Make it counts

The past few weeks had been hard to believe. It was very hard to lose money in stocks recently. Plenty of stocks doubled from their lows. We like to say stocks like to anticipate. Does it mean the world will recover in 2010 ?

This is decision time. If you believe that 2010 will be just fine and smooth sailing, time to pile in on pull backs. If you don't believe in Santa coming to town in 2010, a tremendous opportunity awaits as well.  BUT timing is critical. A bear market rally tends to run longer and harder than anyone dreams ever possible. It sucks everyone in before the truth reveals itself. This one won't be any different. I am still going go for the May-Jun/Jul dip before a very strong snap back. And then maybe an implosion later in the year.

The Sydney property market is no different. To buy or not to buy. I have been thinking about this issue a long time recently. We have finally got enough of a deposit. And boy it tooks us nearly 10 years. And let's be frank, the journey has not been easy. My better-half, when she still had a job, worked till midnight regularly. We had to send our kids to childcare far earlier than we would have liked. The work environment was brutal. I really don't want to squander our deposit so easily.

I have been asking myself should we yield to the market reality now and just buy something ? I just did my usual rental yield comparison. Here is one example. A house (4/4/3)  is for sale in Mosman for $3.15M. Its next door neighbour (4/3/2) is for rent ($1400/week). Forget what everyone tells you about now is the time to buy, collect as much data points you can before you make the plunge.

Like all those war movies, this is the time to "make it counts".

Time to hop on ?

Wait.....The train is leaving without me.....I need to catch this train.......

My fuzzy logic is leading me to tie the stock market to the Sydney property market. By now, we have seen that stocks have bounced a lot from the low. If you are truly good or lucky, you would have at least doubled or tripled your money. Before we get too excited and put new money to work, it is worthwhile to step back and cool down a bit. As far as I can tell, most results are only suggesting that the environment is stabilizing. Most companies are not seeing any sharp snap back in orders. The stocks are running because analysts are typically using say EPS in 2010/2011 and then arrive at their price targets by using terminal PE of 12-15X.

Hello ? I can't even forecast my household budget of 2 adults and 2 kids 3 months out. Analysts are trying to forecast the macro + companies earnings' 2 years out. Throw in a banking system that was going to disappear a month ago, and you want to buy stocks based on their forecasts ?The only good news is, anecdotally, lots of funds have missed the current rally. Maybe it can go on longer than anyone thinks possible. Do be careful out there. Don't be too greedy on the way up.

Turning back to the Sydney property market....I notice that the market is thawing a bit. My better half was talking to an agent last week and he was telling her that the buyer/seller balance is now a bit more even than late last year. In the LNS area, a few houses in the high $1 - low $2M range were sold. These houses probably fetched $1-200K lower than "peak" prices one feels.

Let's see. The stock market is saying that 2010 should be better. Mortgage rates are low. I still have a job. Prices have come down a bit. Should I take the plunge now ? I guess this is a question a lot of folks ask themselves these days. From my perspective, there are two considerations:

a) There is no secret that there are limited number of new houses coming onto the market. As a matter of fact, we haven't seen a house this year that meets our needs.

b) I really don't think a 10-15% price fall is enough to compensate for the risks. For a start, we know that the Australian economy is seemingly lagging the rest of the world by 6 months or so. Furthermore, I struggle to see why house priecs would rocket up over the next 3-4 years. Imagine how much your dream home would cost today ? And assume house prices appreciate by 5-10% a year for the next 4-5 years, just take a step back and think about how many people in Australia can afford to pay you enough to get you to sell your dream home ? When I mentally run this exercise, I discover that there is no way I can afford my "appreciated" dream home ever. Even if I work till I am 130, the mortgage would remain very substantial. For the FHOG warriors out there, imagine if a 30 year old 2 bedroom flat costs $700000 in Sydney.

In my situation, I haven't found our dream home so I really can't be bothered. I also figure that over the next 5 years or so Sydney house prices probably won't go crazy. So why the rush ? If I were a rational person, I would gladly miss the Australian home ownership train for the time being.

Sub-prime in Oz

Here is an interesting idea. What if Australia is having its own version of sub-prime loans with the FHOG ?

Think about it.....Let's say you are looking at a $3-400K flat/apartment. You have struggled to save for the deposit for the past 1-3 years. Suddenly, our beloved leader Ruddy magically gives you $17-21K to spend. There is your 5% deposit. If you are truly nice to your friendly banker, you will tip in an extra 5% to round up your deposit to 10%. Your little problem is Ruddy is playing Santa to everyone else as well. You end up battling with other buyers with similar firepower.

Thus far, the situation in the magical Kingdom of Oz is a little bit better than USA. We don't have people forging documents. But we are getting lots of folks who have over represented their abilities to save. To make it worse, they are signing up to variable interest loans and are fully confident that their jobs are safe.

