I first noticed this in the year 2000, when the GST was introduced by the Howard government. I was a university student, and the cost of a single textbook had broken the $100 barrier. It seemed that book prices had virtually doubled overnight. When I asked the manager, I was told that the introduction of the 10% GST and the new accounting procedures added a lot of overhead.

I think that’s only a small part of the explanation:

In Australia, four chain bookstores dominate retail book sales: Dymocks, Angus & Robertson, Borders & the Co-op Bookshop. They are traditional walk-in bookshops with large displays, elaborate decorations and many staff. Online book retailing in Australia has not yet reached the mainstream as it is in the USA and Europe.

Also, Australia has controversial laws preventing parallel importation – stores are not allowed to legally sell a cheaply imported book published overseas if the same book has also been published locally. There have been calls to change these laws to allow parallel importation,  but I doubt it will reduce prices significantly.

Despite this, there are still many things you can do to avoid overspending on books. Here is a list:

1. Borrow from a Library

Try and borrow the book from your local library. If your library doesn’t have it, you can request an interlibrary loan whereby your library will try and obtain it from another library in Australia or abroad. This commonly incurs a nominal fee, anywhere between $1-$10 dollars. If you are a university student or staff member, interlibrary loans can even be free.

You can quickly find out if a book is available in an Australian library by searching the Libraries Australia database, hosted on on the National Library of Australia website. If you want to check overseas library catalogues, they have a list of foreign library websites.

Borrowing, of course, may not be a viable option if you need the book immediately and/or have to refer to the book again and again.

2. Buy Books From Overseas Online Retailers

Amazon has been around for a long time, but they have no Australian presence, so most people usually go to the Amazon USA website. Unfortunately, they charge a lot for shipping to Australia, so it’s only economical if you have to buy a few books, or combine purchases with someone else.

A better alternative I discovered is BookDepository. They are located in the UK, but all of their prices include shipping to anywhere in the world. Even after currency conversion from British Pounds into Australia dollars, they come up cheaper than buying locally.

3. Buy Electronic Versions of Books (eBooks)

I don’t have that much space on my bookshelf. It really sucks when I buy a book, finish it and then have to stash it somewhere. Also, I am an impatient person and when I order books, I really hate waiting for them to arrive.

For this reason, I prefer eBooks. I don’t mean those cheap and shabby amateur self-published PDF eBooks that litter the internet, but mainstream books published by big name publishers like Random House, Harper Collins and others.

When you buy an eBook online, you download it as a file, most often in Adobe eBook and Microsoft Reader formats. Clients for these formats are freely downloadable.

If you are comfortable reading books on your computer monitor (today’s flatscreen LCD displays are much more gentle on the eyes), this may be a viable option. You can search the net to see if your desired book is available as an eBook – it’s a simple matter of going to your favourite search engine and specifying the title with the added word ”eBook” as the search term.

The main drawbacks of commercial eBooks is that you cannot resell them or give them away after you have finished with them – they are licensed to only be used by you. Each computer that you use to read an eBook must be ‘activated’ or ‘registered’ to prevent unauthorised sharing and illegal copying of eBooks. e.g. If someone else makes a copy of your eBook and opens it on his or her computer, it will refuse unless they also have obtained a licence. At the moment, Microsoft Reader lets you activate up to 6 computers, i.e. you can read an eBook that you have purchased on 6 different computers.

There are a number of websites that sell eBooks, but I have found Diesel eBooks to be the best. Of all the sites I have checked, they seem to have the biggest range of eBooks and for 3 of my recent purchases, they also had the lowest price.

4. Download Public Domain Books From Project Gutenberg

In most countries, copyrighted books enter the public domain between 50-70 years after the death of the author, depending on the copyright law in the country of publication. This means that if the book you were after was written before 1969, Project Gutenberg may have it.

Project Gutenberg describes itself as ”a volunteer effort to digitize and archive cultural works, to encourage the creation
and distribution of eBooks.” It was founded in 1971 by Michael S. Hart and is the oldest digital library.

All the works on the site are in the public domain, or are published with permission of the copyright holders. The bulk of Project Gutenberg’s eBooks are available in plain ASCII text and HTML formats, though some are in PDF format. Unlike the commercial eBooks mentioned in point 3, these files are unprotected and can be opened on any computer.

Some noteworthy examples are: Alice in Wonderland by Lewis Carroll, The Complete Works of William Shakespeare, The Meditations of Marcus Aurelius and Nineteen Eighty-Four by George Orwell.

The main USA site is http://www.gutenberg.org/

Project Gutenberg also has sister sites located in other countries. As copyright law differs between countries, the list of books in the public domain also differs. If you are looking for books written in English, it is worth checking the catalog of Project Gutenberg Australia and Project Gutenberg Canada if you can’t find them on the USA site.

