ERICOPOLY

I am happy with my holdings on the merits of their so called "owners earnings"(or my expectations for those earnings) relative to the current price. I don't need any economic growth to get those earnings, I don't need a rebound in retail spending, I don't need housing to go up. I don't even need the share prices to go up -- just the dividends (which are currently exceedingly depressed relative to historical payout ratios).

To get evidence of a bubble, I resort to these three facts: 1) People have been rewarded by leveraging up in property over the past 20 years because the property has gone up at a rapid clip. 2) This game has led to rental yields (before expenses) falling from 8% of property value to just 3.5% 3) So exciting has this game been, that now 12% of Australian households own a rental property, yet 70% of them claim a loss on their tax return. Okay, that's 8.4% of households that are losing money on their property before considering capital gain. How long will those 8.4% hold their properties off the market if prices stall? That's a lot of properties. And once prices slip, where will the support come from? In this country (the US), the experts in the newspapers (who people pay more attention to these days) claim that prices should resort to their long term trend line relative to rents. I think the income tax rate is something like 48% in Australia, so this has made property rental losses more bearable -- they call it "negative gearing"... however it still doesn't count as money in the door, now does it. Wow, imagine their surprise if prices go down 20% and people still tell them it's only half-way over. They are mostly amateurs almost by definition if they think this is even a half-way good idea -- so they'll be turning to the newspapers for information and all they'll get is people like Peter Schiff telling them to prepare for the even larger decline. And he might be right too! Is there more water in the well for Australian real estate? Well, I dunno... the banks now have 55% of their loan portfolios in real estate today vs just 35% twenty years ago. During that time frame, down payments have declined from 20% down to just 3% down. Is there anyone left who doesn't believe this price appreciation is debt fueled? I read that hedge funds (almost certainly only a few of them) in Australia have unloaded their long positions in banks and are starting to short the banks. Ask yourself... why do young people want to buy when they can rent for half the payment? My answer is that they are looking for capital gains. Okay, but what if they are worried about prices slipping? Once the psychology shifts, it shouldn't take too much convincing to get them to understand that this supposed undersupply of housing ought to also put pressure on rent in the same proportion (but it didn't). I tried explaining this to a cousin (who owns multiple rental properties with leverage) but it didn't sink in -- I think if there was a bit of fear it would.

That's true about California, but not all states. Here is an article on the topic: http://money.cnn.com/2010/02/03/real_estate/foreclosure_deficiency_judgement/ In the case of foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms. Note that Florida is one of the hardest hit states in the real estate collapse.

Instead of buying the shares, one can write cash-covered deep-in-the-money puts on certain stocks that you intend to own for at least the period of time as the contract. The options market will generally roll the expected dividends into the options premium -- so you are effectively converting the dividend payments of up to the first couple of years of ownership into capital gains (you get assigned the shares when they get put to you, but no tax is due until the shares are sold). There are potential limitations though (like the stock runs up too far and you don't get assigned but instead owe capital gains tax). Depends on how deep-in-the-money the contract is.

Here is a good one: http://en.wikipedia.org/wiki/File:United_States_Population_by_gender_1950-2010.gif It's an animated GIF that shows the age demographics of the United states from 1950 to the present. Every second it increments the year and the picture changes. A martian would comment "this is going to lead to a higher proportion of millionaires" even if he had no other data to look at. Older people have saved longer and had the magic of compounding in their favor. I would say this is a no-brainer. The "typical" millionaire is age 57. As the proportion of the population increasingly shifts towards that age group (the baby boomers), should we therefore expect more millionaires. Thrifty people who save and invest are not millionaires by age 25. It takes a bit of time to get the snowball rolling. This isn't really related, but do those of you in your 20s really feel jealous of 50+ yr old millionaires? They can't take it with them.

Actually the table below shown in the other referenced article above tells more about the story. The "top 1%" just happens to be a gross approximation of what has happened with extreme polarization of wealth. Table 3. The Count of Millionaires and Multimillionaires, 1983–2007 Total Number (in thousands) with Households Net Worth Equal to or Exceeding (in 1995$): (1,000s) Year Households 1 Million 5 Million 10 Million 1983 83,893 2,411 247.0 66.5 1989 93,009 3,024 296.6 64.9 1992 95,462 3,104 277.4 41.6 1995 99,101 3,015 474.1 190.4 1998 102,547 4,783 755.5 239.4 2001 106,494 5,892 1,067.8 338.4 2004 112,107 6,466 1,120.0 344.8 2007 116,120 7,274 1,466.8 464.2 % Change 38.4 201.7 493.8 598.3 Is this partially explained by the baby boomers? In other words, if the age distribution is top-heavy, it stands to reason that there will be more millionaires. Expressed differently, is this huge demographic more or less likely to have millionaires today at age 55 vs 24 years ago at age 31?

