to invest in property. [if you have a secure job, meet bank lending criteria and dont buy a property which is over-priced, i.e. over 3 - 4 times your gross wage, or difficult or unrewarding to rent, even if you are negatively gearing it for a deductible loss to legally lower your income tax and boost your investment returns.] 'We probably won't see a clear or substantial shift in the next month or two, but I think if we get through to the end of the year and the banking system remains in as reasonable quality as it currently is [even though we are in the middle of a credit crunch and stock market crash] then as we go into February-March next year we should see prices starting to improve,' Mr Anderson said. While six- to 12-month term deposits looked good [now], the cash option would become less attractive because the cash rate was on the way down, he said. 'The nearer the cash rate comes to 5 per cent [it has just been reduced from 7% to 6%] you will have a bit of an ignition point because you can find gross yields on residential property at or above that level,' he said. 'All indications are this isn't going to be a case where the cash rate comes down and then it's back up to 6 per cent or 8 per cent in a year or two. I think it's going to stay low until we've moved through some of the problems in the credit market'. [Therefore best, while interest rates are falling, to have variable rate loan and then lock in a fixed rate at the low end of the interest cycle before the rates start increasing again.]" - Angus Hohenboken
Published in 'The Australian' newspaper, October 11, 2008.
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[Quote No.29789] Need Area: Money > Invest
"[In a credit crunch and stock market crash with its accompanying psychological wealth loss effect retailers and banks can be effected significantly as explained in the following newspaper excerpt:] Our economy relies on what is termed 'money velocity', that is, how quickly a dollar moves through the economy and is recycled (re-spent or invested). Roughly two-thirds of Australia's economic activity, or GDP (and the world's GDP) comes down to consumers spending and spending quickly. Contrary to current thinking it's not all about the mining boom, which accounts for only about 15% of Australian GDP in boom times. Hence the emphasis on consumer spending patterns. When Gerry Harvey came out and said Harvey Norman [a large Australian furnishings, white goods and electrical chain store franchise] could see a trend developing towards a 5% reduction in consumer sales by Christmas, it was a clear signal to the RBA and the banks that 1.5%-plus in interest rate easing would be needed within the next twelve months to slow this rate to 1-2 %. While 5% may not sound like much but extrapolated across the broad economy it equates to billions of dollars not being recycled throughout the economy. Retailers in Australia are shedding jobs, the banks are watching a sharp reduction in client transaction volumes, and settlements are said to be slowing - which means that people are holding off paying each other and trying to hang onto their cash. Velocity is beginning to stall. The RBA expresses this as 'demand softening faster than expected'. What is the extent of non-performing loans, those which are eight weeks or more behind in repayments? What will be the consequences if unemployment began to rise? Indeed Australian's banks have been notching up record profits and their 70% payout ratios keep the stock prices high. Things look good. Though the risks are somewhat menacing despite the historical comfort of robust capital adequacy ratios. Contributing to capital adequacy is the fact that all the home loans that used to sit on the banks' books have now been on-sold [as Residential Mortgage Backed Securities - RMBS] and the banks now, in theory, have no exposure. What would happen though were interbank transactions to be unwound and the debts were to come back on the books? We will have to wait for a couple of months till we see what the RBA [Reserve Bank of Australia] already knows." - Michael West
Published in the Australian newspaper, 'The Sydney Morning Herald', October 11, 2008.
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[Quote No.29790] Need Area: Money > Invest
"[Here is an example of a company's efforts to prepare itself for difficult trading conditions and possible recession from the 2008 credit crisis and stock market crash and be in a position to grow through acquisitions should strategic, distressed priced opportunities appear.] In its annual report to shareholders released yesterday, Toll [a multi-method transport company] said the distribution of Toll's stake in Virgin Blue to Toll shareholders as an in-specie dividend in August had strengthened its balance sheet and left the company well placed to manage any economic downturn. 'At the same time, the strength of our ongoing cash flows and debt capacity will enable the company to pursue growth opportunities, both in Australia and in support of our global forwarding and Asian contract logistics businesses,' the report said. Toll, which has grown through a voracious acquisition strategy, has in recent years snapped up targets in Asian markets, but until now has not set foot in Africa." - Blair Speedy
Published in 'The Australian' newspaper, October 10, 2008.
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[Quote No.29801] Need Area: Money > Invest
"[In markets, after the boom comes the bust.] After the liquidity comes the liquidation. After the outsized recklessness comes the appropriate regret." - Bill Bonner
Founder and eloquent editor of the financial newsletter, 'The Daily Reckoning.
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[Quote No.29804] Need Area: Money > Invest
"There are clear signs of value appearing [in the Australian share market in October, 2008, after a 40% drop over the last year]. There are clear signs that people are becoming overly pessimistic and that’s not unusual. Markets overreact, both in the bullish phase and the bearish phase, and you see clear signs of over-reaction on the bearish side right now – in the papers [magazine covers, on television] ... anywhere you care to look." - Denis Donohue
One of the Bancassurance’s most highly rated fund managers, who after running Australian insurance company Suncorp's investment team for two decades, runs style neutral - both value and growth styles - boutique fund manager, Solaris Investment Management.
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[Quote No.29806] Need Area: Money > Invest
"The economic crisis [in 2008, in fact any economic crisis] is the opportunity of a life-time for investors." - Martin J. Whitman
Founder and Co-Chief Investment Officer of the highly successful Third Avenue Management LLC and author of 'The Aggressive Conservative Investor'.
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[Quote No.29807] Need Area: Money > Invest
"In the middle of every [economic] difficulty lies [a share market] opportunity. [to buy great companies at great prices]" - Albert Einstein

