Archive for May, 2008

Australia’s form of government is a constitutional monarchy with head of the state being Her Majesty Queen Elizabeth II, represented by the Governor General of Australia . Her role as a head of state of Australia is distinct from her role as Head of the State of the UK and other Commonwealth nations. There has been a long history of debate among Australians to convert their government to a Republic form where the head of the state will be a president who will be elected by the people. The debate started even before Australia become a federation in 1901.

The pro-Republican movement says that it is inappropriate for a person who is not resident nor a citizen of Australia to become the country’s head of the state. They also argue that the Queen cannot adequately represent Australia to the rest of the world because she lives in England not in Australia. The Queen is also the head of State of the UK and other commonwealth countries like Canada. The pro-republicans believe that it is improper for the same person to be both the head of state of more than one country. 

The pro-Monarch groups however think that the republican movement is a less patriotic and an anti-Australian move that does not defend the constitution. It is also a distracting and costly issue that divides people this time when there are actually many other real challenges and problems to face. They also believe that converting Australia to a republic would be very costly to implement and may affect the stability of the country’s economy.

There was a referendum held in 1999 where every Australians were asked whether they like Australia to become a Republic with a head of the state being President. The result is 55% voting ‘no’ to the republican model. Many Republican politicians believe that the circumstances have changed now and more people like to become Republic. There maybe a new referendum to come again especially now that the current Prime Minister is anti-monarch.

I can still remember when I was a little kid; the only brand of camera that I know is Kodak. We even use it as a verb for taking a picture such as “Can you Kodak me please?”. Perhaps the term would really have evolved into an acceptable verb if Kodak Company has retained its status as the world’s leader in photography as the term “google” is now an acceptable verb for searching something in the google website.

Before the age of digital imaging market has emerged in the late 1990s and early 2000, Kodak Company had a dominant market share in photographic films, paper and cameras. It’s only real rival has been Fuji Photo of Japan. However, in recent years Kodak has suffered huge losses due to the rapid growth of digital cameras and mobile phones with cameras. It has even stopped manufacturing the traditional film cameras in the United States and Europe. Its share price in New York Stock Exchange has plummeted by almost more than 5 times from US$83 in May 1997 to just US$15 in May 2008. The company announced sweeping job cuts, slashed dividends and came out with a plan to focus on digital imaging.

Do you think Kodak’s strategic positioning in the digital imaging market already too late? There are already many competitors in the digital imaging market these days and it may take them a long period of time to recover. However, for me I would still make a buy recommendation on their share especially now that it is in its all time low. There could still be a chance though as their distribution network all over the world is still efficient and their product image is still prominent in the market place. Who knows they might be able to find a niche in the digital imaging market in the near future and I would still be able to ask someone to take me a “Kodak” (now used as a noun) from my Technologically Advanced Digital Kodak Camera!

I just find this article today of Anthony Keane of news.com.au very interesting and worth sharing to everyone. Hope you enjoy reading.

 10 golden rules for successful investment

INVESTING is growing more complex by the day as we are bombarded with new products, new strategies and ever changing market conditions. However, if people follow a few simple rules, they can make sense of the confusion and enjoy success in the investing game.

Five financial experts agreed to share their golden rules of investing. Here are 10 of their best.

Invest regularly

Savings & Loans Credit Union senior manager financial planning Phil Butterfield says people should try to make a habit of investing or saving a portion of every dollar they make.

“Regular additions to your investment, as well as reinvestment of any dividends or interest to achieve a compounding effect, is a tremendous way to boost your investment,” he says.

ANZ financial planner Jacquie McCarthy says by investing regularly, you remove the risk of investing a lump sum right before a market slump. “The investment adage ‘time in the market is better than trying to time the market’ applies,” she says.

Financial Planning Association SA chapter chairwoman Kerrin Falconer says reinvesting dividends or interest income ensures you earn interest on your interest on your interest and so on.

“Compound interest does work,” she says. “It is often referred to as the eighth wonder of the world.”

Stay the course

This rule has been more important than ever in the past six months, with many investors tempted to sell their share portfolio after the market slumped more than 20 per cent.

Macquarie Private Wealth Adelaide head of strategic financial planning Jon Wells says when markets drop it can be tempting for some investors to lose sight of their long term goals.

“Panic selling and knee jerk reactions during a downturn will ensure any losses are realised and can have adverse consequences for your portfolio,” he says.

