A Private Portfolio

Catching the falling knife - it's dumb and it hurts

2008-08-17T20:48:00.004+08:00

I purchased a small position in silver early last week, paying US$15.02 per oz. The reasoning was a rather simple case of having believed that the very quick drop was over done (in percentage terms silver had dropped far more than the other precious metals) and that the bounce from close to US$14 would continue. I was expecting a quick return to somewhere above US$16.

I was proven wrong the next day when I woke up to find that silver had dropped below US$13 in overnight trading, leaving me sitting on a quick and ugly loss (as well as feeling stupid). The question is whether I should (i) take my losses and sell now (ii) buy more (if it was worth buying at US$15 it should be even more attractive at under US$13) or (iii) do nothing and treat it as a longer term portfolio investment.

I have no particular views on which is the best course of action at this point. I have no pressing need for the money so do not expect to be a forced seller at any point.

Reviewing My Investment Decisions (2)

2008-08-10T12:28:00.006+08:00

Back in February I reviewed my investment decisions over the preceding 12 months . Given the poor return on investments so far in 2008, I have decided that it is time for another review of the private portfolio and my decisions so far this year. A periodic review process is a healthy part of any financial planning exercise, so long as it does not end up as a case study in damaging confidence through second guessing or introducing an avoidable emotional element to future decision making it should be a healthy and productive exercise.

Here is the scorecard:

1. Hong Kong Property: This is our biggest asset class by far. The only activity this year has been the completion by Mrs traineeinvestor of a property purchase agreement which was signed in December 2007. The portfolio remains fully occupied with no tenants in default. Cash flow remains positive due to low interest rates with a modest boost from the waiver of rates and maintenance expenses being much lower than budgeted. All mortgages are P+I and are steadily being amortised. The only decision made this year were to decline a fix and flip opportunity out of concern over declining liquidity. In effect, the real estate provides a modest positive wealth effect every month (without taking into account capital fluctuations).

2. Overseas real estate: I have two small properties overseas. I have not purchased or sold an overseas property for several years although I did discharge one small high cost mortgage which no longer served its original purpose earlier this year. These are now debt free and rented. Although the yields are not great, they are reliable cash flow generators. Capital values have probably fallen this year, but are still well above cost.

3. Residual equity portfolio: Two shares account for about 90% of the value. The remaining four shares have little value and probably should be sold as the amounts are not meaningful and it will cut my administration time. As a group these shares have appreciated this year. No decisions have been made or are contemplated.

4. Actively managed equity funds: These include Asian small cap, European small cap, Thailand, Taiwan, Vietnam and a very small managed portfolio. I stopped making monthly contributions to the two small cap funds in January. That was a good decision. The investment in the Vietnam fund in early 2007 was a very bad decision. Not only did I buy near the top of a rather frothy market but I purchased a fund which featured a partial lock up and very stiff exit costs which have inhibited thoughts of cutting my losses. It is the worst investment I have made for several years. As a group these funds have declined in line with the markets they invest in.

5. Index equity funds: These are limited to Hong Kong and India. I have had exposure to Hong Kong since Tracker was launched. I have added to the position a few times and purchased the India fund in March 2008. While the timing of my investments earlier this year was poor, as a group I am happy with these investments.

6. Commodities: As a group this has been a very successful investment class over the last three years. My investment in silver started at around US$6 per oz. I exited (after a short term repurchase) with a net sale price above US$17 per oz. Although I missed the top by quite some distance, the decision to exit currently looks quite good. The Lyxor commodities ETF purchased earlier this year also shows a healthy gain. Much smaller investments in platinum (since sold), lean hogs and nickel show losses which are, collectively, much smaller than the gains on silver and the ETF. If I was a disciplined trader I should have taken the loss on the nickel some time ago.

7. Cash: I am not a fan of holding cash. The rates of return are simply too low (well below the rate of inflation). Still in a declining market not investing has been a pretty sensible decision. As things stand I have enough cash on hand (factoring post termination pay outs) to meet all living expenses for about three years should I lose my job tomorrow.

8. Currencies: I have not set out to trade any currencies (apart from building up a token position in RMB which is more about cash management than currency speculation), although I did consider it. However, with assets priced in a number of currencies, FX fluctuations have had a material impact on my balance sheet. The decline of the USD was a positive factor for some time. Over the last few months the USD has started recovering and this is now working against me.