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[Quote No.29808] Need Area: Money > Invest
"Instead of a conventional cyclical downturn, Australia [in 2008] is reaching the end of a debt-fuelled 20-year super-cycle, says Morgan Stanley's Gerard Minack and a small band of other analysts who have remained deeply bearish on the markets and the economy even before the US sub-prime mortgage crisis hit in August last year. [A credit super-cycle is where interest rates are kept too low for too long thereby encouraging loosening of lending institution's standards so loan to income and loan to value ratios became too high, in order to make a commercial profit. The low interest rates and easy credit also discourage savers from putting their money into banks so they go on a binge of consumption and real estate and stock market speculation.] So far, the debt bears have got it right. On Minack's analysis, the central dynamic at play in Australia and globally is the deleveraging of a bank lending system and a household borrowing sector that became overloaded with debt over the past two decades. Facilitated by easy credit, the debt binge drove up asset prices, especially for housing. Whenever the debt build-up hit a speed bump, economic policy quickly pumped up growth, putting off the reckoning to another day. The stock market panic and the seizing up of credit markets [we are experiencing now] are the symptoms of the purge. The key dynamic is the brutal forced deleveraging of the household and banking sectors. This is crunching over-inflated asset values, concentrated in banking stocks and housing prices. Australia did not display the extremes of the US debt and housing boom. With a smaller underclass, we did not have the same excess of sub-prime mortgage lending. Yet, as Minack points out, Australia looks more vulnerable to a household debt correction than the US on a number of measures. While we did not overbuild to the same extent as the US, our house prices inflated much more, even though the Reserve Bank checked their rise in the early 2000s. And Australians borrowed much more against this apparent increased wealth. Australians used to carry much less debt than Americans. On latest figures we now carry much more: 182 per cent of annual gross household income, compared with 134 per cent. Consider what the purging of this may mean over the next two years. Households sharply cut back their consumer spending and demand for credit. Banks ration the supply of credit. Housing prices fall 20 per cent. Unemployment rises [from 4 percent to] above 6 percent. Much of the $20 billion budget surplus disappears [being spent on economic stimulus packages as well as higher social security entitlements like unemployment welfare]. While exports hold up the official numbers, Minack says that 'in almost every practical sense I think the domestic economy faces recession in 2009'. " - Michael Stutchbury
Economics editor for 'The Australian' newspaper. Quoted from an article published October 14, 2008.
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[Quote No.29809] Need Area: Money > Invest
"[In the present credit crisis and looming recession steps will be needed to stimulate the economy's growth.] The economic outlook is so grim that the Federal Government should abandon concerns about inflation and run down next year's forecast $20 billion budget surplus to zero, or a slight deficit, by cutting taxes, raising welfare payments and investing in infrastructure, economists say. Other ideas include a one-off payment to the states for infrastructure spending, a one-year cut to the goods and services tax and an immediate boost to the age pension. Above all, economists said the Government should let the surplus shrink automatically as revenue from company tax, capital gains and income taxes shrink and more people lose their jobs and claim benefits. 'There's absolutely no reason why you can't have small deficits for a number of years,' said Brian Redican, an economist at Macquarie Bank. Mr Redican said the Government should aim to get the projected surplus of $19.7 billion for next financial year down to zero or even 'pushed into the red' to help stimulate the economy. 'The point of having a strong balance sheet and a large surplus is that when that rainy day comes along that you can utilise it.' Mr Redican said investing in infrastructure, such as state transport systems, would help to create employment while also making the system more efficient for when the economy took off again. The chief economist at ANZ, Saul Eslake, said measures to help households should be targeted at low-income families, like pensioners, who would spend the money immediately. Direct payments would be better than tax cuts. 'People will tend to save tax cuts more in these circumstances,' he said. The chief economist at Morgan Stanley, Gerard Minack, said higher spending and lower interest rates would be required. 'The shame, of course, is that the very loose fiscal policy of the past five to six years has left us with a smaller buffer than we should have had'." - Jessica Irvine
An article from Australia's 'The Sydney Morning Herald' newspaper, published October 14, 2008.
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[Quote No.29810] Need Area: Money > Invest
"Understanding the economic, business and share market cycle, sector rotation and relative strength is very important for successful share investing. The key to coming to grip with these is thinking about, as an economy speeds up, where is most of the spending, at that time, and how does this increased demand effect supply and therefore prices/costs/inflation. In this way it is easy to see the way the economy and things like the cost of credit - interest rates/monetary policy and inflation, effects company profits and share prices first in the financial sector of the economy then consumer discretionary then industrial and lastly materials, mining and energy." - Seymour@imagi-natives.com

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[Quote No.29811] Need Area: Money > Invest
"[The following article gives some insight into what happens to commercial property, which includes Real Estate Investment Trusts -REITs, during recessions.] Tuesday's one percentage point drop in interest rates did not only cheer up the residential developers and those with big mortgages. It gave some optimism to commercial property owners, many of whom paid too much for their buildings and have flooded the market with properties [for sale in order to reduce their debt to equity ratios and interest expense]. The assumption is that funding costs are coming down, so there will be a positive margin above loan repayments for the first time in many years. Unfortunately, it looks like a false dawn. The banks have tightened their lending criteria and the days of gearing above the 50 per cent level are long gone. Buyers may want to use debt, but it will still be very hard to come by. Also, the so-called 'fundamentals' that underpin values such as vacancy and rental rates won't be immune from the [current] credit crisis and wobbly business confidence. Only a few of the big cashed-up private investors have started buying so far, and then it has been very selectively and in comparatively small deals. Despite the drop in interest rates this week, most expect property market conditions to weaken further. Head of property for the Roberts Family's RF Capital, Ian O'Toole, says the family is waiting for prices to drop to 2003 levels -- and that won't be until next year. The family sold its 26 per cent of the then listed builder Multiplex to Canada's Brookfield in 2007 for $1.1 billion, ending 45 years of family control. O'Toole says the downturn will present a once-in-a-lifetime opportunity to buy property -- but it's not yet. 'It's a classic three-phase downturn,' he says. 'First capitalisation rates blow out [so asset values fall], then market fundamentals such as vacancy rates and rents deteriorate [so income falls]. Finally, the market bumps long the bottom. The average downturn is 22 months, but this will be a lot longer.' O'Toole expects office building vacancy rates to rise to double-digit numbers. 'Office was the last bastion against a downturn. But look at Sydney -- it has the largest exposure to the finance sector,' he says. Retail property was usually the last to come under pressure, but the near-collapse of Centro Properties Group had resulted in shopping centre values being affected first. The one bright spot, says O'Toole, is the lack of over-building in the office market, with supply and demand in equilibrium at the moment, unlike 1991 [in the last recessionary downturn], when cranes dotted the horizon. RF Capital expects to spend $300 million on property acquisitions in the next 12 months -- but it will be on what O'Toole calls 'boring property' or so-called core assets (properties with long leases and secure income). O'Toole estimates that private investors have 'a couple of billion dollars' to spend. With interest rates falling and the Australian dollar down [and still falling], O'Toole expects the re-emergence of the international buyers such as German funds, sovereign wealth funds and private equity funds. 'It will be a game of patience,' he says." - Turi Condon
Property editor for 'The Australian' newspaper, published October 09, 2008.
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[Quote No.29812] Need Area: Money > Invest
"In recessionary times beware dividend traps. As asset values fall and debt to equity ratios become too high companies will consider either raising more equity which will dilute and devalue existing share holders or reducing the dividend they pay out in order to rebuild the equity in the company. As interest rates fall the opportunity to reduce dividend yields becomes less damaging to the stock prices. So beware of buying for a high dividend yield especially if the company has high debt levels as the high yields are unlikely to remain." - Seymour@imagi-natives.com