Ms McCarthy says it is important to be clear on the timeframe that you can invest for.

“Higher risk investments generally have a longer time frame associated with them in order to help with market recovery if required,” she says. Shares and property are the most common types of higher risk investments while cash and fixed interest offer lower risk and lower returns over the long term.

Chartered accountant Ernie Tatarelli from Tatarelli Consulting says markets move in cycles and highs and lows are a natural part of investment. “Over the long term market movements become insignificant,” he says.

Diversify

Keeping all your eggs in one basket can be a recipe for disaster and investors should aim to hold a range of different investment types.

Mr Tatarelli says diversification prevents your investment portfolio being over exposed to a poor performing asset class.

“A truly diversified portfolio should be spread across different investments within each of the major asset classes, including Australian shares, international shares and property,” he says.

Diversifying within asset classes means instead of just owning mining company shares, investors reduce their risk by also investing in such areas as retail, banking, healthcare, insurance, agriculture, energy and transport.

Avoid get rich schemes

“If it is too good to be true, it probably is,” says the FPA’s Ms Falconer. “Speculative shares that will triple overnight or fixed interest investments that offer returns of more than 10 per cent a year should always have a ‘buyer beware’ notice on them,” she says. “Take advice from professionals, not taxi drivers.”

Regular reviews

Investing is not a fire and forget activity. You need to keep up with tax and legislation changes. “A formal analysis of your taxation and financial situation on at least an annual basis will help keep you on track to meet your goals and objectives,” Mr Tatarelli says.

Some investors compile a monthly net worth chart keeping track of all their assets and debts to ensure their wealth is steadily growing and they are not spending their money on depreciating assets, such as cars.

Get the structure right

Savings & Loans’ Mr Butterfield says people need to choose the right balance between superannuation and non superannuation investments.

“Superannuation provides significant tax advantages, particularly in retirement, but you can’t access your super until you retire,” he says. “Non super investments can be accessed at any time but need careful management of the tax implications to give the best net return to you.”

Mr Tatarelli says investors should understand how investing in shares provides franking credits that can reduce overall tax payable and they should understand the rules surrounding superannuation.

Borrow to invest

Also known as gearing, borrowing to invest magnifies potential gains and losses.

“It means your investment balance is bigger, and therefore so is your potential return in dollar terms. Your investment needs to out perform the interest costs on your loan, however, those interest costs in most cases are tax deductible,” Mr Butterfield says.

“Borrowing to invest should be considered as a long term strategy but it is easy to establish and can also be set up as a savings plan where you borrow small regular amounts to add to your investment.”

Look long term

People should only invest in higher risk assets, such as shares and property, if they have a timeframe of at least five years.

Macquarie’s Mr Wells says a fundamental starting point to investing is understanding what you want to achieve and being realistic about how you are going to achieve it.

“This involves thinking about where you are now, where you want to be, how long it is going to take to get there and what level of risk you are comfortable with,” he says. Mr Tatarelli says people should aim to invest in a sound manner to build and protect wealth long term.

Seek professional advice

All five financial experts say this is an important rule. “Valuable advice from a licensed financial adviser can significantly improve your investment outcomes,” Mr Butterfield says.

Mr Wells says it is crucial to tell your adviser about your financial goals and dreams. “An adviser who understands you, your goals and your risk profile can guide you through both the rough and smooth of investing,” he says.

Spend less than you earn

It is one of the simplest rules but one that is broken more often than others.

“If you save you will then have the funds for investing,” Ms Falconer says.

“If you find it hard to save then do a budget. Often little things like taking your lunch to work cansave quite a few dollars.

For example, if you save $4 a day on your lunch you will save approximately $1000 over a year.”

Can you imagine a place wherever you go you will see red crawling organisms around? They’re around your house, around your office, in the shops and on the roads! Whenever you drive you can’t avoid but crush them and feel your tyres squashing them down the concrete and hear the eerie sound! Yes folks you heard it right and I’m talking about “crabs”. See them coming.. (more…)

During the first quarter of 2008, Andrew Forrest took over the title of Australia’s richest man from James Packer. His wealth was boosted by the increase in share price of Fortescue Metals Group (FMG), an iron ore mining company that he establised 5 years ago which he now owns 36%. In contrast to James Packer who owns a well-established and a very diversified holdings in media and gambling businesses in Australia and abroad, Andrew’s fortune is just situated in FMG. 