In conclusion, while I could beat myself up for not exiting my equity positions late 2007 or early 2008, that would be somewhat unfair given that I did reduce purchases, did shift to lower cost funds and have built up cash. My commodities have done well and as a whole my decisions here have been pretty good. It also has to be remembered that I remain a beneficiary of the decisions in 2003-2007 to aggressively purchase Hong Kong real estate using leverage. The resulting portfolio with its positive cash flow and amortising mortgages makes a steady positive monthly contribution to our net worth.

The two decisions I should be flogged for were the decision to buy the Vietnam fund and not cutting my losses on the nickel investment. In the overall scheme of things, the resulting losses are not large and I have learned a lesson from the Vietnam fund.

On the whole, I am happy with my decisions so far this year. After five years of fantastic returns, the set backs of the last seven months are relatively minor and it would be a mistake to be overly critical of my investment management during that time.

HK Tracker Fund Purchased

2008-08-07T20:10:00.002+08:00

Having decided that I have too much cash on hand and being paranoid about inflation eating into the value of cash, I decided to make a small additional investment in the HK Tracker Fund. HK Tracker Fund is an ETF which tracks the Hang Seng Index. The purchase price was $22.80 which was, unfortunately, close to the high for the day.

Interest rates creeping up

2008-08-06T15:32:00.003+08:00

A quick review of the latest interest rate fixings on my mortgages shows that the cost of debt financing has crept up off the low points set in the second quarter. The increases are not large and even the highest rate is still well below both the net yield on the underlying properties and the rate of inflation. In other words, debt finance is still cheap.

The interest rates I am currently paying range from a low of 2.1286% to a high of 3.0014%.

As an aside, given that deposit rates have not moved (still close to zero), this effectively represents margin expansion for the lending banks. New loans are currently available on less favourable terms than some of the more recent loans I have taken out, which will also help the banks' profitability.

A typhoon and an attempted scam

2008-08-06T11:58:00.003+08:00

The typhoon #8 signal was hoisted early this morning which means that offices, schools (it was summer holidays anyway) and most shops will be closed and services suspended until the signal is lowered. Depending on the severity of the weather, a reasonable number of people will go to work anyway. It is usually possible for those like myself who do not live on or close to an MTR station to find a taxi although you may get quite wet in the process.

The first taxi I flagged down wanted to charge me a HK$30 premium because of the typhoon. This would have roughly doubled the fare. I have been living in HK for well over a decade and this is the first time a taxi driver has tried to extort more than the metered fare from me. It's illegal for them to charge more than the metered fare. In any case, with two other taxis coming down the street behind him, it was a rather pointless exercise and I had no hesitation in telling him to foxtrot oscar. My only regret is that I forgot to make a note of his licence plate.

Monthly Review - July 2008

2008-08-04T08:54:00.002+08:00

July was another ugly month. While not as awful as June, it was the second month in a row that my net worth declined. This is the first time this has happened since I started keeping monthly records in January 2007.

As a group, my mark to market investments largely went sideways and showed a small net loss. Adverse currency movements amplified the losses and were the biggest contributor to the overall decline.

Here are the details:

1. my actively managed funds were mixed. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam. The loss on the Vietnam fund is now approaching 50% of the capital invested. It is unlikely that I will invest in another fund that effectively locks me in for several years;

2. my equity ETFs recovered some of last month's losses. I currently have exposure to Hong Kong and India

3. my residual equity portfolio fell;

4. my commodity investments showed very marginal decline with a loss on my commodities fund slightly outweighing small gains in my Nickel and Lean Hogs ETCs;

5. my properties are all fully rented and tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). Although some of the reductions in interest rates have been slightly reversed with the rise in HIBOR, the cash flows remain positive;

6. currency movements were adverse (the USD recovered some of its losses) and were the biggest single factor in the net loss for the month.

The only investment made this month was a small subscription for an RMB bond issue. My income was in at the low end of expectations this month. My spending was in the mid range. The resulting savings were less than previous months but still helped to offset the effects of the losses on my investments.