Quoting from that article: financial wealth is what counts as far as the control of income-producing assets Table 1 shows that the top 1% owned 42.9% of total financial weath in 1983, but this number slipped to 42.7% by 2007. The trend shows that the top 1% is taking a relatively smaller slice of the financial wealth pie. I'm not sure that's bad, unless you are that 1% and you are worrying about losing your control?

I had no idea either -- I agree, why not just speak plainly.

I went to Google and searched on the phrase: "What is a productivity loop?" http://intellacore.blogspot.com/2009/10/productivity-loop.html Take Wal-Mart as an example. It sells similar products as its competitors, yet it is more successful than its competitors. The Wal-Mart and Kmart in the same shopping complex do not compete against the each other. Instead, the supply chains of each company compete against each other. How? Wal-Mart has always focused on improving sales, cutting costs, achieving greater efficiency in distribution, and using innovative IT tools. All of these strategies allow Wal-Mart to lower prices. Additionally, the company has a bigger supply chain, with more suppliers, and then has more opportunities to bring customers into their stores. Therefore, Wal-Mart is more competitive. This example illustrates the productivity loop - lower costs, then lower prices, sell more, and then increase profits.

Wow. I'm turning up some interesting things. It looks like one may be able to purchase $1,000,000 properties in Australia for just $20,000 down! http://www.debtdeflation.com/blogs/ I’ve just been alerted by Banking Day (a subscriber-only service) that Westpac–via its subsidiary St George–is now allowing potential borrowers to treat their rental payments as “evidence of genuine savings” when applying for a home loan. This is of course portrayed as good thing in the press release that announced the development–issued by the broker Loan Market (see the press release at the end of this post). It will, they state, enable Australians who currently can’t afford to buy a home–because they can’t save a deposit–to do so. All good news. The more cynical interpretation is that this is a way to let banks increase their maximum LVR (loan to valuation ratio) without actually saying so, and to expand their pool of potential borrowers as a consequence. At present, you need a $30,000 deposit to bid $1 million for a property if you get a loan from the Commonwealth Bank, which currently has one of the highest maximum LVRs of 97%: “The maximum we will lend you is 95% of the valuation amount. We also add the Lenders Mortgage Insurance or a Low Deposit Premium to your loan (up to a maximum of 97%), so it doesn’t cost you anything upfront”. This press release implies that you could approach St George with $20,000 in savings, be given a $1 million loan, and have it recorded as a 95% LVR loan (since St George probably has the same maximum published LVR as Westpac of 95%) where $20,000 was your actual deposit and the effective LVR was actually 98%. The effect of this trick is to expand the pool of potential borrowers to whom St George can extend a loan, while appearing not to alter its lending standards. There’s at least one line that I agree with in the following press release: “This is a major step forward which will also boost activity in the struggling home finance sector and we expect other lenders to follow suit.” It will enable the banks to meet their loan sale targets, by expanding the number of applicants who qualify for a loan. To me, this move smacks of desperation. The house price bubble has made entry into the market impossible without sky-high LVRs, and this in turn has undercut the banks’ business model. Increasing their maximum LVRs by around 5% back at the end of August apparently wasn’t enough to secure the level of loans business they wanted, and St George’s response is this ruse that gives a higher LVR without calling it such. It will be interesting to see how regulators treat this: will they allow rent that you’ve already paid to a landlord to be recorded as “evidence of genuine savings” and pretend that St George hasn’t increased its maximum LVR?

Explain then how rental income as a percentage of the property value has fallen from 8% yield in late 1980s to 3.5% today. Are rents immune to a supply shortage? That says it right there in a nutshell. My parents are both from Australia, I was raised in California (born in 1973). Throughout my young life we'd visit relatives in Australia every two years and one thing I remember is that Australia was about 4 years behind on my sister's favorite TV program (The Days of Our Lives) and that theaters would always be showing the "new releases" that I'd seen a year earlier back at home. Today, I go online to the "property" section of the Sydney Morning Herald online and judging by the tone of the articles I feel like I'm once again watching last years' show.

I only mentioned it because I think some people who own DELL have bought it for the 5x operating income allure. I haven't yet heard of an acquisition made at 5x earnings, so I was just pointing out that people likely aren't getting 5x earnings -- it just looks that way for now because the cash hasn't yet been deployed. Apollo's acquisition of Brit at 5x earnings will close in a few days. Validus bought IPC at a similar low multiple last year. That's insurance though. DELL isn't going to venture outside of technology one would assume.

I only mentioned it because I think some people who own DELL have bought it for the 5x operating income allure. I haven't yet heard of an acquisition made at 5x earnings, so I was just pointing out that people likely aren't getting 5x earnings -- it just looks that way for now because the cash hasn't yet been deployed.

The dollar is practically at parity, so the math is getting easier. Australian median household incomes are 34% higher, but the median house price is more than triple. Despite the seeming relative bargain, people in this country still point out that houses are not cheap by historical comparison.

valuecfa, thank you. immensely helpful. cliffs notes for anna karenina.