Feel free to leave a comment on any tips you may have for saving money on books.

Fine print: If you have time, always shop around for the best price. Links in this post to online bookstores contain affiliate codes. If you click on them, I may receive a commission if you make a purchase. This goes straight into maintaining and developing Here’s Trouble.

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That means that ASIC would be responsible for investigating and uncovering insider trading, market manipulation and other fraudulent practices that occur on financial markets.

This responsibility was previously assigned to the market operator, the Australian Securities Exchange (ASX). Since the ASX demutualised and became a publicly listed company in 1998, it has been argued that there is now a conflict of interest between its duty to supervise the markets and its duty to maximise profits for its shareholders. That was the government’s reasoning for ordering the transfer of powers.

My answer is that I agree that there is a conflict of interest, but I do not believe ASIC is competent enough to carry out its new duty. ASIC is under resourced, inefficient and has a culture of apathy and incompetence. In addition, they lack the ASX’s technological know-how. The government did not mention how much extra funding they were going to allocate, if any.

I want to hear more about plans for extra funding and a cultural purge before I would have any degree of confidence in the new arrangements.

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In the media, it has been reported that a 17-year old British ‘autistic’ teenager from Yorkshire was attempting to set up a new Channel Islands-based airline that would service most of Europe.

He pulled this off by creating a number of bogus websites, and using virtual office services in a number of countries and writing convincing letters and emails to air industry bosses, which led to telephone conversations and face-to-face meetings.

His mistake came undone after an aviation magazine, who ran an article on his business, got suspicious and started snooping – his biggest mistake was using his own voice to impersonate several different people. In my opinion, he should have invested in one of those voice changing gadgets and learnt to speak and switch between several British regional accents.

His real name has not been published, but he is referred to one of the pseudonyms he used – Adam Tait.

The reports said that he was autistic, but I find this very hard to believe considering the number of social interactions he had. At worst, he would probably have suffering from some form of Aspergers syndrome, in which individuals are high-functioning.

Here are a few articles that tell the story in details:

http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article6719191.ece
http://www.airliners.net/aviation-forums/general_aviation/read.main/4487857/
http://www.muscletalk.co.uk/17yearold-with-autism-pulls-off-identity-stunt-of-the-decade-m3504726.aspx

Still, I am not convinced that he would have failed. I wish they had let this go on a bit more and see where he would have gotten up to. I do believe that creative young people have to struggle to get a fair go and face many forms of discrimination in society.

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As part of the Australian Labor Government’s measures to try and stimulate the economy, the Small Business and General Business tax break legislation went into effect on the 22nd of May 2009.

The allowance in a nutshell is this:

if you run a small business with a turnover of less than $2 million and buy an eligibile depreciating asset costing over $1000, you can make an additional one-off 50% tax deduction. This is in addition to the all the normal tax deductions on assets used to earn an income.

If your business is bigger, you still get an additional deduction, but it’s only 30%.

Full details can be found here on the Australian Taxation Office’s website:

The website smartcompany.com.au has a well-written explanation in their article “New details on the 50% small business tax deduction“.

Some examples of tangible depreciating assets include new computers, peripherals, furniture, vehicles and tools. Computer Software does not count as it is not considered tangible and does not depreciate.

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But I am sure that many people would be struggling a whole lot less if they found and retrieved their unclaimed money! In Australia alone, over $500 million dollars in unclaimed money is being held in trust by ASIC and other government bodies.

This article explains where unclaimed money comes from and tips of searching and retrieving money that you may own.

Where does unclaimed money come from?

Money can become unclaimed for many reasons. Here are a few examples:

• In Australia, if a bank account lies dormant for 6 years (no deposits or withdrawals), it will become unclaimed.
• If a person owns shares that pay dividends, and have not received or deposited their dividend cheque, the dividend amount will become unclaimed money.
• If a person has changed jobs frequently, they may have money in a number of superannuation (retirement) accounts. This may end up as lost super.
• A person may have been left money as part of an inheritance, but they were not contactable when the inheritance was disbursed

Why is There So Much Unclaimed Money?

The reason why there is so much is because most people do not know it exists.  Many people do not believe that they could ever forget where they put their money. Even those that have heard of unclaimed money often don’t know how to locate and retrieve it - especially elderly people who are computer illiterate and have never used the Internet.

There are a few money-finding companies who search official unclaimed money databases and send unsolicited letters to people offering to help return their money in exchange for hefty commissions. Often these letters look like scams and people toss them in the garbage.

I discovered unclaimed money in 2001 after a family member received such a letter. Since then, I have recovered over $8000 for family and friends.

How can I search for unclaimed money?

Here are resources for Australians and International Readers:

Australia

Each of the following websites belongs to a different government agency (state and federal) and has a search facility.