The end result was a decrease in net worth of 0.3% for the month. The year to date increase is 5.8%. Looking forward, it has been several months since I made any meaningful investments and my cash holding has been building up. With inflation running at 5.4% officially and deposit rates still at close to zero, cash is depreciating quite rapidly and finding suitable investments is something of an imperative. The difficulty is finding somewhere attractive to invest the money.

Book Review: Superclass

2008-07-31T20:10:00.002+08:00

When I picked up a copy of David Rothkopf's book on "the global power elite and the world they are making", I was assuming from the cover image of a world under the thumb of a pin stripe wearing man that this would be another diatribe bashing the rich and powerful.

Fortunately, it was a well balanced study that provides an overview of what it takes to be one of the estimated six thousand strong "superclass", how the superclass network and carry on their "business". The later is an interesting point as the superclass covers people from a wide variety of backgrounds, including the obvious candidates from the world of wealthy business types, CEO's from some of the world's largest companies and political leaders. Also included were religious leaders, pop stars, athletes and scientists. In one sense, the superclass is representative in that it draws people from a variety of backgrounds. (For other purposes the group is weighted towards male business and political leaders from the world's wealthy economies.)

While the absence of any conspiracy theories and a corresponding degree of objectivity was welcome, by the time I reached the end of the book, I was left feeling that I had not learned anything new and could just as easily have been reading a series of newspaper or magazine articles as much as a book. Put differently, while the book represented a useful summary of the world's elite and how they operate, it was ultimately a rather bland read that offered little in the way of insight.

"Professionals" still bullish on Hong Kong property

2008-07-16T10:01:00.003+08:00

The weekly Property Post supplement to the South China Morning Post carried a front page article on how professionals are still bullish on the Hong Kong property market.

Refreshingly, the professionals being quoted were actually investors as opposed to permabull real estate agents. These are investors who put their own money into the market. The expectation was for a small drop in prices (5-7%) due to a combination of factors (declining share indices, small rises in interest rates and general economic uncertainty) before the fundamentals reassert themselves and the uptrend continues. All of the investors quoted were intending to hold their positions and, in most cases, look for opportunities to add to them.

Among the fundamentals cited were:

1. limited supply of new units

2. rising rental incomes (up 19% year on year)

3. cheap debt finance (still below 3% for new loans)

4. readily available debt finance (banks are still keen to lend and have excess deposit build up)

5. lack of alternative places to invest (close to zero percent interest on short term bank deposits and inflation rates above 5%)

The longer term case for property investment in Hong Kong remains solid.

Monthly Review - June 2008

2008-06-30T20:37:00.004+08:00

From a financial perspective, June was the worst month I have experienced since I started keeping monthly records in January 2007. If I had been keeping monthly records for longer, I suspect I would have had to go back several years to find a month in which I had lost as much money.

As a group, my mark to market investments all fell in value by meaningful amounts with the sole exception of my relatively small exposure to commodities. Adverse currency movements amplified the losses.

Here are the details:

1. my actively managed funds all fell. I currently have investments in actively managed funds investing in Thailand, Taiwan, Eastern Small Companies, European Small Companies and Vietnam. The loss on the Vietnam fund is now approaching 50% of the capital invested. It is unlikely that I will invest in another fund that effectively locks me in for several years;

2. my equity ETFs also fell. I currently have exposure to Hong Kong and India

3. my residual equity portfolio fell;

4. my commodity investments showed very marginal appreciation with a gain on my commodities fund slightly outweighing small declines in my Nickel and Lean Hogs ETCs;.

5. my properties are all fully rented and tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). Although some of the reductions in interest rates have been slightly reversed with the rise in HIBOR, the cash flows remain positive;

6. currency movements were adverse (the USD recovered some of its losses) and amplified the losses on investment. Currency movements have played a major role in determining the returns on my investments over the last 6-12 months. For the most part I have been a beneficiary of a falling USD. This month was one of the few months in recent times when the currency movement has been adverse.

To put the losses into context, the total mark to market write down was the equivalent of about 7 months of gross income from my Hong Kong rental properties. It is also worth mentioning that many of the investments continue to be held at well above cost. However, this is small comfort when I consider that I could have taken some quite good profits or cut my losses with at least some of them over the last six months.

