Warren Buffet’s Goldman Sachs Deal Actually Starting To Look Good

March 25, 2009 · Filed Under Business News, Featured Articles, investments, Wealth Management · Comment

Last October perhaps the world’s greatest investor whose nickname “The Sage of Omaha” makes him sound more like a wrestler than an investor invested US$5 billion in venerable investment bank Goldman Sachs.

At the time it looked opportunistic; Goldman looking for a marquee investor whose stamp of approval carried more weight with financial markets than anything it could ever say or do, Mr. Buffet picking up his much fabled wonderful stock at what looked at the time, a wonderful price.

For Berkshire Hathaway, it was a no lose deal, it bought a US$5 billion equity stake in perhaps the world’s best known investment bank and arguably the dominant player or alpha male of the industry, and for its money receives a guaranteed dividend of 10 per cent a year on its perpetual preferred shares.

For a kicker Goldman’s gave Berkshire 5 year warrants which give Berkshire the right to buy 43.5 million common shares of Goldman Sachs at a strike price of US$115 at any time before 2013.

After doing the deal banking stocks tanked, the crisis deepened, Goldman shares hit a low of US$47.41 on November 21st, and after writing an op-ed piece for the New York Times on why he buys America, Mr. Buffet came in for criticism.

His critics should have known better. Goldman Sachs shares have nearly doubled since its November low and closed on Monday at US$111.93. Mr. Buffet’s warrants could soon be in the money.

The Investment bank has had to change its business model, and reduce the amount of leverage it carries on its balance sheet, but some business areas are positively on fire with flow or client driven trading benefiting from wide spreads being charged and really bringing in the moolah.

Analysts are revising earnings estimates, and banking stocks have rallied, conceivably if Goldman stock hits US$150 a share, then Berkshire could exercise its warrants position for a profit of US$35 a share or a cool US$1.5 billion.

Mr. Buffets GE deal has not fared so well however. Berkshire got similar warrants in General Electric when Mr. Buffett invested in the industrial conglomerate on October. 16. The GE warrants can be exercised for an aggregate cost of $US3 billion, or $US22.25 a share.

GE shares closed at $USUS10.43, which means Mr. Buffett’s GE warrants remain deeply out of the money and unlikely to recover in the short term. GE needing to restructure its business radically, having lost its prized long term AAA credit rating, and overly reliant on financial services as a profits generator.

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Australians Spending Less On Credit Cards

March 24, 2009 · Filed Under Australian Economy, credit cards · Comment

Figures released by the Reserve Bank of Australia on Thursday shows that Australian consumers seem to be reducing the amount of debt they carry on credit cards as they hunker down and try and weather the onslaught of an impending recession.

Data from the Australian central bank shows that about Australians spent $5 billion less in January on their credit cards than they did in December.During January more than $16 billion was spent on credit and charge cards compared with the $21 billion spent in December which represents a decline of 21 per cent. During the same month in the previous year the total value of transactions fell by $500 million, and the number of purchases using credit cards fell by more than 22 per cent.

It should be noted that same month comparisons for the month of January are rather more useful than comparing December and January. December is the most active shopping months due to the holiday season, whilst January traditionally is one of the slowest months as people moderate their behaviour after having splurged in the previous month

The total amount of credit balances outstanding fell 1.5 per cent whilst balances accruing interest fell marginally by $100 million and stands at $32.9 billion.

Some analysts reckon that the data may be skewed by payments made to families under Federal Governments fiscal stimulus package, and that 90 per cent of the payments made were either put into savings or used to pay down credit card debt.

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Tags: Australian Economy, credit cards

Analysts Cautiously Suggest The Worst May Be Over For Australian Banking Stocks

March 24, 2009 · Filed Under Australian Economy, banking, Business News, Capital Markets, Equities, Mergers & Acquistions · Comment

An extremely tentative view is starting to emerge that the worst of the global banking could be over, after global financial markets across all asset classes went into a tizzy in the aftermath of the failure of Lehman Brothers.Analysts are suggesting that Australia’s Big Four could emerge from the crisis in a far stronger position than they entered the crisis with.

The banking crisis has forced weaker financial institutions in Australia to seek merger partners or even outright buyers, which have been largely if not exclusively comprised of the big four Australian banks. This has meant there is less competition and larger market shares for the big four, particularly in specific areas such as mortgage lending and SME lending. All of which has resulted in fatter margins, increased pricing power.

The view has seemed to have taken hold of Australian investors and could be one explanation why the big four banking stocks outperformed the broader equity market last week. Australian banking stocks began their march upwards last week in spite of CBA chief Ralph Norris making statements to the effect that he believed the “worst is yet to come”

Shares in Mr. Norris’s own bank climbed 12 per cent last week.