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[Quote No.29813] Need Area: Money > Invest
"Statistics, if tortured sufficiently, will confess to anything." - Jonathan Pain
Chief Investment Strategist, Morgan Stanley
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[Quote No.29814] Need Area: Money > Invest
"The investment landscape is littered with extraordinary opportunity...at times of financial crisis." - Jonathan Pain
Chief Investment Strategist, Morgan Stanley.
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[Quote No.29815] Need Area: Money > Invest
"[Here is an excerpt from an article during the 2008 credit crisis and recession that discusses how savings rates increase at these times.] Whilst liquidity and lending will gradually improve, governments will want to rebuild 'their' [considering they have just part nationalised some banks and guaranteed both their deposits and future wholesale borrowings] banks' balance sheets as fast as possible. Globally, official interest rates will be slashed; the unusually co-ordinated cuts earlier this week by six major central banks is but the start. Lending rates however, will stay high thus increasing the margin between deposit rates and the price of loans [and therefore the bank's net interest margin and profit]. Fees will also soar, such as new extra charges in most economies for arranging a mortgage. Many did not exist at all even a year ago. Credit card companies will lower credit limits to individuals, irrespective of true personal wealth, as their imperative has switched from maximising profits to minimising losses [which is the new conservative attitude in banks too, with their tighter lending criteria including lower loan to value and loan to income ratios]. Only the best personal balance sheets will get decent-sized limits. If individuals cannot obtain credit, they are forced to save if they want to buy a new car, or a home. In the 1970s and early 1990s recessions, savings rates in advanced countries rose dramatically: in Britain from 2% to 12%, in America a slightly smaller rise. 12% again seems a good educated guess, especially as the starting point is record low savings rates (-1.1% in the UK for the first quarter). Thus the impact on retail economic activity is dire. As governments tax more and cut expenditure, and the consumer is forced to save, this is why for 2009 we pencil in at least two quarters of serious GDP contraction for the UK, US, Spain, Australia, Ireland and Italy." - Bedlam Asset Management
London, England based fund manager published October, 2008.
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[Quote No.29816] Need Area: Money > Invest
"[If you have an interest in defence stocks the following might help you get a better grasp of how their shares fare in recessions.] We did not expect that within two weeks of a financial meltdown, Russia would have achieved a key military ambition. As four Scandinavian governments dithered over supporting their fifth cousin a window opened, in through which Putin flew like Count Dracula, with a $4bn lifeline to Iceland's government: 'no strings attached'. Oh yes? Russia in Europe has always been 'choked'. The Black Sea/Bosporus ext is tricky. Large naval vessels can leave Petersburg but the Baltic straights too, are narrow. Hence much of the fleet is in the only other port, Murmansk. Even from there, the problem has been that to get the navy into the North Atlantic, it is blocked by other straits such as the English Channel. In 2005/6, NATO schizophrenically decided to poke Russia in the eye by putting missiles along its European border, and also to close its Keflavik Airbase in Iceland (although there are still a few odd American planes there). It has handed Russia at worst a neutral sea passage, almost certainly a refuelling base/friendship zone. This makes us slightly dither about defence stocks. They look cheap but historically in recessions, governments have slashed military expenditure. The UK could cut back its still quasi-imperial ambitions and become a Belgian-type power. Even so, across all Western Europe, so antiquated are many armaments and so poorly equipped many of the troops, it may be that defence, usually the first cow to the slaughter is actually fattened up instead. America too has usually slashed defence budgets in previous recessions, and could do so now. Any one of the 14 battle fleets has more fire power than the entire Chinese navy. The totality of America's naval firepower is nearly 60% of the entire world's navies combined; such overwhelming superiority is unnecessary in terms economic expenditure or national security. Yet operating in two oceans, with Russia sending off a fleet to Venezuela in one (we're amazed the rust buckets got there at all) and a Chinese naval building programme which is accelerating, we suspect America's military will continue to claim its full funding. So too wills NASA: rocket launches already planned from Asia will allow more communist cadres to peer down at Houston from space than ever before. This is not going to be popular." - Bedlam Asset Management
London, England based fund manager published October, 2008.
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[Quote No.29817] Need Area: Money > Invest
"Gabriel Andre Falling [bear] markets are almost always faster than rising [bull] markets. It means that the 'panic' generated by the bears is much more powerful than the 'exuberance' generated by the bulls. " - Gabriel Andre