Hello ??? Did anyone notice in the past 2 weeks even the government has acknowledged that the Lucky Country may not be so lucky afterall ? Economists are forecasting 7% unemployment rate later in the year.

For the lucky winners in this property rat race in 2009.... The more you end up over paying relative to 2008, the higher the risk that you may end up with negative equity in your home if something else goes especially wrong in the world.

Tick....Tick......Tick........

Head Fake

Two things happened this week. First, I finally finished the Black Swan book. I feel inspired by it. What I got from the book is the idea that no one can forecast the future so surfing to the far edge of the risk curve is not such a crazy idea after all, providing you manage the overall risk well. Second, something happened at work. Let's just say it changed my perspective on life forever. 

Outside of my little universe, an important thing happened. The stock market globally rallied strongly. Yet, the world hasn't changed this much. Maybe the only big change is how Europe is contemplating "quantitative easing" as well. Otherwise, the best that we can say is the world is not getting any worse. US car sales dropped 40%, instead of 50% like the previous few months. One suspects we are also seeing inventories being replenished. Also of note is how the US market is feeling somewhat more optimistic about the various measures (say TALF) to save the banking system.

If you are perfectly smart, you may say so what ? The world is still in a lot of trouble. There is no way the global system can be fixed so quickly. Now is the time to call the market bluff and short the market. My humble advice is don't. The market's collective might is bigger than you and I. The market is voting that maybe there is a chance that the world may be on the right track. Remember, the gist of the Black Swan book is you and I don't have a clue on what is going to unfold in the next 12 months. Don't adopt the "holier than thou" attitude and be pigheaded. Be flexible and agile. For all we know, all these countries printing money may actually bring back inflation and growth.....We just don't know.

In my case, I have seen this before. My game plan is don't argue with the market. Enjoy the ride. It may go on far longer than anyone can anticipate. Remember as recent as 3 weeks ago, there were lots of shorts out there. Comes mid-Apr, we will see if the "inflection" trade can persist. Maybe another 2-3 weeks of happiness if the companies report as expected results and that things have "bottomed". But I will definitely cut back my exposure in late Apr - "Sell in May...Go Away". After a lull, if you are very aggressive, maybe you can resume the "2010 will recover" trade towards Q4. If 2010 turns out to be another down year, you are toast. If 2010 turns out to be OK, you will make lots of money. Take your pick and overlay your macro view there.

By the way, I don't offer financial advice. Think of the above as rambling of a worthless stock market participant who has plenty of scars on his back to remind him of all the lessons over the past 10+ years.

Turning to the Sydney property market, again I am quoting the fantastic RWM.com.au. Got the following statistic from the latest blog there:

MOSMAN HOUSES

• 2009 – 24 sales. Averaging 8 sales per month with a median sale price of $1,425,000
• 2008 – 264 sales. Averaging 22 sales per month with a median sale price of $2,200,000
• 2007 – 409 sales. Averaging 34 sales per month with a median sale price of $2,230,000
• 2006 – 396 sales. Averaging 33 sales per month with a median sale price of $1,900,000
• 2005 – 293 sales. Averaging 24 sales per month with a median sale price of $1,850,000
• 2004 – 310 sales. Averaging 26 sales per month with a median sale price of $1,637,500
• 2003 – 376 sales. Averaging 31 sales per month with a median sale price of $1,699,500
• 2002 – 392 sales. Averaging 33 sales per month with a median sale price of $1,690,000
• 2001 – 446 sales. Averaging 37 sales per month with a median sale price of $1,250,000
• 2000 - 349 sales. Averaging 29 sales per month with a median sale price of $1,150,000

Source: RP Data

Looks like property prices in Mosman have doubled since 2000. 2009 is turning out to be a very quiet year. I also notice that quite a few auctions fall through. The $2-3.5M range feel very quiet. An interesting question is what will drive prices down ? Maybe something is happening. Remember I once wrote about how property valuation is such an imprecise science. Here is an example. In Cremorne, a 4/5 bedroom house with proper harbour/city view was sold for $1.66M (vs. $1.8-1.9M initial asking price). When I saw the price, I thought it wasn't a bad deal for the buyer. The house is now available for rent at $1495/week. A house round the corner was up for auction last week. We saw that house as well. The vendor was asking for around $2M at the time. It wasn't sold and the vendor bid was $1.6M. I am waiting to see if the domino effect kicks in elsewhere.

I think I will stick to my 2010 scenario. Further, if I were to look at my own circumstances, I no longer feel secured about anything. My perspective on life has turned 10 shades more grey than 2 weeks before. I can imagine how a lot of folks will feel how their circumstances have changed for the worse as well. Really can't see any reason to hurry.