Australian Securities and Investments Commission:

http://fido.asic.gov.au/fido/fido.nsf

NSW Office of State Revenue:

http://www.osr.nsw.gov.au/benefits/ucm/find/search/

Superseeker (Lost Superannuation)

http://www.ato.gov.au/content/33301.htm

State Revenue Office, Victoria

http://www.sro.vic.gov.au/

Department of Treasury, Western Australia

http://www.treasury.wa.gov.au/

Public Trustee NSW

http://www.pt.nsw.gov.au/Lost+Dollars/Default.aspx

South Australian Treasury and Finance

http://www.treasury.sa.gov.au/dtf/unclaimed_money.jsp

Public Trustee of Queensland

http://www.pt.qld.gov.au/services/unclaimed/index.asp

If you know of any other Australian sites, please send a comment.

International

For our non-Australian visitors – I care about your unclaimed money as well. Here are a few websites that should provide a starting point:

http://www.unclaimedassets.com/au.htm

http://www.unclaimed.org/

Tips For Searching For Unclaimed Money

1. Look for common variations and spellings of your name

For example, a fellow named David McLachlan might search for the following:

David McLachlan
David MacLachlan
D MacLachlan
D Maclaughlin
D MacLoughlin

If you have a maiden name, or if one of your parents or ancestors changed their name, check for that as well.

2. Check Multiple Databases – Not Just Your Home State/Region

If you have lived in different areas, this is quite obvious, but this should also be done if you haven’t.

Let’s say you live in NSW, you may want to check Victoria and the other states as well. If you owned shares in a public company, their registered office or share registry may be located elsewhere and they will lodge money with the departments in that state.

How to Make Yourself Popular with Unclaimed Money

There’s no better way to make yourself popular than to make another person wealthier. Helping other people retrieve their unclaimed money could be considered better than charity, as you are merely reuniting a person with money they already earned and everyone’s dignity is maintained.

You can search for money belonging to of the following groups of people:

1. Friends
2. Family (close and distant)
3. Work Colleagues
4. Old school colleagues/teachers
5. Current/old workplaces
6. Your employer/school/university

Best of luck to you, and if you do recover some money, maybe you can buy me a beer!

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Many people like to own some gold. It’s a shiny yellow metal and brings up romantic images of Pirates, Spaniards, the Wild West, James Bond Movies, Fort Knox, Bullion, Nuggets and Jewellery.

It also has a reputation for being stable and immune to the inflation and devaluation that affect fiat (paper) currencies. Wars and economic uncertainty almost always spark interest in the metal.

I personally don’t care much for gold as an investment because it generates no income, but a reader asked for my opinion on what are the most convenient and cost-effective ways to invest in gold.

I consider the following methods to be the most convenient due to their accessibility, ease of use and relatively low fees. I must note that I have never personally used them.

Exchange-Traded Gold Bullion Securities

These are listed stocks that allow investors to buy a share in an allocation of gold that is held by a trustee in a vault. Each share represents a beneficial interest in a unit quantity.

For example, each share in the ASX-traded stock ‘GOLD’ entitles the shareholder to a beneficial interest in approximately 1/10th of a troy ounce of gold, and the share price trades at the current Australian dollar value of that amount (AUD$115.70 at the time of writing).

For an investor, the only immediate expenses are brokerage and the buy-sell spread. There are internal administration expenses such as gold storage fees and these are reflected in the share price.

More information can be found here:

http://www.goldbullion.com.au/

http://www.exchangetradedgold.com/

Online Digital Gold Certificates 

These are a form of electronic money that is based on unit amounts of gold. These are issued by private companies that operate websites, the most famous being E-Gold. Think of it like Paypal, except your account balance is measured in ounces or grams of gold.

You can top-up your account by purchasing gold at the current market price in a supported currency, and you can redeem gold at the current market price. You can send and receive any gold, to and from other parties. Each time you carry out a transaction, you are typically charged a commission, based on a fixed quantity or a sliding percentage scale.

Online digital gold currencies have generated controversy due to their abuse by fraudsters and money-launderers. Questions have also been raised about the proportion of clients’ funds that are actually held in gold bullion, but I am not aware of any cases in which the digital gold providers did not meet their financial obligations to clients.

More information can be found here:

http://en.wikipedia.org/wiki/Digital_gold_currency

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Pardon the sparseness of my posts in the last fortnight. I have been reading and thinking very hard. For me, it is important to try and say something meaningful rather than contribute to the endless media waffle concerning the current financial crisis that does nothing more than waste time and confuse people further.

As first glance, many ASX stocks look incredibly cheap based on historic valuations. There are now heaps of shares that have P/E ratios less than 10, and offer fully-franked dividend yields greater than 10%. These are not just the battered property trusts who have high debt – many of these companies are in other sectors and are still reporting record earnings growth. So why aren’t these companies’ share prices going up?

