As you all should know by now… RBA has increase the cash rate from 3% to 3.25%

Sometime this week you should expect banks to pass all and potentially more of this 0.25% interest rate rise…

Most bank’s fixed loans should be going into negative margins as the market interest rate swap (i.e. the instrument that we use to provide fix rate to consumers) is moving up too (i.e. costing more)  This just means you can expect fix rates to be moving upwards too!

Obviously, on top of fixed interest rates going up the variable rate will definitely be heading upwards. Historically, the RBA don’t usually do single rate rise or rate drops. So since the RBA has announced the rate rise the market has kindly priced in about 50-75 basis points more in the next 3 months.

One thing to note is that you will be expecting competitive deposit rates in the market in the near future as banks compete to attract depositors funds. Reason for this is because as the financial market stabilise, people start moving their bank deposits into other asset classes such as shares and property which means banks will have to fund more of their balance sheet from the very expensive money markets.

Hint: Make sure you have enough access cash over the near term to cover for the increase in interest repayments!!

Art Cashin is the director of floor operations in UBS, I’ve been following him for the past 6 months and have been watching almost all of his segments on CNBC. I noticed he’s bee pretty pessimistic about the market over the past couple of months and has been very cautious about investing more of his funds into the market. Yesterday, 27th August 2009 was the first time I actually heard Art Cashin talk openly about selling down his portfolio. More specifically his holdings in financials… Art talks about taking risk off the table and always iterates that the fundamentals of the economy cannot justify the current valuation on the market (i.e. the market is currently over bought). Whether this is true, time will tell.

Hope you enjoy this particluar video from CNBC, If you want to check out all of Art Cashin’s videos and commentary then click here

Technorati Tags: Art Cashin, Economy, Shares, Stock Market

Here’s a deceptive looking graph that’s been distributed around the Internet which I feel is doing a big injustice to what is happening in the real world. As you can see the axis is in thousands of jobs loss. The Employment Loss graph is deceptive simply because it’s showing absolute job loss and is intending to measure the impact of these employment losses on the economy. Firstly, we know we know that at different points in time the population is obviously different which would mean that the work force (employable people) is also different. i.e. the best way to measure the effect of the employment loss that’s actually occurred, especially since we want to measure it with previous recessionary period is to look at the percentage employment loss.

Below graph shows the Number of Employment Loss

The below graph shows the Percentage of Employment Loss

As we can see, the current rate of employment loss is just as bad as the 80s recession even though the current employment loss numbers are a lot higher. If you’re wondering why these graphs are so different then you’ll want to know that the population of America in the 80s was around 230 million whereas in 2008 is around 300 million. This means a 3.5million employment loss in the current moment is around 1.16% of the total population and 1.52% of the 80s population. This might look small but it’s actually 30% difference! Anyways, enough of the maths talk…

PS: I haven’t checked the data driving the graphs closely but I trust that these guys actually know how to graph even though I feel that the absolute employment loss graph was trying to be deceptive, even though it is correct. This post is more to show readers that graphs can be misleading even though they are correct. Readers need to understand that percentage graph is usually more useful than absolute graph especially when comparing things. (it’s always more fair and normalise your numbers before you compare them

In short, there no need to get all worried about crazy vertical looking graph, just understand what is the graphs and numbers really mean and don’t be tricked by accurate information presented in deceptive ways.

Technorati Tags: Deceptive Graphs, Employment Loss

Market Capitalisation of Banks over the past 12-18 months has been a one way ride. (If you haven’t been paying attention, it’s been falling and its bringing the rest of the world with it) Bank’s have obviously been hit hard by the credit crisis so when I was passed this interesting fact from a friend, I thought i’ll share it with you. It’s a very good graphical depiction of what has happen to some of the biggest Banks in the world.

Over these ‘rocky’ times, we have heard many different Banks merging and running into liquidity issues, we have also heard their share prices have dropped significantly in value, But this visual representation (I feel) may help you understand the magnitude of the credit crisis on the Market Capitalisation of the Banks.

Uploaded with plasq’s Skitch!

Got this in the mail and thought I’ll share it. Obviously it’s got to do with the world economy and how it is going down the toilet. Although these are pretty old cartoons, they are very relevant at the moment as the world economies are feeling the ‘pinch’ again. Enjoy!

I just read this article and I think it does a pretty good job of explaining the financial crisis up to now and also what is currently ‘brewing’ in the background (which might actually come true depending which way the world decides to turn)

I think the world needs to prepare themselves for another shock as more companies are being dried up of credit (ie. loans) Obvious things will become worse

• cut back on any business expansions
• they will be forced to fire more staff
• leading to mortgage defaults
• meaning more bad debts, and tighter credit
• the loop continues…

Until now, Australia has been very sheltered from a lot of this financial crisis. As the financial crisis drags out and become worse, people are starting to hear mining/resource/oil/gas industry are scaling back their operations, which leads to redundancies across their workforce.