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[Quote No.29823] Need Area: Money > Invest
"Please remember what the job of the Bear is [in a falling/bear market]. His aim is to destroy your capital. But he can only do so if you're willing to stay in the market and keep your capital at risk. In the last week October 12, 2008], fear and panic were so prevalent that there were no buyers in the market. Capital fled, indices fell and the marketplace was deserted of bulls. The Bear's job now is to sucker you back in, to make you think the worst is over and that this is a rally you can't afford to miss. He does that by giving you a rally that seems convincing. A rally you can't resist. [But don't forget the lesson's of history.] In the huge stock market Crash of 1929 the Dow lost 49% in less than a month. [Then] the bear got clever. Between November of 1929 and April of 1930, the market zoomed up 52% in just five months. It didn't make a new high. But the price action was surely enough to sucker many investors back in, believing the worst was over. It wasn't. [This is why bear market rallies are called suckers' rallies.] Over the next two years, stocks fully priced in the debt deflation in the economy and fell 86%." - Dan Denning
Financial journalist with the financial newsletter, 'The Daily Reckoning'. Quote from 14th October, 2008, edition.
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[Quote No.29824] Need Area: Money > Invest
"[Don't assume that after a stock market crash and the following recession that jobs will be easy to find.] 'I'm thinking about going back to work,' says one retiree to the New York Times [in October 2008]. Another says he will not be able to retire when he had planned. But these fellows have only just begun to sweat. Jobs were plentiful in the boom years - so easy to get that people assumed they could always find work. That, too, could be changing fast. Unemployment is rising. And after last week [when the stock market dropped 20%], every company executive in America must be considering a freeze on new hiring plans...and cutting unnecessary workers as fast as he can. The typical business spends more on labor than anything else. And in a downturn, labor is the one cost employers can control. So, the marginal worker could soon find himself with no money...no credit...and no job. Go back to work? Where? [One report stated that economists are expecting the unemployment rate in the U.S. which over the last year has gone from 5% to 6% to reach about 9% next year!]" - Bill Bonner
Founder and editor of the financial newsletter, 'The Daily Reckoning'. Published 14th October, 2008.
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[Quote No.29825] Need Area: Money > Invest
"Bailouts and state guarantees to shore up the [financial] system [in the light of the 2008 credit crunch and stock market crash] may help, but they also strain public finances and raise concerns that the government may be tempted to inflate away its debts by printing money. [In periods of currency weakness and panic, gold becomes popular as a store of purchasing power.]" - Richard Daughty
General partner and Chief Operating Officer for Smith Consultant Group. Published in the 'Economic Focus' column in 'The Economist' magazine, October 2008.
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[Quote No.29827] Need Area: Money > Invest
"The introduction of exchange traded commodities (ETCs) has permanently changed the nature of commodities investing, opening up a key asset class to a much wider range of investors than in the past. An ETC is a securitisation process that allows you to trade the price of commodities on the sharemarket with having to actually buy or sell the actual commodities. The first ETC was a gold one listed in 2003 on the Australian Stock Exchange by the founders of ETF Securities. Since then, a full platform of ETCs has been listed on exchanges across Europe, giving a wide spectrum of investors direct access to physically backed gold, silver, platinum and palladium and the ability to take long, short and leveraged positions in commodities ranging from livestock to copper." - Nicholas Brooks
ETF Securities
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[Quote No.29828] Need Area: Money > Invest
"Instalment warrants have become one of the most popular equity derivatives used by Australian investors over the past decade [1998 - 2008]. Economically, they offer investors margin loan-type leverage within a less risky product structure that allows the investor to 'walk away' from the loan - usually called the instalment payment - if the underlying share price falls below the level of the loan. For example, buyers of ANZ [Australia and New Zealand Bank] instalments, which might have an instalment payment of $15, can choose not to pay that amount if the underlying shares fall below $15. If an investor had a margin loan of $15 per share on ANZ shares they do not have the option to walk away from their liability to pay back the loan. One of the most popular strategies used by instalment warrant buyers over the years has been the dividend yield play (DYP). In this strategy, investors obtain exposure to the dividend streams on their favourite shares by buying instalment warrants over them. Since the instalment warrants are leveraged products, investors could significantly enhance their dividend yields because despite outlaying only a fraction of the capital to purchase the instalments, they still receive the full dividend - and applicable franking credits. That is, if ANZ shares were trading on a cash dividend yield of 5 per cent, investors could buy an ANZ instalment warrant for half the price, still receive the same cash dividend and therefore double their yield to 10 per cent. This strategy has been used regularly with instalments over the big four bank shares, which have a long history of paying attractive, fully-franked dividends. The continued use of the strategy is therefore reliant on the dividend payout ratios on those bank shares. That is, if the big four banks reduce their payout ratios then investors will not derive the same dividend yields from the bank shares or any instalments over those bank shares. That makes investing in instalment warrants less attractive. The ABN AMRO research team believes it is highly unlikely that the banks will reduce their dividend payout ratios due to the large amount of support from retail investors, who buy bank shares for the fully-franked income stream. If the banks dropped their dividends, retail investors may not continue to support the shares, which would produce further downside pressure on their prices. As a result, given the currently depressed share prices of the big four banks [in 2008 from the credit crisis, stock market crash and looming recession], if the banks keep paying the same dividends, the yields should look very attractive." - Aaron Stambulich
Head of Equity Structured Products and Warrants at ABN AMRO Group Australia and New Zealand.
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[Quote No.29829] Need Area: Money > Invest
"Detailed analysis of performance of the A-REIT [Australian - Real Estate Investment Trust] sector through 2007 and 2008 [at the start of the credit crisis, stock market crash and looming recession] reveals that while the fall in value has been sharp and widespread, it has not been indiscriminate. The sharpest falls have been recorded by those REITs with extensive exposure to weak offshore markets, those with high levels of debt and those with exposure to relatively high risk activities such as property development and tourism. This process has probably run its course now. Indeed, there are signs that the REIT sector is already recovering from the excessive pessimism of June and July. Viewed from this perspective, the sector's fall is a vote of no confidence in the business models of many REITs. It is not a precursor to a collapse in underlying asset values in the domestic market. In this important respect, the performance of A-REITs differs from trends abroad. It is also sharply different from the experience of the early 1990s [when there was also a recession] when oversupply, particularly in the office market, saw sharp falls in value of real estate assets. Most A-REIT managers have drawn a sharp lesson from the past 12 months. Debt levels are being reduced. Offshore portfolios will be critically examined. Development activity will slow. The sector will be recapitalised. None of these strategies will be painless. We can expect that REITs will more carefully consider their capital management and introduce more conservative distribution policies. 'Back-to-basics' is the theme. However, the good news is that underlying asset values held in the Australian portfolios of REITs are reasonably robust. We can expect some retreat in values over the next 12 months, but this is probably already reflected in REIT valuations. Fundamentally, commercial property - offices, shopping centres, warehouses and distribution centres - are high yield, low capital growth assets. Falling interest rates and high levels of debt [which A-REITs have been using for the last few years in the Australian very low interest rate environment] are cosmetic devices that can make them look like high growth assets and, indeed, the past five years convinced many people - investors and portfolio managers alike - that the sector had been transformed. [from the staid, high dividend yield but low capital growth investments that risk averse investors used to know.] The sharp falls through 2008 have been a reminder that this is not so. What will emerge is a sector that will resemble the past - and REITs will return to the job they do best - delivering steady income and financial stability." - David Rees
Regional Director, Head of Research, at Jones Lang LaSalle.
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[Quote No.29830] Need Area: Money > Invest
"The ASX [Australian Stock Exchange] interest rate market enables investors to invest in bonds as they do shares. Companies, like individuals, need to raise money from time to time to fund day-to-day operations or expand their business. A company can raise money in a variety of ways: for example, it can issue new or additional shares, or it can borrow. Most people would be familiar with how companies issue shares, but far fewer would know how companies borrow. Companies can borrow from a bank or lending institution, or they can sell negotiable Interest Rate Securities, often referred to as bonds, to other companies or to individuals. Bonds have the advantage over other forms of borrowing in that they are sold directly to investors thereby increasing their return and making bonds a less expensive fundraising option for the borrower. The introduction of the interest rate market on the Australian Stock Exchange (ASX) has given investors easy access to a market where they can buy and sell bonds in the same way as they trade shares. [Be aware that if you don't hold the bond until the maturity date but sell earlier, the price achieved will be determined by the comparison of the face value of the bond yield - the higher the more risky of default - and the current risk free central bank cash interest rate. So is bought the fixed -interest rate bond for $100 and pays 10% per annum while the central bank rate is 5% and the central bank rate goes to 10% and you try to sell the bond the market will probably only pay you $50 because the bond is twice as risky as cash so they'll want twice the current interest rate. If the central bank lowered interest rates to 2.5% and you sold the bond you would probably get around $200, depending on many factors including the reamaining time before maturity, etc. So it is possible to use bonds for yield or capital gain speculation. Like all investing you must become knowledgeable, especially about the risks, in order to be successful. If in doubt, then don't do, or go and get independent, competent advice.] In Australia, investors often have a large portion of their portfolio in either cash management or bank accounts. These are not, by definition, investments in fixed interest securities. In general, interest rate securities tend to have higher yields than both cash management accounts and bank accounts. The high levels of cash in both cash management accounts and bank accounts can give rise to under-performing investment portfolios. Cash is not usually an efficient investment over a long period of time compared to other investments [although once in about 7 years it is the best for that year]. It is important to remember that there are different risks involved with an investment in interest rate securities and having cash in the bank. It is important that investors are fully aware of the products in which they are investing and the particular mechanics of those products. It is advisable to consult a licensed financial advisor before making any investment decision. Differences between bonds and shares: -Interest rate investments provide investors with a steady and reliable income stream, whereas returns from share investments fluctuate in line with the profitability of the company; -Shareholders are owners of the business and receive a return (dividend) related to the company's profitability; -Bondholders are creditors of the company and their return is a fixed rate of interest paid regularly until the bond (loan) is repaid at maturity by the company; -Bondholders have a prior claim on the company's assets relative to shareholders, making bonds a safer investment than shares; -Bondholders carry a lower risk than shareholders and therefore the return they receive can be lower than the return from shares; and -Bondholders are repaid their investment at a specified price (face value) and at a predefined time (maturity date), whereas shares have no fixed maturity; rather, shareholders decide when they no longer want to be an investor in the company, selling the shares and accepting the prevailing market price. Portfolio diversification: An important consideration in investing is diversification among the different asset classes so that the effects of shifts in market conditions have minimum impact on the long-term performance of a portfolio. For example, a rising [booming] sharemarket produces positive returns, which encourages an increasing number of investors to put all their money into equities. This may leave the investor vulnerable if the buoyant market cycle ends [crashes] and equities lose value. To achieve an acceptable level of diversification, professional fund managers typically invest about 20 per cent of their portfolio in interest-bearing securities. The average Australian do-it-yourself superannuation fund, however, invests a much lower amount, about 5 per cent. To maximise the benefits they receive from investing, it may be favourable for Australian investors to minimise their exposure to avoidable portfolio risk; a basic way to minimise risk and protect a portfolio may be by diversifying. Diversification is achieved by: -The number of asset classes. Usually it is best for a portfolio to contain a mix of assets such as interest rate securities, shares, cash and property. -Increasing the number of individual investments within an asset class. Most investors in shares would be familiar with this concept; that it is usually sensible not to have all their shares in companies in the same industry or sector. For example, they should not hold shares exclusively in banks, or solely industrial stocks. Rather, investors know that it is generally beneficial for a portfolio to hold a mixture of shares from different sectors, representing holdings in mining, bank, insurance and industrial companies. The same applies to interest rate securities: an investor typically would not hold solely securities issued by companies that are in the same industry, or perhaps sector. Furthermore, to soften the potential impact of market or interest rate changes on overall return, it is usually wise for a portfolio to also include a spread of maturities." - Australian Stock Exchange