The reason is that sentiment is very very poor. The market is anticipating future drops in earnings over the next few years as the financial crisis runs its course. People lack accurate, trustworthy information, so they are expecting the worst.

I personally see reasons to be positive. Emerging markets like Brazil, China and India are still growing strongly, and many Australian companies have exposure to these economies. There will still be demand for cheap consumer goods. Plenty of money will still be made in biotechnology and agriculture.

My share portfolio has been battered heavily – I have many small cap stocks which naturally are more volatile and lack liquidity, but they’ve all been paying their dividends like clockwork and most of these dividends are higher than last year. I do not buy shares that do not pay a good dividend – I see the dividend as a mark of business stability and compensation for periods of stagnation.

Right now, I expect the market to see-saw up and down for a prolonged period. I am looking at ways to take advantage of this. One area I am reading up on is the investment technique known as Value Averaging. Most people are familiar with Dollar Cost Averaging, in which one regularly invests a fixed amount of money into a share or managed fund, regardless of the price. 

With Value Averaging you vary the contributed amount depending on the value of your portfolio at the end of each time period, in order to reach a pre-defined target. The end effect is to buy more shares when prices are lower and buy fewer shares when prices are higher. Research has shown Value Averaging to outperform Dollat Cost Averaging about 95% of the time. I plan to write a post on this in the near future. If you can’t wait, click on the above link.

In other news, on the 12th of October, Prime Minister Kevin Rudd surprised everyone by announcing a package to provide an unlimited  guarantee on bank deposits. The financial markets reacted like an agitated grizzly bear hit with a tranquiliser dart – there was a day of temporary euphoria, followed by a swift return to instinctive behaviour.

A week later, Kevin realised that the package may have been overly generous and he announced that the bank deposit guarantee would be limited to $1 million. Beyond this amount, bank account holders would have to pay for insurance.

I question the wisdom of this scheme. Although this may have allayed consumer fears about the solvency of banks, it may have had the unintended side effect of further fuelling an exodus from shares and other asset classes into this newly created ‘perfect safe haven’.

Furthermore, in the event that the financial crisis worsens and a bank does become insolvent, where is the Government going to get the money to meet their guarantee obligations? Probably by printing more money! This will cause increased inflation and devalue everyones’ wealth. Nonetheless, this is probably far more emotionally palatable than going to your bank and being told that your money is gone.

Speaking of inflation, the Australian Bureau of Statistics stated that the Consumer Price Index (CPI) will reach a 13-year high of 5% this year. The current interest rate on Australian bank deposits is around 6%-6.5% per annum, so people who have their money in cash will be treading water.

In contrast, corporate earnings are more resistant to inflation. Assuming that demand remains constant, corporate revenue rises with inflation. For this reason, I see better value in making defensive investments in defensive low-debt stocks than blindly putting money in the bank, unless you need to access your money in the short-term.

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Most media coverage has sought to educate the public as to what short-selling is and debate whether the growth of the practice is a cause or merely a symptom of the financial crisis gripping the world. Questions have also been raised as to whether it should be permitted or not.

Despite this, I have not seen anybody attempt to explain how short-selling has been abused in the last year to lead us to the situation we have today.

This article aims to uncover how short-selling has been abused as a tool of market manipulation and deception on the Australian Markets (the ASX). Before continuing, it is essential that you understand the following terms: short-selling, hedge fund, short-position, long-position, margin calls and stop-loss order.

The Swindle in a Nutshell

Hedge funds and other large short-term speculators have been short-selling stocks in vulnerable companies without disclosure, using stock borrowed from investment funds with large portfolios, with the intention of triggering margin calls and stop-loss orders to further propel the fall and cause a collapse in market confidence, allowing them to buy back stocks at bargain basement prices and make massive profits at everyone else’s expense.

Short-Selling in Australia

Prior to the last Sunday, short-selling could be carried out in two ways:

• Naked shorting – placing a sell order, without having any shares to deliver
• Covered shorting – selling shares that have been borrowed from another party, to be returned at a later date

Naked shorting was the most restricted – it was only permitted in specific leading large-cap stocks, and the number of short positions was supposed to be limited to 10% of the shares on issue in the stock. Brokers were always supposed to report their clients’ naked short positions to the ASX, and prevent them from opening prohibited ones.

In practice, if a naked position was opened and closed on the same day, these restrictions would be almost  impossible to enforce. Even when naked short positions were properly reported, the only people who would know would be other brokers who receive the complete market depth information from the ASX, unlike most retail investors who receive only a limited subset.

In contrast, covered short-selling using borrowed stock went largely unreported. To the rest of the market, a covered short is indistinguishable from a regular sell order, as the stock is ultimately delivered to the buyer at settlement. The only parties who know the true origin of those shares are the stock broker that initiated the sale, and the party who lent the shares.