At the same time, Australian banks are most probably preparing themselves for Babcock and Brown going under after their trading halt got extended for another week. It’s not that pretty when it starts affecting your backyard and this is what we’re starting to seeing. It’s happened so fast and most people are not prepared for it.

So watch your back pocket and if possible, borrow as much as possible for a buffer just incase the worse is yet to come.

The financial crisis has morphed into several simultaneous crises that feed upon each other. The real estate bust crippled the banks. Crippled banks starved companies of credit. Starved companies laid workers off. Laid-off workers defaulted on mortgages, deepening the bust in real estate. By a similar process, crippled financial institutions stopped making auto loans, which caused people to stop buying cars, which pushed the carmakers to the brink. If the carmakers go down, a whole new round of job losses and mortgage defaults will slam into the financial system – Source

Technorati Tags: crisis, Economy, financial crisis, subprime

It’s going to be interesting as more and more banks tighten their lending policy and make it harder for people to borrow. In the article below, CBA is axing their no deposit loans. I think its important to interate that the Property market is “moved” by the ability to finance the asset (ie the property).

Reducing/tightening credit policies and rules will obviously make it harder for individuals, investors and of course businesses and large corporations to finance things. Which means people will fail the credit assessments and not be able to purchase (ie. reducting in the demand of property due to the inability to finance the asset)

So keep an eye out for other signs of tightening credit which will effect the economy and all other markets!

CBA axes no-deposit loans
Prospective homebuyers will find it hard to get no-deposit loans in the wake of the global credit crisis.

The Commonwealth Bank of Australia has banned no-deposit loans and the ANZ has tightened eligibility requirements.

JPMorgan banking analyst Brian Johnson says stricter lending standards are here to stay.

”The era of getting very easy credit to buy a house is over,” he told ABC Radio, adding the move could have negative implications for house prices.

Aussie Home Loans boss John Symond says the change signals a return to sensible lending practices.

”Banks have got to have prudent lending,” he told ABC Radio.

”People buying home in Australia with little or no deposit is flawed process.”

Source – AAP

Technorati Tags: Economy, Finance, loans, Property

Last week the Government announced:

• All bank deposits will be guaranteed, at no charge, until 28 November 2008.
• After 28 November, the first $1 million of a deposit will continue to be guaranteed, at no charge, for three years until 12 October 2011.
• After 28 November any amount over $1 million will be guaranteed only if the bank holding the funds opts into the Government’s deposit guarantee scheme.

For the majority of people who doesn’t have millions of dollar worth of deposits, this will not apply to you. However for people who do have a substantial cash portfolio you may want to read on.

After the 28th November deposits over $1 million will no longer be guaranteed by the Rudd Government unless Banks decide to pay a fee for this ‘guarantee’. What you need to do is contact your bank and find out whether they are intending to opt-in to the Government’s deposit guarantee scheme or create a guarantee of some sort through hedging/buying insurance. The banks will obviously need to pay some sort of insurance fee for this service so I suspect the interest rate will be slightly less attractive.

Another way is for you to overcome this issue is to spread your deposits over several banks. From my understanding the deposit guarantee is per depositor, per bank. I think it will be wise to go speak with somebody who are in the business of deposits and get their clarification on this (hopefully they will be able to give you a better source)

“The deposit guarantee threshold under which there is no fee is one million dollars per depositor, per bank the government said last night. The clarification came amid advice from planners and analysts to companies, councils and individuals with more than one million to spread their money around to avoid the fee.” – Source

Until next time, maybe its about time to put your cash to work? Rediscover Stock Market and Real Estate, both are looking attractive compared to 18-24 months ago. World interest rates are falling; governments are pumping in large amount of money via stimulus package.

Technorati Tags: deposit, deposit guarantee, real estate, rudd government, Stock Market

Here’s the media release from the Reserve Bank of Australia state the reasons for the 0.75% interest rate drop today. Official interest rates is now 5.25% from an all time high of 7.25% (5th March 2008)! The last time interest rates in Australia was 5.25% was 3rd December 2003 (nearly 5 years ago), be expecting mortgage interest rates to be below 7% for the first time in a very long time!

Looking through the RBA media release, I think the important sentence out of the whole media release is, “…On balance, it appears likely that spending and activity will be weaker than earlier expected….”