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[Quote No.29831] Need Area: Money > Invest
"[Interest rate securities - bonds:] -Primary market: A primary, or new issue, market for Interest rate securities is created when a company first offers them for sale to the public. Just as Telstra [an Australian Telco] sent out a prospectus to members of the public outlining the opportunity to buy shares in the company as part of its initial public share offering (IPO), companies seeking to raise funds by issuing (selling) bonds publish a prospectus [PDS - Product Disclosure Statement] offering investors the opportunity to buy a particular Interest rate security. An Australian example was the launch, in 'DJ Financial Notes' earlier this decade. Those wishing to invest in the primary issue phase would first evaluate the issuer's offer in the prospectus and then subscribe for a number of securities. -Secondary market: Existing Interest rate securities are traded in the secondary market. There are two main types of secondary markets: over-the-counter markets run by investment institutions and banks and conducted by traders via telephone; and exchange-traded markets operated by licensed exchanges such as ASX [Australian Stock Exchange]. Interest rate securities in Australia have traditionally been traded in an over-the-counter market. But ASX has made it easier for these products to be traded on its exchange. Brokers can use their SEATS (Stock Exchange Automated Trading System) screens to compare the returns offered by ASX traded Interest rate securities with those of other interest-rate products such as term deposits, finance company debentures and cash management accounts. A list of ASX traded Interest rate securities available to investors is provided on the ASX website, in the Australian Financial Review, or can be obtained from a stockbroker. Note: The over-the-counter market exists primarily for institutional investors [for example superannuation funds]. This market does not require a prospectus for new securities, but has a minimum investment of $500,000, and hence is not appropriate for most retail investors. -ASX's interest rate market: ASX's interest rate market offers three key benefits to investors. 1-Transparency: Until the establishment of the ASX interest rate market the information about Interest rate securities and yields was not available from a single source. ASX interest rate market provides investors and their advisers with ready access to information about the price and return (yield) of different Interest rate securities and facilitates comparisons with other interest rate products. As the market develops, ASX expects that investors will find it increasingly easy to select the investments with the return which best suits their chosen level of risk. 2-Ease of entry and exit: Locating shares and Interest rate securities on common trading and settlement systems, SEATS and CHESS, enables investors to move more easily between asset classes. 3-Liquidity: Prior to the establishment of this market, investors holding Interest rate securities which they wished to sell before maturity had limited options for achieving this. At worst they had to accept the price that was offered by the issuer to buy back the securities. Listing these securities provides investors wishing to sell their Interest rate securities with access to a broader range of potential buyers, which creates price tension and assists in improving the price available to the seller. -Components of interest rate securities traded on ASX: When a company issues an interest rate security, it enters into an agreement to pay interest to the buyer of the Interest rate security at a certain rate (the coupon rate) until a defined date (maturity). The coupon payments during the life of the bond and the payment at maturity are the two cashflows arising from Interest rate securities. An interest rate security therefore can be said to have two components: 1-the face value (principal sum) or the amount originally lent by the investor, usually expressed in units of $100, and repayable to the investor at a predetermined fixed date (maturity) of the Interest rate security. 2-interest on the face value (principal sum), which accumulates at a predetermined and fixed (coupon) rate. This coupon interest accrues daily and is paid to the investor on predetermined dates, usually quarterly or half yearly. -The following characteristics identify an Interest rate security: -an issuer (the borrower); -an income stream (the coupon); -payment of the income stream (coupon frequency); -return on investment (the yield); -repayment amount (the face value); -expiry date (maturity date); -purchase price (cost of investment); -accrued interest; and -transferability. Characteristics of interest rate securities: -Face value: Face value is the amount that is to be paid to an investor at the maturity date of an Interest rate security. Interest rate securities can be issued at different face values, however, in Australia, Interest rate securities typically have a unit face value of $100. -Maturity date: The final coupon and the face value of an Interest rate security is repaid to the investor on its maturity date. The time to maturity can vary greatly from short term (up to four years), medium term (five to 12 years) or long term (12 or more years). Perpetual securities have no maturity date. -What is a coupon? A coupon represents an interest payment paid at regular intervals by the issuer to investors, and it is normally expressed as a percentage per annum. The coupon rate is the interest rate paid to investors during the life of the security and is determined when the issuer first sells the securities into the market. The coupons vary according to the type of Interest rate security. A fixed rate security has a coupon that is fixed for the life of the security. A floating rate note has a coupon that varies in line with a benchmark rate, usually at a margin above the bank-bill rate, and is different at each payment date. -Coupon frequency: Coupon payments are made at regular intervals throughout the life of the Interest rate security and are usually quarterly, semi-annual or annual payments. Fixed rate Interest rate securities generally have semi-annual coupon interest payments while floating rate notes usually pay quarterly coupon interest. -Yield: The yield is the return an investor receives on an Interest rate security. The yield is based on the price paid by an investor for an Interest rate security and the payments (coupons) received if the security is held to maturity. The most important types of yield are the nominal yield and the yield to maturity. Nominal yield, also known as the coupon rate, is the cashflow investors receive from an Interest rate security and does not change throughout the life of the security. Yield to maturity is the return an investor receives at a given price. It is the most useful indicator of the value of an Interest rate security because it enables comparisons to be made of the return between different types of Interest rate securities and interest rate based products. -Call provision: Some Interest rate securities, notably perpetual securities, have a call provision attached. This gives the company the right, but not the obligation, to buy back the securities from investors at a particular point in time at a certain price. -Price: The price of an Interest rate security is stated as a percentage of its face value. For example, a price of $100 means 100 per cent of face value; a price of $99.90 is 99.9 per cent of face value; a price of $102.45 is 102.45 per cent of face value. -Purchase price: The purchase price (also known as the gross price) is the total amount that an investor pays for a bond. Purchase price = the number of bonds that an investor buys multiplied by the price paid for a bond. The purchase price includes two components: Capital price which is the price estimated by the market and is based on a number of variables including the general level of interest rates, maturity date, status and credit quality. Accrued interest which is the amount of interest accumulated on an Interest rate security since the last coupon payment. Because interest is known and paid at regular intervals the security price increases daily by the amount of interest accruing. On a 6.50 per cent annual coupon, interest accrues at 1.78 cents per day per $100. Immediately following the coupon payment the price should fall by the amount of that coupon payment. The purchase price of a bond is determined by adding any accrued interest to its capital price. Whereas the capital price of a bond may remain stable from one day to the next, its gross price will fluctuate to reflect the amount of interest accruing. -Transferability: Unlike other forms of interest rate products, such as term deposits and cash management accounts, Interest rate securities are negotiable instruments, that is, investors are able to transfer (trade) their securities to other investors. Just as investors can buy and sell shares, Interest rate securities can be traded and their ownership transferred. Ownership of bonds is recorded on a register in exactly the same manner as shares. Specialised companies operate registries for Interest rate security issues and make interest and maturity payments to security holders on behalf of the issuer." - Australian Stock Exchange