There were no investments made this month. My income was in line with expectations this month. My spending was on the low side. The resulting savings helped to offset the effects of the losses on my investments. The end result was a decrease in net worth of 1.2% for the month. The year to date increase is 6.2%.

Looking forward, it has been several months since I made any investments and my cash holding has been building up. With inflation running at 5.4% officially and deposit rates still at close to zero, cash is depreciating quite rapidly and finding suitable investments is something of an imperative.

World Wealth Report

2008-06-25T19:47:00.002+08:00

The 2008 edition of the Cap Gemini Merrill Lynch World Wealth Report has been released. As usual the report made interesting, although slightly predictable, reading.

Among the highlights:

1. The number of HNWIs passed the 10 million mark for the first time (up 6% to 10.1 million).

2. Global HNWI wealth increased 9.4% to $40.7 trillion.

3. The average wealth of HNWIs reached $4 million for the first time.

4. India, China and Brazil had the fastest growing populations of HNWIs. Emerging markets continued to show higher rates of growth in HNWI populations than developed markets.

5. The US still has the highest number of HNWIs (3.3 million).

6. The population of UHNWIs increased to 103,300.

7. HNWIs asset allocation showed a material shift to more conservative investments with cash, deposits and fixed income making up 44% of assets (from 35% in 2006) with substantial reductions in real estate and alternative investments. Equities remained the largest asset class (33%) There was also a rotation away from investments in North America.

The section on "passion investments" made interesting reading and supports the thesis of Robert Frank's Richistan .

Definitions:

High Net Worth Individuals (HNWIs) hold at least US$1 million in financial assets, excluding collectibles, consumables, consumer durables and primary residences.

Utra-High Net Worth Individuals (Ultra-HNWIs) hold at least US$30 million in financial assets, excluding collectibles, consumables, consumer durables and primary residences.

Hedging inflation - not speculating on commodities

2008-06-23T11:21:00.006+08:00

There has been a considerable amount of commentary (mostly by politicians trying to blame the free market and others for their incompetence) about how speculators are contributing to the increases in the prices of many commodities and the resulting effects of inflation. This is largely nonsense. Certainly, speculators play a role in driving up prices just like any other demand factor does. However, there are much larger factors at work:

1. rising end-user demand. The world's economy is still growing and the demand for raw materials will increase with such growth (although not necessarily on a linear basis);

2. market distortion. Many countries heavily subsidise the prices of raw materials and key consumer goods. In some cases this is defensible - in some countries subsidies (or similar) on foods are very necessary to prevent starvation. In some cases subsidies are indefensible on both economic and environmental grounds. Fuel subsidies that prevail in many emerging markets are the worst example. They stimulate demand at a time when the world desperately needs to consume fewer hydrocarbons for both economic and environmental reasons. As much as it goes against my belief in the free market, the case for (higher) user taxes on hydrocarbon products is pretty overwhelming.

As to the calls for speculation in commodities to be regulated in some manner, this is totally unjustified. Not only is it an erosion of free market principles, but any measures which are likely to be introduced will (most likely) prevent consumers from taking one of the few steps available to them to hedge against the impact of rises in commodity prices on their standard of living.

The proposition is simple. Rising prices of essential commodities are an expense which most households cannot avoid paying and can only take limited steps to reduce. Investing in the underlying commodities (e.g. through an ETC or a commodity based ETF) is a simple and effective means of providing a hedge against the impact of rising commodity prices. The gains on the hedge instrument would offset to at least some degree the increased living expenses.

As a side note, there is plenty of academic commentary on the benefits that speculators bring to a market. Attempting to regulate speculators out of the market is likely to be detrimental to the markets as a whole.

Millionaire density by country

2008-06-10T20:15:00.005+08:00

Barclays Wealth released an interesting report on concentrations of millionaire households. It was the 5th report in a series and, like the earlier reports, made for interesting reading.