The focus of the crisis over the last few weeks has shifted to Eastern Europe, where mortgage holders in the part of the world took speculative home loans in foreign currencies and have seen the cost of servicing the debt multiply as domestic currencies collapsed against all major global currencies.

CBA’s Norris in particular specified that loans for infrastructure projects and privatization programs could be the next Achilles heel for global finance.

“Now we’re seeing the collapse of (the region’s) currencies. This has led to a huge amount of debt in local currencies that has not been hedged, and this is obviously going to come back and haunt the banks that have lent money to these sorts of countries. I think this is going to be the next phase of the crisis.” Mr. Norris said last week.

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Citigroup lifted its earnings forecasts for the Big Four in a detailed report on Monday, citing the federal Government’s wholesale funding guarantee, improving interest margins and “bland” balance sheets with minimal exposure to structured credit.

“As a result of this, we would also call them beautiful — in the sense that their profitability is likely to improve sharply as the economy recovers, yet their valuations are increasingly attractive,” Citi said.

Despite the upgrade, Citi said it was not yet the time to buy the Big Four, as they were fully priced after last week’s rally.

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Tags: Australian Banking, banking, Banking Equities, Commonwealth Bank, Equities, home loans, Investing, Mergers & Acquisitions, Shares

Cost of Borrowing And Insuring Debt In Australia Rises

March 24, 2009 · Filed Under Australian Economy, banking, Business News, Capital Markets · Comment

The cost of borrowing in Australia has risen, whilst the price to insure against defaulting corporate bonds has increased. According to data from the Australian Financial Markets Association, shows that the rate Australian banks charge each other for lending for a period of three months has risen by 3.03 per cent.. The difference between the three month lending rate and the overnight swap rate was 29.2 basis points.

The spread between three month lending and overnight swap rates is a measure of cash scarcity, and averaged about 11 basis points in the five years prior to the start of the banking crisis which began in August 2007.

LIBOR, or the London Interbank Offered Rate, the rate of interest banks charge for Eurodollars in London across a number of maturities, and in particular three month dollar denominated loans, fell for an eight consecutive day on March 20th, and was being quoted at 1.22 per cent, according to the British Bankers Association.

The benchmark Markit iTraxx, an index tied to the debt of 25 companies, including Qantas Airways Ltd. and BHP Billiton Ltd. Was being quoted 2 basis points higher during Monday morning trade in Sydney and stood at 392.

The index is a benchmark used by investors who own Australian credit and is used for protecting investors from default and is also used by speculators to wager on changes in credit quality. An increase in the price of the index implies that investor perceptions of the credit quality of Australian issuers are deteriorating.

Credit-default swaps pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements. A basis point is worth $1,000 on a swap that protects $10 million of debt from default.

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Tags: Australian Economy, banking, Business News, Capital Markets, news

RBS To Issue First Foreign Sovereign Backed Kangaroo Bond

March 23, 2009 · Filed Under Australian Economy, banking, Capital Markets · Comment

Troubled UK banking giant RBS in a first says it intends to raise Australian dollar denominated funding, as a first of kind UK Sovereign backed bond offering. The issue would be the first of its kind, where an issuer has sold debt in Australian dollars backed by a foreign sovereign.

The fund-raising could raise the floodgates for a market that since the banking crisis went into overdrive in September last year, has been dormant in terms of international issuers being able to tap a deep and liquid pool of Australian superannuation savings.

Market participants will keenly watch the investor response to a foreign sovereign guaranteed issue, and whether there is much pricing difference between similar Australian government guaranteed issues, and the amount RBS manages to raise.

RBS’s Australian branch is selling a three-year, UK government-guaranteed, Australian-dollar-denominated bond. Price guidance on the notes is set at around 90 basis points over the relevant swap rate, with the bank expected to raise at least $500 million.

The deal, which is expected to price tomorrow, is being led by RBS.

RBS could well be paving the way for future UK issuers to do similar UK sovereign guaranteed deals, raising money in Australian dollars. Investors will examine the underlying credit and not rely purely on the sovereign guarantee.

Since RBS’s major shareholder the deal is likely to get a positive reception from fund managers.

Sean Carmody, the head of fixed income at Barclays Global Investors told the Australian in its report, that as long as the deal is priced reasonably, it should attract investors purely for diversification reasons, if anything else.

“I think it can certainly open the door for other issues, though pricing will be key, while the taste of diversity will encourage investors, The market has been so dominated by domestic government-guaranteed issues, the market is desperate to get some sort of diversification.”

According to a research report by Deutsche Bank Domestic Australian banks have so far raised more than $65 billion since the Australian Sovereign guarantee became effective. Westpac research reckons that, Australian banks are the third largest issuers of sovereign guaranteed debt behind only the UK and US.

Should RBS tap the Kangaroo bond market, from a pure diversification basis, the issue is likely to receive a good response from institutional investors.