Were the cash to be used for an acquisition at 20x earnings, the argument would go "poof" pretty quick. And that cash hoard has been sitting there for years. What is a dollar of cash worth today if you can't get it for 5 years? I don't know, but I figure one should discount it. Would I pay book value for a company that held cash only (no debt and no operations), but I was confident that it wouldn't be liquidated for 10 years? Nope.

nwoodman, Thanks for those links. I see the bubble naysayers arguing that the tight supply justifies increased housing costs. Yet in that data it points out that real rents have risen 15% since 1987, whereas real house prices have climbed roughly 170%. I'm not sure why, but the greater mass of people are not connecting the dots between 15% and 170%.

This is an interesting article -- lots of good numbers in there: http://www.marketoracle.co.uk/Article16958.html Check out Figure 7. Wow! "‘‘I think it is a mistake to assume that a riskless, easy, guaranteed way to prosperity is to be leveraged up into property." - Glenn Stevens, Governor, Reserve Bank of Australia http://www.smh.com.au/business/rbas-housing-comments-stun-real-estate-chief-20100330-raxn.html How much faith do you have in the IMF? "Australia’s house prices may be overvalued by 5 per cent to 10 per cent, the International Monetary Fund said last week." http://www.smh.com.au/business/top-end-house-prices-sag-as-rates-bite-20101222-195ac.html Prices of the most expensive 10 per cent of Sydney properties dropped 7.5 per cent in the six months to September, compared with an average 1.1 per cent increase in the rest of the market, according to real estate researcher RP Data. Melbourne’s top end property prices fell 10.8 per cent in the period, compared with an average 2.5 per cent price climb for the remaining homes. John McGrath, chief executive officer of Sydney-based realtor McGrath, said his company had seen a 50 per cent increase in listings from the same time last year. Reserve Bank governor Glenn Stevens raised interest rates seven times since October last year, citing a surge in home prices among reasons for the increases. Economists expect the central bank to raise rates by another three quarters of a percentage point by the end of next year, according to the median forecast of economists surveyed by Bloomberg.

valuecfa, What do you understand about this "adjusted book value" that they make so much mention of in the annual report. The stock traded at about 90% of ABV in 2007, but today it trades at a bit under 30% of adjusted book. Is it reasonable to make the connection that adjusted book value suggests a 3 bagger as the upper bound of what you can reasonably expect to make in the stock? (once the smoke clears of course). Or is it somewhere explained in that annual report that adjusted book is temporarily depressed for some reason? I guess I'm trying to read this thing for the first time and am really confused by all the "adjustments" they make.

Nice ending.

Alexander Hamilton did it -- so at least the newspapers can't say it's "unprecedented". John Adams' wife wanted to buy the paper when it was discounted -- but John Adams refused because he said that Adams' only invest in land. His wife was right -- the paper was trading at such a discount that it would have been a multibagger.

One guy I worked with at Microsoft was a refugee from Cambodia as a little boy. I believe he survived with an uncle but most of the rest of his family was murdered. We also have a lot of "Lost Boys" of Sudan living in this country. This is the kind of people I like to see granted immigration. When it comes strictly to people looking for a better opportunity, I prefer another path. Last year I gave $6,000 to a local charity that buys educations (careers) for the students of Omatepe (the sister island of our community). Omatepe is an island in Nicaragua. That $6,000 will fund one young persons' medical education (it costs about $1,000 per year for a medical education in Nicaragua). My thinking is that the $6,000 will then benefit many more people in Nicaragua who this young doctor goes on to help. Anyways, my point is that $6,000 won't get them very far here in the US. If the goal is to help the world, it might be cheaper on a person-by-person basis to help them succeed in their home countries. This way they also benefit by not having to leave their communities and loved ones.

I thought I'd share this link I came across: http://2010.census.gov/2010census/data/ It's a terrific way to see which state are experiencing population growth from decade to decade. Just mouse over the state to see the rate of growth. My own state of Washington grew 14.1% over the past 10 years. It won't take long for the housing supply to be absorbed at that rate. What I find astounding is that Nevada grew it's population by 63.8% between 1970-1980, 50.1% between 1980 and 1990, then by 66.3% between 1990-2000, and yet again by another 35.1% between 2000-2010. No wonder Nevada had a high amount of housing speculation!

The voter initiative in the state of Washington to install an income tax on persons earning over $400,000 per year was shot down. We don't do tax increases in this state I guess. The Democratic governor of the state is proposing to balance the budget by cutting spending: http://seattletimes.nwsource.com/html/localnews/2013685184_budget16m.html Unlike the last budget, higher taxes are not being considered. A Tim Eyman initiative approved by voters in November requires a two-thirds vote in the Legislature or voter approval to increase taxes. It's hard to imagine a supermajority of Democrats and Republicans agreeing to boost taxes.

Did anyone notice that Michael Milken made the list? http://givingpledge.org/#enter