Among the data included is the density of millionaire households in various countries expressed as the percentage of all households in each country as a percentage of total households. The top 10 countries were:

1. Hong Kong (26.4%)
2. Singapore (23.3%)
3. Switzerland 22.3%
4. Denmark (17.9%)
5. Britain (15.5%)
6. Ireland (14.8%)
7. United States (14.7%)
8. Australia (11.9%)
9. Italy (11.8%)
10. France (11.7%)

The report also makes a number of forecasts regarding wealth creation for the next 10 years. In terms of total millionaire household populations, it should be no surprise that China, India and Russia are all expected to show significant growth in the creation of high net worth households. While the US and Japan are expected to retain their places as the two countries with the highest total wealth held by the domestic sectors, China and India are both expected to join the top 10 countries by 2017.

The report makes a number of observations on trends in matters ranging from asset allocation, comparisons between household wealth and GDP and other matters.

Failed quest to simplify my life

2008-06-01T19:00:00.003+08:00

Back in January I stated that one of my objectives for 2008 was to simplify my life by reducing the amount of time I spent on administering my investments . While I have managed to move some payments (inwards and outwards) on to autopay I still have quite a few payments which I have to make manually (including several which require me to write cheques each month). The principal problem areas are:

1. building managers who refuse to allow autopay (even though it is in their interest to do so);

2. government rates and government rent. Autopay is not available for these;

3. distrust of the service provider. I have heard enough horror stories of service providers who continue to debit their former customers' accounts months after the service is terminated to be very careful about signing up to direct debit arrangements;

4. too many investments and too many non-investment related expenses which require non-automated payment by me.

I am currently taking a good hard look at my investments with a view to selling some of the smaller ones to reduce the administration work. I suppose I could take a positive view - my finances have reached the stage where my time has become an increasingly material consideration when making investment decisions.

Interest Rates - Is the cycle turning?

2008-05-31T15:36:00.002+08:00

Over the last 12-18 months Hong Kong investors have been beneficiaries of interest rates that started at modest levels and became progressively cheaper. This had implications for both affordability levels and asset valuations. Property prices rose steadily as interest rate falls. Certainly there were other factors which contributed to the bull market, but interest rates falling to levels materially lower than the rate of inflation unquestionably played their part.

With inflation now commanding space on the front pages of the financial news, there is talk of interest rates rising due to a combination of central bank action to combat inflation (although avoiding recession is likely to remain a higher priority) and lenders using inflation as a pretext to inflate their lending margins. The yields on investment grade debt securities have started rising already. Expectations of further interest rate cuts have dwindled sharply. It would be unrealistic to expect interest rates to fall further (and if they do, there is only limited room for cuts anyway) and the possibility of increases in interest rates by year end is quite real.

What are the implications for investors?

Rising interest rates should create a headwind for investors in real estate and equities. I say "should" because there is at least a possibility that rising interest rates signal the US economy moving away from the edge of a recession. Bonds will of course be an investment to avoid when interest rates rise. I have no idea what commodities would do in a rising interest rate environment but it would be reasonable to assume that at least some money will be rotated out of that sector. The safe or default strategy in an environment where interest rates are rising would be to focus on deleveraging the portfolio and wait for asset values to come under pressure before buying again. Of course, if the increase in interest rates is only small and real interest rates remain negative then paying down debt is logically a poor strategy but if the values of the major asset classes all enter into a downtrend, there may not be any obvious alternatives.

Monthly Review - May 2008

2008-05-30T20:40:00.003+08:00

Although my net worth showed a decent increase for the month this was a case of a substantial bonus from my employment offsetting losses on the investment front.

As a group, my mark to market investments declined by small amounts. Those small declines were partly offset by a very small net gain on the comodities and the net income from my properties and slightly increased by adverse currency movements.

Here are the details:

1. my actively managed funds declined. All of them. I currently have investments in actively managed funds investing in Thailand, Taiwan, Vietnam, Eastern Small Companies and European Small Companies. The MERs are far too high and I will not be adding to these positions;

2. my equity also declined in value. I currently have exposure to Hong Kong and India;

3. my residual equity portfolio was almost unchanged;

4. my commodity investments showed a slight gain during the month. I continue to hold a commodity ETF and lean hogs and nickel ETCs. I made a small profit on a trade in silver during the month;

5. my properties are all fully rented and tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). The cash flow and the surplus have benefited from recent cuts in interest rates although my view is that interest rates have reached bottom (or so close as makes no different);

6. currency movements were adverse (the USD recovered some of its losses), but only marginally.