The Origin of Borrowed Shares

One can borrow shares from anyone prepared to lend them.

Hedge funds usually borrow stock from investment funds with large long-term holdings. The biggest stock lenders are superannuation (retirement) funds, who receive fees in exchange for this service. It has been reported that for some fund managers, 30% of all their holdings are being lent out at any point in time.

One could say that that fund managers are allowing their investors’ assets to be used as a weapon against them. Most people who have their superannuation invested in shares are completely unaware that their holdings are being lent out in this manner.

The Avalanche Effect

If someone sells enough shares in a given stock in a sufficiently large quantity, it will overwhelm the bidders and force the market price down. As the share price falls, there is an increasing probability that margin calls and stop-loss orders will be triggered, further adding to selling pressure, creating an avalanche-like effect, causing the share price to fall even further.

The only way to counter a false oversupply caused by undiclosed shorting is for someone to know, or suspect that something fishy is going on, and fight back by buying. In this currently depressed market, not many people would have the stomach for that action. Most participants would interpret a sudden increase in selling as a precursor to the announcement of bad news to the market.

Vulnerable Shares

To maximise the likelihood of success, the hedge fund must choose a share that is vulnerable to this kind of manipulation. The best candidates are:

• Mid to large cap shares in companies that are commonly held as long-term investments
• Shares with good liquidity – a large daily volume traded, to ensure that the hedge fund can enter and exit their position quickly.
• Shares in companies who have rivals that have announced bad news, which could be perceived to affect their sector as a whole. For example, the Investment Bank Babcock and Brown’s (BNB) recent troubles that may have provoked rumours and speculation about their rival Macquarie Bank (MQG) whose shares experienced wild volatility recently.
• Those companies who are experiencing difficulties or are in negotiations with creditors or buyers, e.g. ABC Learning.
• Shares in companies that margin lenders lend against and are are available for trading by CFD providers – that maximises the opportunities for triggering margin-calls and stop-loss orders, fuelling the avalanche of selling.

It is also possible for someone to intentionally spread false rumours to create a fall. Whilst this is effective, it is illegal and could result in prosecution, and it is not strictly necessary if the above steps are followed.

The Aftermath

This swindle results in a number of detrimental effects. Many of these are of course typical of any sort of wide-spread market manipulation.

Short-term Effects:

• Investors are forced to exit long-term positions that they would otherwise keep and take losses at artifically depressed prices. Margin lenders may choose to remove these stocks from their ‘allowed stock lists’, forcing geared investors to pay out the entire debt on the share.
• Triggering of clauses in commercial contracts that are conditional on the value or performance of shares in the company that has been ‘attacked’. This usually results in a win/lose situation for the parties to the contract. Examples: Cancellation of dividend reinvestment plans, derailing takeover bids and mergers

Long-term Effects:

• Loss of morale amongst employees of the companies whose shared have been manipulated, as many employess receive shares or stock options as part of their remuneration.
• Loss of faith in the integrity of the stock market
• Increased bearish sentiment
• Depressed economy and business confidence

Long-Term Remedies

Assuming that short-selling will be permitted again, the following remedies may prevent a recurrence of what has been happening:

• Making identical information available to all participants

 All participants in the stock market should be entitled to obtain the same level of market depth information, whether they be stock brokers or retail investors.

• Complete disclosure of all short positions

If a party is opening a short position, everybody should be able to see this this when viewing the market depth. For example, if I place an sell order to short 10,000 BHP shares at $40, this would appear in the market depth on on the offer side, with a symbol ‘S’ printed next to the quantity, so people know that I am not just a normal shareholder disposing of my stock.

At least once a day, the ASX should publish the total number of short positions in a given stock to allow participants to view the degree of bearish sentiment. This is already done for financial derivatives like options and futures. There is no reason why this should not be done for shares.

• Banning of Naked Shorting

People who wish to short-sell a stock should be limited to the quantity of shares that have arranged to borrow in advance, even if their intention is to perform a day-trade. This would prevent attempts to ‘flood’ the market.

• Accountable Stock Lending

Investors should be able to choose whether their fund managers lend their stock out to other parties. If an investor chooses to allow this, then they should receive their fair share of these profits as part of their income distribution.

Devil’s Advocate (Responses to Expected Criticism)

1.  Could the same argument be not be made about margin lending? After all, this allows people to buy shares with money they do not have, and many people do this for short-term gain as well.

The physical market is by definition asymmetric. There are a finite number of shares issued in a company, and people can either own some or not own it. The above logic would only apply if there were an equal number of long and short positions in the market.

The opposite of a stop-loss order is called a start-gain order, and there are very few of those.

This in contrast to the options and futures derivatives markets which are zero-sum games played between counterparties with opposing views.