It should be noted that the market value of his Company is based on the share price traded in the exchange which takes into account not only the current mining site the Company owns and being operated but also includes all future operations and future iron ores that they’re going to mine. Share prices in the stock exchange are very sensitive to information released by the Company and some analysts. When the entity’s management or some analysts release favourable information to the public like for example, the Company discovered a huge deposit of iron ore in their mine site and the value of these is billions. This information will be incorporated into the Company’s share price as the investors speculates that the market value of the Company will grow in the future even though it has not happened yet. Even just a false rumour can affect stock prices. A false information of a mergers deal of two Companies will increase the share price of the target company and decrease the price of the acquiring company. This is because traders and investors speculate that the acquiring company believes that the target company is undervalued and will therefore buy it at a premium from its current market price.

Going back to Andrew Forrest’s riches, his wealth may not actually represent the current value of his Company. Is he able to sell his shares at the current market value? Probably not because selling such a huge number of shares will create liquidity bubble in the market causing the price to decrease. It may also bring negative signal to the market like the Company is not actually doing well and has negative prospects in the future that’s why the major shareholder is selling his shares and eventually will cause the share price to decline.  In short, we can probably say that his fortune is just “in paper” and not a real wealth yet to think the Company only made its first shipment of iron ore to China this month (May 2008). There are a lot of questions to ask. Is the Company able to sustain in several years and attain stability? Do their mine sites have enough iron ore reserves that will make the Company grow and meet investors expectations? Will the management be able to uphold and maintain the current culture and structure to keep the operations going? No one knows. We’ll see in the future.

Driving in Melbourne CBD can be quite stressfull because you share the road with the trams. If you’re not very careful enough you may bump into one of them in the intersection and the effect can be very bad because of the momentum. Having said that, a special traffic control system is implemented in intersections to give way to trams and also to improve traffic flow. This special traffic method is called the “hook turn”. You do a hook turn when you’re turning right and you need to wait in the left lane to go around instead on the right. You can only turn around right when the traffic light turns red. The hook turn procedures keep the middle of the road free for cars going straight and of course for trams. Here’s the Hook Turn road sign taken in one of the intersections.

Another hook turn sign..

And here is the tram coming.

And more trams..

And watch out for the trams..

Cars making a hook turn..

Just wondering, can we call the cars making a hook turn “hookers”? 

Banks and other lending institutions have played a major part in the development of the society throughout the history. People who have excess money can deposit it in a bank for an interest return and the bank in turn lends the funds to individuals or businesses that need the money to finance expenses or business expansion. In short, banks have become the means of the free flow of funds in the economy that brings prosperity.

Decline in the economy decreases business activities resulting to income deterioration of businesses and individuals and increases unemployment rate. As a result, borrowers experience difficulties in meeting interest and principal repayments of their bank loans. Successive economic slowdowns build up non-performing loans in the bank books that create liquidity problems for the banks. Those banks that do not survive go out of business and most often acquired by bigger banks. This has resulted to the growth of mergers and acquisitions in recent years.

In conjunction with mergers and acquisition, banks have devised another way of getting rid of their non-performing loan assets in their balance sheet. This is through securitisation. A special purpose entity (SPE) or special purpose vehicle (SPV) is created by Banks (called the originator) whose sole purpose of existence is to buy the non-performing assets from the banks and issue tradeable securities to the public. An example of these securities is a mortgage-backed security (MBS) which is a security backed by mortgage loans. The return on these tradeable securities depends upon the cash flows coming from the loans backing these securities. SPVs normally issue the securities into smaller denominations and into tranches to make the investments more affordable to smaller investors and more liquid. The originator of the SPV normally issues a credit guarantee in cases there are defaults in the loans which results to a higher credit rating issued by rating agencies to the SPVs. The higher credit rating makes the securities an attractive investment.

The SPV maybe owned by anyone and may not be connected to the originator at all in legal form. However, it can be seen from the securitisation arrangement that the ultimate risks and rewards still remain with the originator because of the guarantee extended by the originator. The guarantee is a form of credit enhancements which makes the SPV’s financial position robust. A credit enhancement can also be in a form of a borrowing or credit line extended by the originator to the SPV.

Securitisation has solved the bank’s problem of clearing off their mounting loans receivables in their balance sheet by converting them into tradeable securities. However, it should be noted that the original pool of loans that have been securitised are still in the same form of loans. Any defaults of these loans are still the responsibility of the banks. In this way, do you think securitisation is just actually a form of window dressing the banks’ balance sheet?