The only investment made this month was a short term trade in silver which showed a small profit.My income was significantly boosted by the receipt of a bonus this month. My spending was low (about as low as I could reasonably expect). The resulting savings helped to boost the effects of gains on my investments. The end result was an increase in net worth of 2.1% for the month. The year to date increase is 7.4%.

Book Review: Mellon

2008-05-29T18:24:00.002+08:00

David Cannadine's very detailed biography of Andrew Mellon weighs in at over 620 pages (with another 150 pages devoted to footnotes and an detailed index). Although it was far from being a light read it was interesting and enthralling for two reasons.

The first is that Cannadine succeeds in portraying Andrew Mellon in a balanced way - conveying a sense of what he was like (good and bad) both as an individual and as a financier, business man, art collector, public official and philanthropist.

The second is the way in which Mellon's life was a reflection of the various "ages"that he lived in. He was a contemporary of people such as Ford, Rockefeller, Frick, Carnegie, Morgan and Gould. Unlike most of the other leading plutocrats of America's guilded age he lived long enough and remained active either in business or in public life to see both the end of "his"era but also the backlash during the Great Depression and the Roosevelt presidency. Cannadine conveys an excellent understanding of the issues and realities of life during the guilded age in particular and the spectacular gulf between the ultra rich and the ultra poor. In many respects the book can be viewed as work of economic and social history as much as a biography.

An excellent read.

Silver sold

2008-05-28T16:27:00.002+08:00

With the price of silver going up and down faster than my comfort level I exited the silver position earlier this afternoon. As the position was only opened on 19 May it turned out to be a much shorter trade than I anticipated at the time of purchase.

My entry price was US$17.15 and my exit price was the equivalent of US$17.45 per ounce. These prices include the bank's spread and there are no other costs. A profit of US$0.30 per ounce is not a huge amount (it could have been close to US$1.00 per ounce if I had sold at the end of last week), but is still a pleasant outcome.

Inflation - undertstated (2) - the implications

2008-05-24T17:10:00.003+08:00

In part 1 of this post I made the point that CPI type indices which are typically used as proxies for inflation tend to understate the true rate of inflation. If inflation is understated this has a number of potentially significant implications for investors and for personal finance more generally. From a personal finance perspective, underestimating the rate of inflation on your future expenses can result in a significant underestimation of those future expenses. Try calculating the difference between household expenses growing at 4% pa compared to 3% pa over a period of 30 years.

Understating the true rate of inflation also has implications for investments. Bonds and deposits will be overpriced as a result. Inflation indexed annuities and bonds will also be overpriced. All of these instruments will show real rates of return lower than expected. Given that the nominal rate of return in bonds and deposits is very low already, the real rate will be even lower. In many countries it will be negative.

Equities I am less sure about. History suggests that equities are a better investment that bonds in times of inflation. However, pricing is often at least partly done on a comparative basis. If bonds are overpriced this may suggest that equity prices have also benefited from that mispricing as well. Similar arguments can be made in favour of real estate and commodities and just about any asset class.

Debt is under priced. In Hong Kong we have negative real interest rates already. An upward restatement of the rate of inflation would increase the size of the negative margin.

While I do not expect governments to restate inflation numbers any time soon as they need to (i) inflate their way out of massive deficits and debt levels and (ii) do so while managing inflation expectations, growing awareness of how unreliable and inaccurate CPI indices are has the potential to cause changes in the way people invest. Hard assets such as real estate, commodities and collectibles will become more in demand. People will become more reluctant to hold assets that do not at least have the potential to keep pace with inflation.

The biggest question of all is whether central banks will keep interest rates low in an attempt to stave of a recession or raise interest rates to try and cool inflationary pressure (which they are creating by inflating the money supply). My betting is largely on the former (at least until we see signs of an economic recovery). If this is right, then using debt to invest in assets such as real estate and equities is a logical investment strategy.

Inflation - understated (1)

2008-05-23T11:15:00.004+08:00

PIMCO's Bill Gross joined the chorus of people who believe that inflation is understated (or, at least that CPI type indices understate the true rate of inflation). Mr Gross stated that the US CPI numbers probably understated the true rate of inflation by about 1%. Leaving aside the technical point that "inflation" is a measure of increase in the money supply rather than a measure of the rate of increase in the price of goods and services, the evidence seems very clear.