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Super Funds Post Seventh Monthly Loss From The Last Eight

March 23, 2009 · Filed Under Australian Economy, investments, Wealth Management · Comment

Australian Superannuation funds had another bad month in February posting their seventh losing month in the last eight.

Declining Equity markets were the main reason with the Australian stock market shedding 4.6 per cent of its value during February whilst international equities declined by 9.1 per cent whilst unhedged international equity positions posted double digit losses. Falling equity markets were chiefly to blame, with Australian shares losing 4.6 per cent during February. International shares lost 9.1 per cent on a hedged basis and 10.8 per cent if unhedged.

Analysts have drawn the obvious conclusion that super funds with any significant exposure to equities have posted negative returns.

A survey by superannuation research and consultancy firm, Chant West found the median return was a negative 4 per cent last month for growth funds with a 61 to 80 per cent allocation to assets such as shares and property. These funds form more than half of all super funds.

The best performers continued to be industry funds which in general invest a larger fraction of their assets under management in unlisted entities.
Chant West found that industry funds were down 17.2 per cent in the past 12 months, judged by the median, while commercial/private funds, known as master trusts, were down 25 per cent.

Over three years, industry funds are showing a negative 1.8per cent while master trusts are posting a negative 6.1 per cent.

“Industry funds continued to outperform their commercial rivals, albeit by delivering a smaller negative return. Given the weakness in listed markets, their decision to maintain higher allocations to unlisted assets has again been rewarded,” Mr Chant said.

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SmartyPig An Online Savings Account For Australia’s Generation Y

March 20, 2009 · Filed Under banking, Online Savings Account, Savings · Comment

SmartyPig from ANZ Australian Banking Major ANZ has teamed up with US based company SmartyPig to launch an online savings product with a difference. According to the website, ANZ SmartyPig “is a unique savings program designed to make saving social, goal-oriented and fun. SmartyPig uses the power of social networking and retailer value boosts to help people reach their savings goals faster.”

At time of publishing the interest rate that SmartyPig accounts pay is an extremely competitive 4.5 per cent which is paid once a quarter with no fees. The idea behind the account is relatively simple. Individuals set savings goals with a specific purchase decision in mind, which can be as little as $500 for a Blue Ray DVD player, or $5000 for a holiday to Bali.

The savings decision is purely up to the individual with the minimum amount being $250. Once the information is supplied to SmartyPig, it will then calculate the exact amount the individual needs to save each month to reach their goal and deduct the amount automatically from the individual’s current account, with the individual being able to track their own progress.

The most unique feature of SmartyPig is its web 2.0 compatibility. Individuals can make their savings goals public through social networking sites such as Facebook and MySpace, and if family or friends want to contribute to the goal, they can either do so through SmartyPig or through the social networking sites themselves.

SmartyPig also allows savings to be converted in gift certificates of leading retailers such as David Jones, Virgin Blue Holidays and Bunnings. Savings converted into gift certificates get a value boost of anywhere between 4 to 8 per cent.

SmartyPig is an attractive way to start teaching children the value of savings. To open an account one needs to be over 16, but parents wanting to teach their children how to save can open an account in their own name.

Co-founder Jon Gaskell said the technology would improve the spending habits of young Australians, who have a “buy now, pay later” attitude. “Because of the viral and social nature of it we see kids getting involved,” he said.

“We need to rethink how we use credit cards. We need to be socially responsible with finances more than ever. Generation Y are plugged in 24/7. It is the new nuclear family, and we want you to take up saving before you buy into the social space.”

SmartyPig’s deposits are managed by ANZ but customers of any other bank can sign up.

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Australian Market For Distressed Debt Set To Emerge

March 20, 2009 · Filed Under banking, Capital Markets · Comment

A report issued by professional services firm PriceWaterhouseCoopers, and legal firm Blake Dawson suggest that a robust market for distressed debt is going to emerge as the economy deteriorate and banks look for ways to exit and free up their balance sheet from billions of dollar bad debt carried on their balance sheet.

The report reckons that banks will eventually cut their losses selling their distressed assets to the highest bidder in a market for distressed debt. There are many potential private investors keen to snap up assets at bargain prices with an estimated $10 billion in nonperforming loans.

A viable distressed debt market would be the most efficient method to shore up the banking system allowing banks to transfer some of their risks to private investors and unlock frozen capital.

“A 15-year boom time has meant Australian banks have never needed to participate in the global distressed debt market, which has an estimated $US50-100 billion of capital to invest. That was then, this is now. Banks now have the opportunity to unlock capital tied up in non-performing loans and to start lending good loans to people and businesses. They need to be able to instil confidence in the banking system by crystallising the value of assets on the balance sheet and accessing the sources of alternative funding.” PWC’s Mike McCreadie says.

