Rob Coyte's Blog

The main problem with the “Credit Crisis” is the fact that no one was lending money. Bankers don’t want to be bankers anymore and the private markets for lending have effectively stopped since the collapse of Lehman Brothers on 12 September 2008.

One main measure of activity in this area is called the LIBOR-OIS spread and basically measures how reluctant banks are to lend to each other. At its height these measure was 3.66% but has subsequently eased to 0.87% on Friday which suggest an increasing willingness for the banks to lend to each other. Other measures such as corporate bonds and high yields markets have generally been heading in the same direction.

In the last couple of months we have seen equities markets perform strongly which is a further sign that investors are more prepared to accept “risk” which also feeds through to credit markets.

Whilst there is still progress to be made the signs are positive that the credit markets are thawing which is crucial to keeping the economic wheel turning.

However, in the new world borrowings are going to be done at lower levels then previously and this adjustment known as “deleverage” takes time. It is like a household that needs to batten down for 6-12 months to get rid of a pesky credit card balance. Whilst this is happening they obviously need to cut their expenditure to free up cashflow to repay credit card debt. This is what is happening on a global scale at both corporate and household level in most of the Anglo Saxon world. On the flip side, Asia and other parts of the world have huge cash reserves or savings which can be applied.

A major concern was the fact that the government was thinking about tinkering with franking credits derived by individuals and superannuation funds from their Australian share portfolios. However, Wayne Swan as effectively quashed these rumours by saying “I personally think dividend imputation has delivered an enormous benefit to the Australian economy”.

However, there will be changes at some point and one such change may be in the Transitional to Retirement Strategy which will impact anyone over 55 years old. This being the case we would implore you to discuss with us your options before the upcoming budget because very rarely are these changes applied retrospectively.

The government has already announced a whole range of measure to make it harder for individuals to gain access to Family Tax Benefits, Seniors Concession Cards and other benefits by changing the definition of income. These measures will be introduced on 1 July 2009 please refer to  article titled Definition Changes to Income For Government Benefits for more information or contact our office.

A couple of weeks ago Queensland's richest man, Clive Palmer, bought a Brisbane office tower for $20 million. The property, which is fully occupied, will earn him about $2.2 million per annum in net income for a yield of around 11%. His comments to the media were simply “The yields on property are a hell of lot better than they are in the bank”.

The simplest lessons are usually the most effective and here you have a transaction where the income from the property is considerably more than in the bank (alternatives). Investing is about assessing the alternatives and it is this very reason that over time the share market and other asset classes such as property will be supported given this differential in returns to what cash in the bank can generate.

It is also important to note that every year the rent form this property will grow whilst bank interest will only ever be what the rate of interest will be. All other things being equal - which income stream would you prefer for the next 20 years?

Probably the biggest misunderstanding I see with clients is the interaction of the share market and economic news.

The share market reacts to what it will think will happen in the next 6-12 months whilst most economic news tells you what happened in the last quarter.

The share market started to falter in October 2007, but especially in Australia we have only started seeing poor economic news in the last quarter. Quite a time difference. What happens is the share market anticipates this news and prices it in to the market.

The share market will also start to price in a recovery before it actually happens (in theory while it is happening) so by the time we get good economic news (which always lags) the share market has already priced that in.

What many clients don’t understand before we purchase shares for them is that they are actually buying part of a business. Over time, if the business they have invested in is profitable, the business will pay out dividends to investors and retain money to invest in the business to grow profit in future years. Here is an example:

Let’s start a company named ABC. You are there only shareholder who tipped in $100. Your share would be worth $100 and it would be backed by the cash in the company’s bank account.

ABC wants to start a business selling ‘widgets’. In the first year if ABC makes a 10% profit they will make $10. They may pay half as a dividend ($5) to the shareholder and retain the other half ($5) to grow the business. This means ABC will now have assets of $105 making your one share worth $105.

In their second year, if ABC make a 10% profit they will make $10.50 (10% of $105). They may pay half as a dividend ($5.25) to you, the shareholder, and retain the other half ($5.25) to grow the business. This means ABC will now have assets of $110.25, making your one share worth $110.25.

As you can see this process continues. This is how investors can get increasing dividends as well as capital growth over time by holding profitable companies.

Our office will be closed this coming Friday and Monday for the Easter long weekend.

Have a safe and relaxing weekend!

Rob