2. Is this a conspiracy theory?

No, just an example of how intelligent people can find ways to exploit weaknesses in a system for their own personal gain. Think of it as cheating.

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The Australian Government does not concern itself much with the affairs of young people these days – we have an aging population and the young person’s vote is not considered important, but every now and again, it throws a token gesture their way.

By this, I am talking about the First Home Saver Scheme, which commenced last Wednesday, the 1st October.
The stated purpose is to assist people, who have never owned a home, to save for their deposit. The full details and conditions of the scheme can be found here.

This scheme is accessed by opening a special First Home Saver Account with a participating bank or superannuation fund.

At the moment, all the First Home Saver Accounts offered by banks work just like interest-earning savings accounts, paying between 6-8% per annum on your account balance. In the near future, equity market-linked accounts will be offered by superannuation funds, allowing you to invest your savings in shares and other assets.

I see the main attractions as being:

• You get up to $850 per year in free money from the government (you must deposit at least $5000/year to get the maximum) – equivalent to a risk-free and tax-free 17% return!
• Interest you earn on money in the account is taxed at only 15% instead of your normal marginal tax rate (30% for most middle-income earners).

The main drawbacks are:

• You have to deposit at least $1000/year for four years to be able to use the money as a deposit on a propery
• If you buy a home before the 4 years are up, you can’t withdraw the money – your only option is to transfer the money to your super
• You can’t yet use it for property bought at auctions

Even if you don’t plan to buy a home, you can still take advantage of the scheme to boost your super:

• Each year, just deposit $5000 and you’ll get $850. This is useful for those of us who are ineligibile for the superannuation co-contribution scheme.
• On the other hand, if you ARE eligibile for the super co-contribution scheme, you get can up to $850 on top of the $1500 maximum you are receiving from that scheme. e.g. up to $2350 per year!

Other reasons to participate:

• Housing affordability may actually improve over the next few years as the credit crisis and slowing economy bite
• Share prices are depressed, and regular investing over the next few years may allow you to pick up bargain investments at the bottom of the market.

For further Information:

The Australian Prudential Regulation Authority (APRA) have a list of institutions that offer First Home Saver Accounts.

The Australian consumer magazine, Choice, has a review of the current First Home Saver Accounts on offer.

The best deal at the moment, is being offered by AMP Bank, who are paying 8% per annum, paid monthly until the end of the year.

Disclaimer: I am in the process of applying for an account with AMP Bank, and I have a subscription to Choice Online. Other than that, I have no affiliation with any organisations named in this article.

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The US Democratic Senator for Ohio, Dennis Kicinich explained his own reasons for rejecting the bailout in an interview with the community media network, Demoracy Now!.

I agree with the need to stabilize the market, but it should be done in a way that is fair to the American public. Just as when a criminal is released on bail, he or she is subject to stringent conditions, so should the corporations being bailed out.

If a corporation wishes to receive some kind of Government assistance, e.g. the Government taking over its bad debts, there is no way that they can be permitted to keep any of the ‘booty’. Possible conditions could include the following:

• NO payouts for executives that choose to resign or retire
• Cancellation of all outstanding stock options issued to executives
• Any stock issued to executives in the last 5 years should be returned to the corporation
• Confiscation of personal assets purchased with bonuses awarded to executives over the last 5 years

This of course should happen independently alongside a comprehensive investigation of all lending and risk management practices with criminal charges laid against those suspected of fraud.

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The ban commences from the start of trading this morning (Monday 22nd September).

In their statement, ASIC expressed concern that short selling bans that have recently been enacted in a number of markets around the world may result in hedge funds moving their activities to Australia and increasing ”unwarranted activity” here.

These new restrictions are more extensive than those enacted elsewhere, which have generally only targeted financial stocks.

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For those not in the know, short selling is the act of selling stock one does not own, with the aim of buying it back at a lower price and profiting from the difference. This strategy is used to make money in a falling market, or when one expects a fall in the near future.

Large hedge funds have been blamed for abusing short selling to manipulate the market and contributing to the deterioration of world stock prices. 

The US ban applies to 799 stocks, and will initially last for 10 days, but may be extended. The UK ban applies to 32 companies and will last until the beginning of January 2009.

In Australia, our own so-called regulator ASIC has stated that we already have restrictions on short selling. Many people would consider this laughable.

I have an article that’s been sitting on the back-burner concerning my opinion of the role of short selling in the world stockmarket turmoil. It will follow next.

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Google News erroneously reprinted an old article from 2002 concerning United Airlines, which faced deep financial problems at the time. This caused a run on its NASDAQ-listed stock UAL, leading to its share price falling from $12 to $3, after which the stock was suspended from trading. This caused a drop in its market capitalisation of $1.14 billion. The stock has since recovered to over $10, but its market capitalisation is still down over $300 million from before the old article was published.