The report shows that between 2007 and 2008 the number of companies entering voluntary administration jumped by 6 per cent, from 8,300 to 12,700. In a similar period, Australia’s big four banks have seen bad debt charges rise by 174 per cent.

Blake Dawson partner James Marshall says private investors are circling with the view of buying distressed assets at discount prices.

“The good news is that we are beginning to also see a private sector response where investors with risk tolerance enter the market to invest in distressed companies, or buy up distressed debt and assets from parties wishing to sell their positions. Australia is now firmly on the radar of offshore funds, institutional investors and private equity markets who are looking at distressed investing.”

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Some Credit Card Issuers And Banks Willing To Do Deals With Borrowers On Amounts Owed

March 20, 2009 · Filed Under Australian Economy, banking, credit cards, Hints and Tips, interest rates, loans, Personal Finance, personal loans, Self Help · Comment

Personal credit growth has slowed to levels seen in the 1991/92 as consumers prepare for a prolonged recession. The federal government’s economic stimulus payments has resulted in repayments on credit cards rising by 22.2 per cent in December, when the first-round thousand dollar cash handouts were made to families.

Some card issuers and lenders are cutting deals with borrowers and accepting as little as 60 cents on the dollar, just to be able claim some of the stimulus money and entice indebted consumers to pay off some if not all of their loans.

“Some of the second-tier card issuers in particular are caving in very readily to consumers, offering them around $3,000 to pay off $5,000 debts. One or two of the second-tier lenders are very soft touches at the moment and will cut deals very readily,” Melbourne-based debt advisor and agreement administrator, Donna Elliot, said.

Some industry financial advisers even say that even Citibank has been particularly easy to deal with of late. Contrastingly the big four banks, in particular ANZ and Westpac have been maintaining a harder stance with their borrowers.

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Things Consumers Should Consider Before Cancelling A Credit Card

March 19, 2009 · Filed Under banking, credit cards, Featured Articles, Hints and Tips, interest rates, news, Personal Finance, Self Help · 3 Comments

Cancelling a credit card, is not so simple as picking up a pair of scissors and cutting it up. Cancelling the card in the proper way requires more than just a snip, and there is a procedure that should be followed so that the credit card account can be closed permanently. In the first of a series of two articles money-au explains things consumers should think about before cancelling a credit card. In the second piece money-au explains the exact procedure that should be used in cancelling a card.

Why Consumers Should Cancel Cards In The First Place

There are a number of reasons why one would want to cancel their credit cards; it may be the desire to avoid the temptation of excessive spending. Having multiple credit cards encourage individuals to make purchasing decisions they perhaps could live without and would not make were the credit not available in the first place. It also makes sense to close credit card accounts which do not have much use and cost unnecessary money in fees. Most importantly, it is perhaps best to close down credit cards for which interest rates are extremely high, that way consumers by default avoid paying extremely high interest because the card account has been closed.

Another reason to close a credit card account is if consumers are attracted to new cards which offer balance transfers and longer interest free periods or just better deals. In that case it is prudent to maintain the same amount of credit available and close and transfer balances of older cards that offer unattractive terms.

Before cancelling a credit card

Consumers should be aware of a number of things before going through the procedure of cancelling a card account. The most important of which is the possible effect of cancelling an account on the consumers credit history and score. Even after cancellation, the account information doesn’t necessarily come off the credit history.

Positive credit data on an open account can stay on credit reports indefinitely. Closed accounts with zero balances and no associated negative information typically remains on a credit history for 10 years from the date they are reported closed.

Over the last few years, card issuers have focused more on the amount of credit still in use once a card gets cancelled. This is because credit bureaus and lenders are most interested in what is known as a balance-to-limit ratio, or the utilization ratio, which compares the actual amount of credit being used to the amount of total credit available to the borrower. From the lenders point of view obviously a low balance-to-limit ratio is a strong indicator of a borrower who represents a good credit risk,

So the tip here is, when closing one credit card account, ask other lenders to increase the credit limit they provide, so that the ratio can be maintained. If the consumer is unable to negotiate an increase in credit limit after closing a card account then that closure could actually end up hurting the consumers credit score as the utilisation ratio will automatically increase since the total amount of available credit decreases.

To close card accounts without impacting the credit score, consumers need to have only zero balances on their credit report for all of their active credit cards. This is because with only zero balances the credit utilization rate is therefore also zero and cannot be raised potentially hurting the credit score by closing one or more of the active card accounts.

Having excessive access to credit in relation to income is also a liability for consumers. Lenders become risk averse when they see customers whose credit limit in relation to what they earn is inconsistent, the risk being obviously that the borrower ends up spending more than they can afford to pay back.

Consumers should also be aware of the age of the card account. Card accounts with long histories are often valuable to a consumer’s credit profile and have a positive impact on their credit score. Closing such an account could end up having more of a negative impact than a positive impact on the consumers credit score.

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