End of the day its good news for people with variable mortgages, if you fixed your home loans… hopefully you didn’t fix your interest rates for too long. As with the economy only time will tell how severe its has been effected. Over the next few years I wouldn’t be surprised if unemployment increased as small to medium businesses close their doors or at least cut back their goods and services as demand drops.  

It’s definitely worth learning and understanding about investing particularly over the next few years, such as the stock market or in real estate . Interest rates are now ”low” and there are many buying opportunities if you have the cash or the cashflow to service the debt. Take advantage of this opportunity and start your nest egg or build on it especially in these depressed times.

Statement by Glenn Stevens, Governor Monetary Policy

At its meeting today, the Board decided to reduce the cash rate by 75 basis points to 5.25 per cent, effective 5 November 2008.

World financial markets have remained turbulent over the past month. Global equity prices have been volatile and fell further in net terms, and there have been significant exchange rate movements, including a sharp depreciation of the Australian dollar.  A number of governments have announced measures to strengthen their financial systems, which should help to stabilise conditions over time.

International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well. These conditions have contributed to further falls in world commodity prices.

In Australia, the overall path of economic activity appears until recently to have been close to what the Board had expected, with a needed moderation in demand occurring after a period of earlier strength. Recent reductions in borrowing rates, the depreciation of the exchange rate and the fiscal stimulus announced in October will work to assist growth in the period ahead, but deteriorating international conditions and falling commodity prices will have a dampening influence. On balance, it appears likely that spending and activity will be weaker than earlier expected.

Consumer price inflation in Australia remained high in the September quarter. As expected, CPI inflation in year?ended terms picked up to 5 per cent, while underlying measures were just over 4½ per cent.  Nonetheless, capacity pressures are now easing and, given the outlook for more moderate growth in demand and activity, it is reasonable to expect that inflation in Australia will soon start to fall. Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of inflation to the target could take longer than would otherwise be the case.

Weighing up these international and domestic developments, the Board judged that a further significant reduction in the cash rate was warranted. The Board will continue to monitor developments and make adjustments as needed to promote sustainable growth consistent with achieving the 2–3 per cent inflation target over time.

official statement by the RBA

Technorati Tags: Economic Update, Economy, interest rates

The world economy is having a challenging time at the moment so here’s a quick economic update on the general economy and obviously the Economic Growth of Australia

Firstly, the Australian dollar is currently trading at around $0.62 USD/AUD. It’s fallen quite substantially from a high of $0.95 about 3 months ago. So, if you had any foreign currency that you’ve been waiting to bring back to Oz, now is a very good time!

Secondly, interest rates are still set to drop next week, Tuesday, 4th November 2008. It’s currently set at anything between 50-100 basis points depending on how the reserve bank feels the Australian economy is holding out. Recent inflation reading was 5% which is higher than the target of 2-3%, that said, inflation is a lagging economic indicator and RBA is hoping the recent slow down in the world’s economy will bring inflation down for the next reading. If not, the RBA will have be pulling what’s left of their hair on what to do with interest rates.

Lastly, Couple of weeks ago, The Australian government announced a $10.4billion stimulus package which will help with reduce the impact of negative economic growth and the threat of a recession in Australia. If you haven’t already read about the stimulus package it comes in three major parts:

• 4.8b for Pensioners
• 3.9b for Families
• 1.5b for First Home Buyer

Here’s more details on the 10.4b stimulus package which you can easily Google and find on any news site:

Prime Minister Kevin Rudd and Treasurer Wayne Swan unveiled the emergency spending plan, which allows for $4.8 billion for pensions, $3.9 billion in support payments for families, and $1.5 billion for first-home buyers.

$4.8b down payment to pensioners, payable in December. The pension aid will assist four million pensioners, carers and seniors, with single pensioners receiving a lump sum payment of $1,400, while pensioner couples will receive $2,100. People receiving the carers’ allowance will also receive
$1,000 for each eligible person in their care.

$3.9b in support payments for families. Approximately 3.9 million Australian children will receive a $1,000 one-off benefit, also commencing in December. Families who receive Family Tax Benefit (A), and families with children who receive Youth Allowance, Abstudy or a benefit from the Veteran Children’s Education scheme, will be eligible.

$1.5b for first home buyers. The current $7,000 first home buyers’ grant will triple to $21,000 for people buying a newly constructed home. Those first home buyers moving into existing properties will receive a doubling of the allowance to $14,000.

$157m to create new training positions. The Productivity Places Program will increase positions from 57,000 to 113,000 in 2008-09.

The government has also indicated that it will accelerate the implementation of infrastructure spending, with further detail to follow.

Technorati Tags: Economic Growth, Economic Update, Economy