Google News regularly searches and indexes online news sites around the world. In turn, many other online news sites grab headline from Google News. The automated nature of this process provides many opportunities for false information to be widely disseminated.

With the growth of Social Bookmarking sites and News Aggregators, people wishing to manipulate the market, or spread any kind of propaganda now have a very powerful tool at their disposal.

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An enterprising fellow by the name of Armin Heinrich, capitalised on conspicious consumption centred around Apple’s much-hyped iPhone, released last month.

He created an iPhone application named “I Am Rich”, whose sole function is to display a computer-generated image of a glowing red ruby, as a status symbol in order to flaunt the wealth of the owner.

Apparently, 8 people purchased this application, for the listed price of $999.99, before it was removed by Apple, following a complaint from a purchaser who claimed he accidentally clicked on the buy button.

The LA Times has a fantastic article, with pictures of the Apple store advertisement and an application screenshot.

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First of all, I am alive and well. I have been away on vacation recently in the USA. I had naively hoped to return home to better economic news, but it turns out that the opposite is true. The price of oil has continued to climb, more American Banks have become insolvent and the repercussions are being felt worldwide.

Most people have found few things to be positive about, but I can think of one thing. The weak US dollar made my vacation far more affordable. I can’t say that I lived or travelled like a king, but I certainly ate like one. Even in the most touristy areas, such as Niagara Falls, I was able to get a satisfying meal for $10. In contrast, last weekend in Sydney, I paid that same amount for a mere tomato bruschetta in a cafe, located on Broadway.

Two things however did annoy me very much about the USA. These are the practices of quoting prices ex-tax and the need to pay an additional tip for table service at restaurants. Tax was usually around 10% and tips averaged to 15%, so the menu price would be inflated by 25% in most cases.

Here in Australia, these practices do not exist. You pay the advertised price and that is that.
I expressed my feelings of frustration to other travellers I ran into, who would often answer ”When in Rome, do as the Romans”. I did, but I really didn’t like it. Here are my main reasons:

1. Tipping Encourages Misleading Advertising

To me, I am effectively dealing with a business that quotes a misleadingly cheap price to get my attention, who then ask for an additional fee to get fulfilment of the service. This stinks of corruption and is completely against the ideals of capitalism, which relies upon transparency.

It appears that the reason tipping took off in America was because it allowed an employer to hire staff at a ridiculously low wage, to avoid taxes.

2. Tipping Promotes Idleness Amongst Employees

When I go out, I want the same level of service from each waiter – someone who can understand and take an order, and then bring the food out promptly.

I found, more often than not, service was actually worse in the USA. Although most restaurants had multiple waiters, I usually had to wait for the specific waiter that was assigned to my table, in order to make it easy for them to distribute the tips. As a result, many waiters were standing around twiddling their thumbs, which is very inefficient.

3. No Objective Measure to Value the Quality of Service

It is stated that tip is designed to pay and reward the waiter for their ‘good’ service. In practice, I paid close to 15% to everybody, as there is no objective yardstick to judge what ‘good’ service is.

A number of times, a waiter kept coming back to give long speeches offering me more dishes, or alternative variations. To them, they were providing good service. To me, they were hassling me to eat and purchase more than I had originally asked for, and this detracted from the experience.

I reckon that If the bean counters in the business can prove that a certain staff member is able to attract more business, this should be recognised with a raise following a salary review.

4. No Competition

When I go to a restaurant, would it be acceptable for me to ask for the waiter who will charge the lowest tip? Surely, this should be allowed in a capitalist system.

Also, let’s say I don’t like the waiters in a restaurant. Would I be allowed to bring my own personal waiter who will then be responsible for taking the food from the kitchen and cleaning up after me, and I will pay him myself? I don’t think so.

5. Promotes Discrimination Against Less Wealthy Customers

Apparently, tips were originally 10% and they have crept higher over the years, and are now between 15% and 20%. One explanation is that wealthier people have been paying progressively higher tips to obtain better service than others, and this would result in lesser well-off groups of people receiving inferior service. Is this acceptable?

References

I found this excellent paper written by an economist who discusses the history of tipping in America and beautifully outlines the case against tipping in great detail:

http://taxprof.typepad.com/taxprof_blog/files/the_case_against_tipping.pdf

 What do you think?

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When I have asked economics students to explain it, I have found it to be poorly understood. I have come up with my own analogy to explain the principle. Furthermore, it also explains how this principle applies to individuals in everyday life. Here is my example:

Let’s say I have a day job as contract web developer for which I get paid $50/hr. After work, I can either eat out for dinner or buy ingredients and cook at home.

When I go out to eat, my favourite meal is a Thai stir fry which has meat, vegetables and rice, which I can buy for $10. The resturant takes care of all the preparation and cleaning. All I do it eat and leave.