In Hong Kong, the most recently released figures show annualised inflation at 5.4%. Basic necessities have been the biggest contributors to this figure (food, utilities and housing). The few things that I can point to which have decreased are rates (i.e. property taxes) and wine which declined or were relatively flat due to tax reductions or waivers by the government or consumer electronics. The true rate of inflation can only be guessed at but to illustrate the point that the CPI index understates the true rate of inflation, the most recent adjustment for jewellery can be used. In the 2007 adjustment to the CPI weighted basket, the percentage of household income spent on jewellery was slashed to a fraction of the figure used in 2003. Given that the economy was booming in 2007 and was in recession in 2003, the reverse should have been true.

In an environment where deposits earn next to nothing and dividend yields on the local stock index are around 3%, 5.4% inflation is high and a serious threat to both personal savings and standards of living. The fact that the real rate is higher still is scary.

Silver purchased

2008-05-19T15:03:00.002+08:00

After exiting my position in silver several weeks ago, I have watched as the price of silver (and other precious metals) has consolidated. This morning I purchased a new position at HK$133.8 per ounce (US$17.15) including spread.

From a charting perspective we are now seeing signs that the precious metals have completed a consolidation phase and may be resuming their long term up trend. From a fundamental perspective, equity markets have rallied strongly over the last few weeks while precious metals (possibly excepting platinum which has lead the other precious metals) have lagged the equity markets. At the same time, concerns over inflationary expectations have received increased attention. The latter is generally considered to be bullish for precious metals.

Studies in Wealth (Destruction) - Robert Vesco

2008-05-18T18:20:00.003+08:00

Although Robert Vesco died in exile in Cuba in November 2007, his death was not widely reported until last week.

Vesco will be best remembered as the man who rode to the "rescue" of investors in Bernie Cornfeld's IOS group (also a fascinating study in fraud) by launching a successful hostile takeover in 1970. Following completion of the takeover he promptly looted the company and funds under management of US$200MM + and fled from the US. He spent the next 15 years living in various countries which did not have extradition treaties with the US before finally settling in Cuba. Along the way he managed to get involved in the Watergate scandal by contributing substantial sums (sometimes reported as US$200,000) to Nixon's campaign fund through Nixon's nephew Donald Nixon Jr. The campaign contribution was allegedly used to fund the Watergate break-in.

Vesco also dabbled in drug running (being indicted but never arrested) and peddling a miracle immunity boosting drug that could cure a wide range of ailments including cancer. In 1995 after attempting to defraud both Castro and Donald Nixon Jr, he was arrested, sentenced to 13 years in prison for fraud and illicit economic activity and spent the rest of his life in prison in Cuba.

He will not be missed.

Book Review - Richistan

2008-05-13T11:30:00.003+08:00

Richistan is Wall Street Journal reporter Robert Frank's look at the "New Rich". It was an impulse buy at the airport to give me something to read on a long haul flight back from Europe last week.

Richistan examines the explosion in the number of "rich" people and the issues which they face. The number of millionaires has multiplied over the last decade, as has the number of households with net worths greater than the US$5MM, US$10MM and higher thresholds. The Merrill Lynch Cap Gemini World Wealth Report produced similar findings. The reasons for this explosion in the sheer number of notionally wealthy people are several and include, ample liquidity, low cost of capital, a salary premium for those with skills most in demand, globalisation and the broader adoption of new technology. Even with the current economic uncertainty, the expectation is that the ranks of the notionally wealthy will continue to expand in sheer numbers as will the various benchmarks.

Where Richistan is interesting is the way it addresses the issues which the wealthy face. Two specific points of note were:

(i) US1MM may put you well within the top decile of household wealth, but it does not make you wealthy. Inflation above and beyond the CPI index means that the middle class millionaire is just that: middle class. US$10MM is considered the new benchmark for being considered "wealthy";

(ii) the sheer number of millionaires and multi-millionaires has created issues ranging from the important (instilling values in children, pressure on places in private schools, rising cut offs for access to some high end investment products) to the trivial (waiting lists for luxury yachts and lack of space for private jets at airports) to the pathetic (charity balls and other status symbols).