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[Quote No.29832] Need Area: Money > Invest
"Preference shares usually carry a right to a fixed percentage dividend, eg 10% of the nominal value, before ordinary shareholders receive anything and holders also have the right to the return of the nominal value of their shares before ordinary shareholders (but after creditors). They do not have voting rights. They can be cumulative or non-cumulative. Cumulative means that if the company has difficulties and stops the dividend to shareholders, then the dividend accumulates and will be paid when the company restarts paying dividends." - Wikipedia.com

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[Quote No.29833] Need Area: Money > Invest
"In finance, a warrant is a security that entitles the holder to buy stock of the company that issued it within a specified time, times or perpetually - at a specified price or time-dependent price - which is usually higher than the stock price at time of issue. A warrant is similar to a call option in that it gives the holder the right but not the obligation to subscribe for ordinary shares in a company. Warrants, however, are issued by the company itself and are therefore a liability to the shareholders of that company. Warrants are usually issued in conjunction with a new issue of bonds, preferred [preference] shares or common shares, as an inducement to buy an offering of common stock or other securities. " - Wikipedia.com

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[Quote No.29834] Need Area: Money > Invest
"Option: A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). Options are extremely versatile securities that can be used in many different ways. Traders use options to speculate, which is a relatively risky practice, while hedgers use options to reduce the risk of holding an asset. In terms of speculation, option buyers and writers have conflicting views regarding the outlook on the performance of an underlying security. For example, because the option writer will need to provide the underlying shares in the event that the stock's market price will exceed the strike, an option writer that sells a call option believes that the underlying stock's price will drop relative to the option's strike price during the life of the option, as that is how he or she will reap maximum profit. This is exactly the opposite outlook of the option buyer. The buyer believes that the underlying stock will rise, because if this happens, the buyer will be able to acquire the stock for a lower price and then sell it for a profit." - Investopedia.com

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[Quote No.29835] Need Area: Money > Invest
"Put: An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date. When an individual purchases a put, they expect the underlying asset will decline in price. They would then profit by either selling the put options at a profit, or by exercising the option. If an individual writes a put contract, they are estimating the stock will not decline below the exercise price, and will not increase significantly beyond the exercise price. Consider if an investor purchased one put option contract for 100 shares of ABC Co. for $1, or $100 ($1*100). The exercise price of the shares is $10 and the current ABC share price is $12. This contract has given the investor the right, but not the obligation, to sell shares of ABC at $10. If ABC shares drop to $8, the investor's put option is in-the-money and he can close his option position by selling his contract on the open market. On the other hand, he can purchase 100 shares of ABC at the existing market price of $8, then exercise his contract to sell the shares for $10. Excluding commissions, his total profit for this position would be $100 [100*($10 - $8 - $1)]. If the investor already owned 100 shares of ABC, this is called a 'married put' position and serves as a hedge." - Investopedia.com

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[Quote No.29836] Need Area: Money > Invest
"Call option: An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period. It may help you to remember that a call option gives you the right to 'call in' (buy) an asset. You profit on a call when the underlying asset increases in price." - Investopedia.com

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[Quote No.29837] Need Area: Money > Invest
"Debenture: A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture. Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk free because governments, at worst, can print off more money or raise taxes to pay these type of debts." - Investopedia.com

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[Quote No.29838] Need Area: Money > Invest
"Convertible Preferred Stock: Preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Also known as convertible preferred shares. Most convertible preferred stock is exchanged at the request of the shareholder, but sometimes there is a provision that allows the company (or issuer) to force conversion. The value of convertible common stock is ultimately based on the performance (or lack thereof) of the common stock. [The same result can be achieved by using preferred/preference shares and warrants]" - Investopedia.com