When I eat at home, I might prepare something in the kitchen with frozen vegetables, beef and potatoes, and the ingredients for that will average out to $5/day over the course of a week.

On the surface, it seems that I am saving $5/day when I eat at home, but this is not the whole story.

In addition to the time spent shopping, I will also have to spend time to unpack and prepare the ingredients, wait for them to cook and clean up afterwards. Let’s say that the total time from preparing to washing up takes 1 hour.

What If instead of doing that, I worked for an additional hour per day and decided to always eat out?

I would earn an extra $50, spend $10 on the Thai meal, leaving me up $40 from my starting balance, and $45 ahead of cooking at home. Amazing.

I can extend this further to the Thai restaurant itself. Let’s say the owner/head chef wants to promote the restaurant by creating a website. She could either close the shop, read web design books and learn how to use HTML editing software, or she could hire me. The website the chef wants is simple – it just has the restaurant’s name, phone, address, a street map and the current menu.

I could hammer this out within 2 hours, for which I would charge $100. The chef is also clever, but she might take 5 hours as she has to perform software installation, read documentation and debug common beginner mistakes.

What should the chef do? Let’s say the restaurant serves 20 people per hour, and makes an average margin of $5 on each meal, the restaurant’s hourly income is $100/hr.

If the chef builds her website herself during restaurant hours, she would forego $500 in revenue. If she hires me, her total out of pocket expense is $100. Hence, she is $400 better off by hiring me to build her website.

For this example, we would conclude that my comparative advantage is in web development, and the restaurant’s comparative advantage is in preparing food.

This principle can be used to justify why a multi-talented business owner may be justified in hiring a graduate fresh out of university for clerical tasks, or why one would hire an accountant to do a simple tax return.

Of course this example makes a few assumptions. If I were in a permanent job, perhaps I would not have the ability to work an extra hour. Also, some people might in fact like cooking at home or spending time with family. Also, some Thai restaurants use excessive amounts of oil which could lead to weight gain.

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For the sector as a whole, I expect Capital Gains to be subdued for the next few years as our economy is slowing, interest rates are high and people are borrowing less (or paying back debts). Profit growth will be very small, however I do not expect any cuts in dividends.

For individual banks, the situation is not so clear. ANZ has been in the news due to having increased its provisions for bad debts, as well as the OPES Prime fiasco. NAB has also copped some flack due to exposure to the US mortgage crisis. SGB and WBC have done better, both reporting strong single digit earnings increases.

I am not going to make a call, but I can tell you how I would start my analysis – I would examine each bank to determine the proportion of income from each of the bank’s activities, e.g. Retail banking, business lending, wealth management/financial advice and others. Also, I would look at the proportion of income earned in Australia and the proportion earned overseas. I can then make my own judgement on the future prospects of each activity.

Commonwealth Securities provides research from Aspect Huntley on its website. The above information can be found under the ‘Analysis’ tab.

Be cautious about PEG estimates provided online. These are purely guesses made by the research company’s analysts. It is better to read each bank’s earnings guidance in their annual report and use your own critical thinking skills to see what assumptions lie behind them.

For me, banks are now an income investment, as they pay large, stable, fully-franked dividends. I have been holding ANZ and NAB since last year. Do not consider this a recommendation.

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The presenter pointed out a number of ASX-listed debt securities (often called Capital Notes) that are trading below their Net Present Value (NPV), by between 5-12%. I was asked for my opinion.

For those that don’t know what these are, these are much like bonds – they are normally issued by public companies, e.g. banks/insurance companies to the public in order to borrow large amounts of money, e.g. to facilitate expansion.

Each bond/note that is issued has a given face value, e.g. $100. They pay a certain interest rate periodically for the duration of their lifetime, i.e. 8% per annum for 10 years,  after which the bond matures and the face value is paid back.

The underlying value of a bond at a given point in time is the Net Present Value (NPV) of its future cashflows. We take each pending payment (interest income and the face value paid upon maturity), discount them back to today’s dollars using current market interest rates and then sum them together to produce the NPV.

This is why when the RBA raises interest rates, the value of bonds falls, and if interest rates fall, the bonds rise.

OK, here’s a far better written explanation from Investopedia:

http://www.investopedia.com/university/advancedbond/advancedbond2.asp

OK, so does this mean that if a bond/note is currently being traded below its NPV, that it is a risk-free investment? The answer, as always, is in the fine print.

I checked out a couple of product disclosure statements. I noted the following:

• One product gave the company the right to indefinitely delay maturity of the bond.
• One product stated that in the event of the company getting into financial trouble, note holders would rank above shareholders, but below other debtors.
• Some have other conditions that make returns dependent on the movements of the company’s normal shares.

Such conditions may potentially pose risks and should be factored into your investment decision.

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