One issue which Richistan only mentioned in passing which would have merited further examination was the difficulty in maintaining a given level of relative wealth over a long period of time. This is more of an issue for those in "lower Richistan" than the seriously wealthy, but with the combined risks of lifestyle expansion and high inflation is a material issue for most of the lesser millionaires.

Although we will never be on the waiting list for a private jet or a 200 foot motor yacht, some of the points raised are relevant even to "middle class" millionaires. In particular, the dangers of attempting to emulate those who are significantly more wealthy than yourself, school placements and the rising cost and rising scarcity of some of the very few luxuries which I am tempted by (e.g. business class air tickets for long haul flights).

Richistan was a well written and enjoyable read. Recommended.

HK banks do not cut mortgage rates

2008-05-03T16:50:00.002+08:00

For each of the previous instances in this interest rate cycle, the Hong Kong Monetary Authority and the Hong Kong banks followed the action of the US Federal reserve and cut Hong Kong interest rates. Not this time. With deposit rates now close to zero and lending margins under pressure, the HK banks have been at pains to talk up the market to try and preserve or improve their lending margins. It was no surprise to find that none of the major banks cut their prime lending rates (which is one of the two benchmarks for setting mortgage rates in Hong Kong). In effect, prime linked mortgages should not be affected by the latest interest rate cuts in the US. It remains to be seen whether the HIBOR linked mortgages will change at all (although I note in passing that banks are starting to be less willing to lend on HIBOR linked terms).

As a side note, although the banks did not cut their lending rates, they were quick to further reduce the already tiny yields on deposits.

Monthly Review - April 2008

2008-05-01T10:10:00.002+08:00

April was a good month financially.

As a group, my mark to market investments appreciated in value by meaningful amounts, although the gains were partially offset by adverse currecny movements. Here are the details:

1. my actively managed funds appreciated. I currently have investments in actively managed funds investing in Thailand, Taiwan, Vietnam, Eastern Small Companies and European Small Companies. The MERs are far too high and I will not be adding to these positions;

2. my equity ETFs also appreciated. I currently have exposure to Hong Kong and India. I may add to my India position (but probably the iShares product instead of the Lyxor one which I already hold;

3. my residual equity portfolio appreciated;

4. my commodity investments went sideways during the month. I continue to hold a commodity ETF and lean hogs and nickel ETCs;

5. my properties are all fully rented and tenants are paying the rent on time. I have both a positive cash flow and a surplus of income over expenses (which represents an increase in net worth). The cash flow and the surplus have benefited from recent cuts in interest rates. I have low expectations that last night's 25 bp cut by the US Federal Reserve will filter through to Hong Kong mortgage rates;

6. currency movements were adverse (the USD recovered some of its losses) and partially offset the gains on investment. Currency movements have played a major role in determining the returns on my investments over the last 6-12 months.

There were no investments made this month.

My income was at the low end of expectations this month. My spending was moderate due to the remaing payments for our Easter family holiday as the cost of car rental and some other items came through in my credit card statement (no effect on net worth as I had adequately provided for the expense) and the adoption costs of a kitten. The resulting savings helped to boost the effects of gains on my investments. The end result was an increase in net worth of 1.8% for the month. The year to date increase is 5.2%.

An unhappy tenant

2008-04-29T13:21:00.000+08:00

One of my tenants is unhappy and I cannot blame him. When the tenant signed the lease, the building was undergoing the second part of a refurbishment programme that involved putting scaffolding up around the building and temporarily removing the air-conditioning units. The work was expected to be completed in March or, at latest, the end of April (i.e. before the weather got really hot and humid).

Well the work is still going on and the building manager has been unable to advise when the work will be completed. The tenant has complained about the situation to me, to my agent and to the building manager. I have complained to the building manager and have asked my agent to put some pressure on them (the agent manages several units in the building). While the risk of delay in removing the scaffolding and reinstalling the air-conditioning units was discussed as part of the lease negotiations so that the tenant does not have the right to terminate the lease because of the delay, I would prefer to keep the tenant as happy as possible - good tenants tend to do less damage and to pay the rent on time and are more likely to renew at the end of the lease. Unfortunately, beyond making my displeasure known to the building manager, there would appear to be nothing that I can do about the situation.