As the US Democratic Party is close to finalising its presidential candidate, the Republican Party is planning ways to counteract the popularity of Democratic Party or maybe take advantage of the Democrat’s division due to the long drawn out Democratic Party’s primary process. It cannot be denied that the two contenders of the Democratic Party rose to fame due to the historical importance it will bring when either Barack Obama or Hilary Clinton wins as President. Obama will become the first US black president and Clinton would be the first female president. Now Obama has a majority of the all important delegate count. At the rate this going, it seems that Obama will win the primary nomination and will eventually be the Democratic Presidential Candidate. Political commentators are speculating that he will pick either John Edwards or Hilary Clinton as vice presidential candidate to draw the white, working class votes. Do you think it’s a wise choice for Republican Candidate John McCain to choose Condoleezza Rice as vice president to lure black and female voters to the Republican Party? 

Jersey is one of the islands found in the English Channel collectively known as the Channel Islands. The English channel is the body of water that separates England from the mainland Europe. Jersey is technically not part of the United Kingdom but its defence and international representations are the responsibility of the UK. The head of the state is the Queen and the capital city is Saint Helier. Jersey is one of the leading offshore financial centres in Europe like Bermuda and Cayman Islands in the Caribbean.

I was given the opportunity to explore the island for three months and discovered the wonders that it brings to visitors and to the rest of the world. 

 This is the Corbiere Lighthouse – the most photographed landmark in Jersey.

The Elizabeth Castle built in the 16th century to protect island invaders. The castle was named after Queen Elizabeth I and was the official residence of the Jersey governor during that time.

And finally the Saint Thomas Catholic Church in Saint Helier.

Everyone who visits the island can hop on to the island explorer buses that go around the island’s famous tourist destinations for just one pound per trip. The tour can be completed in two days and I would recommend everyone to pay a visit to the island when you happened to visit Europe.

Macquarie Bank, the only large, majority-owned Australian investment bank in the world, announced the retirement of its top executive Allan Moss in May 2008 for a retirement payout of A$50 million. During the year he also received a total of A$30 million in salaries and bonuses bringing his 2008 total annual income of a whopping A$80 million! Last year he earned a total of A$33.5 million of salaries and bonuses taking the spot of Australia’s highest paid executive. His payout is 80 times more than the salary of Kevin Rudd, Australia’s Prime Minister, and 450 times that of the average Australian wage of around A$58,000.

Is Macquarie Bank just being generous to its employees? Or does the top management just have all the powers to abuse the wealth of the Company that belongs to the shareholders, the owners of the entity? This remuneration package is not actually unusual as this is true to other Companies in the US and in Europe. Walt Disney Chief Executive Robert Iger took in a total of US$27.7 million worth of compensation in 2007. The Company also provides him with a luxury yacht and a mansion!

In general, the top executive remunerations are decided by the Board of Directors who represents the shareholders in the Company. The Board normally has remunerations committee that reviews the salaries and bonuses of top management. It should be noted that ownership and management of Companies are separated. The structure is comparable to a principal-agency relationship where the management acts as an agent of the shareholders. Most often, conflicts of interests between owners and managers arise. The shareholders interest is to increase their wealth by increasing the market value of the Company through increase in share prices or increase in dividends payout. The Company’s management’s interest is to increase their wealth also but through salaries and bonuses they can get from the Company.

In recent years, there have been a great emphasis given to good corporate governance due to some corporate scandals like Enron. Investments analysts have a theory that Companies with good corporate governance are good investment targets as there has been a strong positive correlation between share price and good corporate governance. One of the factors being considered in Corporate Governance is aligning the interests of the management with that of the shareholders. The vehicle to do this is to give remuneration to the management whenever the Company is doing well and punish them when the Company is not doing well. The perfect example of this is a bonus that’s tied to Company’s profit and employees stock options. When the share price of the Company goes up, the value of stock options also goes up. In this way, both the shareholders and the managers are happy when Company’s profit is high and stock prices are skyrocketing.

The question is how much remuneration is enough? Is A$80 million annual remuneration worth the idea of aligning the manager’s interest to that of the shareholders? Or does the management taking already the wealth of the shareholders by these excessive salaries? There are no definitive answers to these questions as the debates have been going on. I can only say I will be happy to take over the position of Allan Moss in Macquarie Bank!