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[Quote No.29839] Need Area: Money > Invest
"[After a period of easy credit comes the inevitable tightening. In 2008 the tightening was accompanied by a stock market crash and a recession. Here's a comment that goes to the heart of the credit binge:] Globally, banks are going to be much more cautious animals. At the dinner last night, one former UK credit controller said that he knew that HBOS [Hibernian Bank of Scotland] in the UK [United Kingdom] was going to hit serious trouble [It had so much trouble it had to be recapitalised by the government and temporarily part-nationalised, 14th October 2008] when he watched them up lending levels to six times income. It had never been done before, anywhere." - Robert Gottliebsen
Highly respected Australian financial journalist. Published in 'The Business Spectator', 15 Oct 2008.
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[Quote No.29845] Need Area: Money > Invest
"[Here is an article showing Australian government following the Keynesian economic theory that in recessions where consumer and business spending falls, government spending should increase to try to make up for it:] Kevin Rudd [The Australian Prime Minister] has declared Labor will spend more public money if its $10.4 billion economic pump-priming package fails. But economists expect the package, including one-off cash handouts for pensioners, low-income families and first-home buyers, will fuel a six-month spending spree that will sustain economic activity and allow Australia to maintain economic growth. The Prime Minister delivered a sombre message to the nation last night about the Government's latest response to the financial crisis. It came shortly before the US unveiled plans to spend $US250 billion ($360 billion) on shares in its nine biggest banks, following the example set by the British Government. The Rudd measures are designed to counter weeks of international stock market turmoil and overseas bank collapses now cascading into the real economy, threatening economic growth and jobs. Warning that history showed the best way to respond to market gyrations was to 'act decisively, act responsibly and act early', Mr Rudd laid out his plans to inject into the economy one-off payments worth 1 per cent of the national GDP [Gross Domestic Product]. But he also said the situation was so grave more action might be required. 'As Prime Minister, it is my job to level with the Australian people,' he said during the televised address last night. 'I don't intend to gild the lily. There will be tough times ahead.' 'But the Government remains determined to take whatever action is necessary in the future to steer the economy through this global financial crisis.' Markets had earlier responded enthusiastically to reports of the latest US plans, with the Australian Stock Exchange gaining 3.7 per cent yesterday. It has now recovered 9.5 per cent of the ground lost last week, when it plunged almost 16 per cent. The gains in Australia yesterday were smaller than those in New York, where there was an 11 per cent jump, or in Japan, where the share index leapt 14 per cent. The London stock market was up 6 per cent in early trading, and Wall Street early today opened 4 per cent up. British Prime Minister Gordon Brown, who has led the world in the reconstruction effort, said Mr Rudd's spending plans were an example to other world leaders. Having flagged the moves on Monday, Australian investors did not react to the Government's budget stimulus, with the market steadily losing ground after having shot ahead by 6 per cent in the opening minutes of trade. Mr Rudd will fund the stimulus package from the Government's 2008-09 budget surplus, predicted in May to reach $22 billion. It will send billions of dollars into the economy, including $4.8 billion via one-off payments to pensioners to tide them over before permanent increases occur next July. Those increases are still being finalised. Single pensioners will receive $1400 and couples $2100 from December 8, with the payments covering all pension categories and also extending to self-funded retirees who hold commonwealth senior health cards. Carers will receive $1000 for each person in their care, also from December 8. And two million families eligible to receive Family Tax Benefit (A) pensions will receive $1000 for each eligible child in their care at a cost of $3.9 billion. The Government will buttress housing sector activity, doubling the first-home buyer grant to $14,000 and tripling it to $21,000 on newly constructed homes until June 30 next year. The housing measure will cost $1.5 billion. The Government will also proceed with earlier announced plans to bring forward infrastructure spending to early next year and will spend a further $187 million creating 56,000 more training places in 2008-09... As the Opposition pledged its support for the stimulus package, Wayne Swan, who returned to Australia yesterday after weekend talks with international leaders in Washington, said the world had changed fundamentally in recent weeks. 'We are in the midst of the worst financial crisis ever to confront the modern market economy,' Mr Swan said. 'The sooner that governments act to protect their people the better.' Mr Swan said Australia was in better economic shape than the rest of the world but could not escape being affected by global events, with the International Monetary Fund predicting zero growth in advanced economies and negative growth [recession] in emerging nations. Economists told The Australian yesterday the package would sustain economic growth over the December and March quarters and was cleverly targeted at low-income earners, who would spend the bonuses quickly. 'We will get a bounce in consumer spending towards the end of this year and early in 2009, and that is when consumer spending would have been under greatest pressure,' Macquarie Bank senior economist Brian Redican said. The mid-year budget update to be published next month is expected to include treasury modelling showing the effect of the stimulus. However Treasury has been influenced by US research showing a boost to budget spending of 1 per cent of GDP produces a similar lift in economic growth. The US launched a $US150 billion budget stimulus package in May, equivalent to 1 per cent of its economy, and Australian treasury officials believe this contributed to the positive growth achieved by the US this year, despite it being the epicentre of the global financial crisis. Treasury expects the boost to the economy from the spending package will be much greater than from the Reserve Bank's 1 per cent interest rate cut. [earlier this month] A study by Treasury's chief economist David Gruen estimated that a 1 per cent interest rate cut would lift GDP by 0.3 per cent in the first year and a similar amount in the second. Although nearly all the money being handed out is expected to be spent by the end of next June, the Government is expected to increase pensions by at least as much as the lump sum payments, which are equivalent to $36 a week for a single pensioner and $52 a week for a married couple. Treasury is finalising estimates for its mid-year budget update. Although several private forecasters believe the budget will skate close to a deficit both this year and next, the Government is confident that it will remain in the black. Although capital gains revenue has plummeted, the Government's revenue this year has been boosted by the record iron ore and coal contracts and by the devaluation of the dollar, which together may have boosted the estimated surplus this year by as much as $5 billion before accounting for the new spending package. ANZ senior economist Mark Rodrigues said the deterioration in the economic outlook had cut the likely budget surplus this year from the $21.9 billion forecast at budget time to no more than $7.3billion now. 'The budget will be very close to balance in 2008-09, with the potential for a movement into deficit,' he said. Morgan Stanley chief economist Gerard Minack said the budget would fall into deficit this year, with a likelihood it would be seriously in deficit in 2009-10 by as much as 2 per cent of GDP." - Matthew Franklin and David Uren
Published in 'The Australian' newspaper, October 15, 2008.
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[Quote No.29846] Need Area: Money > Invest
"Once companies start getting weakness in the revenue line [which shows demand and sales are falling, and if their costs remain the same their profit margins will fall so earnings and], profitability will start to deteriorate. [The share's price/earnings ratio - pe - will be effected so as the earnings fall so will the price to keep the ratio within the historic range justified by the company's long term growth rate prospects. The price fall is made worse by share investors trying to sell quickly before the company deteriorates any further. This exodus can force the price below its intrinsic, long-term mental business value offering opportunities for long-term value investors who eventually start buying.]" - Mark Demos
Minneapolis-based fund manager at Fifth Third Asset Management, which oversees $21 billion.
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[Quote No.29847] Need Area: Money > Invest
"While it is always important to be cautious of investing in companies that have too much debt, it is particularly important to consider this towards the top of a market [boom] cycle [before share prices fall perhaps dramatically - quickly and greater than 20% perhaps even up to 40% or more] as the credit cycle is ending and interest rates are getting higher to deal with inflation, because when demand does fall, as a consequence of this, companies who have not reduced their 'debt to equity' and 'interest cost to earnings' levels will get into real difficulty, especially if there is a credit crisis making getting more credit almost impossible, which happens about once every four downturns/recessions. The father of value investing, Ben Graham, who faced many recessions in his investing career, in his book 'The Intelligent Investor', gives some rough guidelines about what to look for in this regard. Safer companies have: [From the balance sheet] 1-total debt [including bonds and preferred shares] less than half total assets [although utilities because they have very stable earnings even during recessions can have debt up to two thirds of total assets but no more]; 2-total debt [including bonds and preferred shares] less than twice net current assets; 3- long-term debt less than net current assets (i.e - working capital); 4-current liabilities [those due within one year] less than one third current assets [i.e. working capital - which can be liquidated within a year]; [From the Income Statement] 5- earnings at least three times greater than the cost of interest [including bonds and preferred shares]; 6- earnings at least 50% more than dividends [or in other words the dividend payout percentage is no more than 67%]. Also be particularly careful about the 'value' of assets [and therefore the equity after dedts are subtracted] for real estate [including Real Estate Investment Trusts - REITs] and investment fund companies, as these can dramatically fall with changes to demand and valuation in recessionary difficulties [for example: real estate- capitalisation rates, vacancy rates, rents; and funds- share values, dividends, assets under management after redemptions]. In this way it is possible to sell those companies than are likely to become insolvent and go broke or lose the greatest percentage of their share price with a market fall and require either equity raising that dilutes the price and dividends of existing share holders still further and/or stopping or reducing dividends and yields/payout ratios for some time in order to rebuild the equity level of the company." - Seymour@imagi-natives.com

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[Quote No.29848] Need Area: Money > Invest
"Bull markets go to people's heads. If you're a duck on a pond, and it's rising due to a downpour, you start going up in the world. But you think it's you, not the pond." - Charlie Munger
Highly successful value investor and trusted business associate of Warren Buffett.
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[Quote No.29849] Need Area: Money > Invest
"When the market is falling for example in a bear market or recession, rather than sell your shares, it is possible to buy put options over the shares or the market as a whole. Put options appreciate in value as the share or index falls, thus providing an offsetting hedge." - Seymour@imagi-natives.com

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[Quote No.29850] Need Area: Money > Invest
"Citi Smith Barney analysts found the average dividend cut in Australian recessions since 1960 has been 30%. [A company with a strong business model will have only two years in ten when its dividend is less than the year before. It usually but not always corresponds to years of lower earnings per share.]" - Seymour@imagi-natives.com

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[Quote No.29854] Need Area: Money > Invest
"The Debt-Deflation Theory of Great Depressions: The two key factors that cause a Depression, he [economics professor, Irving Fisher, in his book about the 1929-32 Great Depression, which he lived through,] argued, were excessive debt and falling prices. Though other factors might lead to a crisis (such as overconfidence or excessive speculation), debt and deflation were the two key forces that turned a garden-variety downturn [slowdown or mild recession] into a Depression. As he very poignantly put it (since he himself was a victim): 'over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money. That is, over-indebtedness may lend importance to over-investment or to over-speculation. The same is true as to over-confidence. I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt.' [At the time of the Stock Market Crash of October 1929, the US’s debt ratio was 150%; today it is 290%. Australia’s ratio was 64%; today, it is 165%.] Fisher then laid out the sequence of events that follows when a financial crisis ensues in the context of excessive debt and low inflation [which is just the opposite of exactly what caused the boom in the first place]: '(1) Debt liquidation [sometimes called deleveraging] leads to distress selling and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) A fall in the level of prices [deflation], in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be (4) A still greater fall in the net worths of business, precipitating bankruptcies and (5) A like fall in profits, which in a 'capitalistic,' that is, a private-profit society, leads the concerns which are running at a loss to make (6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to (7) Pessimism and loss of confidence, which in turn lead to (8) Hoarding and slowing down still more the velocity of circulation. The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.' After the [Stock Market] Crash of 1929, when business debt was dominant, many firms found themselves with debt repayment commitments that they couldn’t meet out of cash flow. They undertook 'distress selling' to try to raise the money they needed — and because everyone dropped their prices, prices fell across the board [similar to what happens in the stock market when prices fall - people rush to sell to get out before prices fall any more driving the prices down still quicker and those with margin loans find the prices sold at don't aways cover their margin loans, which is why margin loan levels are regulated because they can be lethal when prices are falling]. Even firms that managed to pay their debts down in nominal terms found that their revenues fell even more than their debt, leading to 'Fisher’s Paradox' that: 'the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing.' ... [Between 1931 and 1933, the rate of inflation fell from trivial levels (of between 0.5% and 1% p.a.) to minus 10% p.a.] Economic growth also came to a shuddering halt as the ensuing credit crunch cut spending levels, and as cash-strapped businesses sacked their workforce. That decline is also evident in the data, with the rate of real economic growth falling from 6% before the crash to minus 8% after it – and as low as minus 13% in 1932... The decline in both output and prices meant that the debt to GDP ratio continued to rise after the Stock Market Crash of 1929 – even though credit was tight, and anyone who was in debt was trying to reduce it... [debt ratios continued to rise until 1932–from 150% to 215% of GDP in America, and from 64% to 77% of GDP in Australia.] The effect of this decline on employment was so severe that it has remained etched into humanity’s psyche. When the Stock Market began its collapse, the level of unemployment in America, as recorded by the National Bureau of Economic Research, was 0.04% – one 25th of one percent. Three years later, it reached 25%. Australia’s unemployment rate blew out too, from a higher initial level of 9% to a peak of 20% in 1932. The world had suddenly moved from The Great Gatsby to They Shoot Horses, Don’t They?" - Steve Keen
Australian economist. From his article 'The Failure of Central Banks', published October 6th, 2008, on Debtwatch.com
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[Quote No.29855] Need Area: Money > Invest
"Markets have the ability to adjust and they're very flexible. There is this invisible hand. But it is also prone to be mistaken. In other words, markets instead are reflecting reality. They always look at reality with a bias. There is always a prevailing bias. I'll call it, you know, optimism [bull markets]/pessimism[bear markets]. And sometimes those moods actually can reinforce themselves so that there are these initially self-reinforcing but eventually unsustainable and self-defeating boom/bust sequences or bubbles. And this is what has happened now [in the 2008 subprime loan credit crisis and market crash]. This current economic disaster is self-generated. It was generated by the market itself, by getting too cocky, using leverage too much, too much credit. And it got excessive." - George Soros
Legendary investor
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[Quote No.29856] Need Area: Money > Invest
"Economic strength and interest rates are two important fundamental share market considerations for judging the movement of currencies. A strong economy engenders confidence in domestic markets, increasing their attractiveness to foreigners who need to purchase the currency to buy stocks or other assets." - Seymour@imagi-natives.com

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[Quote No.29860] Need Area: Money > Invest
"What people still are missing [in today's credit crisis and stock market crash] is that every growth story of the last five to ten years has been based on credit. China, commodities, real estate, hedge funds, everything was a capital-intense endeavour. Global growth was the symptom of the credit bubble. [literally a super-liquidity bubble, where the ease of cheap credit drove up demand and therefore volume and prices for everything.]" - Richard Bernstein
Chief investment strategist at Merrill Lynch. Published in 'The Wall Street Journal', 16 September 2008.
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