Month: August 2013

By Investment U

If you were around in the ‘70s, you may recall the episode of the sitcom Happy Days in which Fonzie (in his trademark leather jacket) jumped over a shark pen on water skis.

This had been one of television’s most popular shows, but the shark-jumping episode marked the beginning of its decline. The term “jumping the shark” would go on to become synonymous with reaching a point where there’s nowhere to go but down.

Which brings me to banks and insurance companies.

Over the past few months, analysts have been shouting from the rooftops that banks and insurance companies are the best way to play rising interest rates. But I think the current outlook for these companies has reached a point of inevitable decline. In short, they may have jumped the shark.

First, let’s look at banks.

Many analysts describe banks as “black boxes” – hard for ordinary investors to understand. But banks’ business models are actually pretty basic. Banks make money on interest rate spreads and fees.

While interest rates were low, more people refinanced their mortgages. This generated hefty fees for the banks taking on the risk of lending money.

Now that interest rates are on their way up, they will make money on the interest rate spreads. The only problem here is that fee revenue is drying up and rates aren’t likely to see the sharp increase needed to make up the difference.

Mortgage Fees Are Drying Up

After touching 1.6%, the 10-year yield soared as high 2.7%, pushing up mortgage rates along with it. It’s currently sitting at 2.65%.

This dramatic rise in rates has effectively shut off the spigot in refinancing – possibly all at once. Deciding whether to refinance boils down to how much money you will save. The recent shock that we’ve seen as rates rose quickly has offset more than a year of rate declines.

If you don’t believe me, check it out for yourself. Pick up the phone and call your mortgage banker. I’ll bet the phone doesn’t ring twice before he answers. That’s because they aren’t very busy.

This could be a bigger problem than people believe.

To put this in perspective, Wells Fargo (NYSE: WFC) generated more than 10% of its revenue from mortgage fees. Even though the housing market appears strong, 56% of new loans were refinancings. This is a very large number and while total loans were up year-over-year for Wells Fargo, they were down at JP Morgan Chase & Co. (NYSE: JPM).

The party may be coming to a close.

Many analysts argue that this refinancing revenue will be replaced by revenue from wider interest rate spreads. As rates rise, banks take customer deposits (with miniscule rates) and buy long-term investments at higher yields, further in the future.

This may replace some of the lost revenue. But a major slowdown in a segment as large as 10% of overall revenue is unlikely to be completely offset by rising spreads.

Insurance: Better, But…

Insurance companies look to be in somewhat better shape. But their flaw is that they will see asset values drop.

Here’s why.

Insurance companies’ premiums are essentially pre-payments of a future claim. Since claims are often made months or years after premiums are received, insurance companies capture the float, which is invested in short- and long-term securities. As yields rise, earnings will increase as premium payments are invested at higher rates.

Unfortunately, as yields rise, the price of the bonds these companies are invested in will decrease because the cost of borrowing increases (remember: as rates rise, bond prices fall and vice-versa). This makes the book value of the portfolio decline. For example, a rise in rates from 4% to 6% could cause the price of the bonds in the portfolio to drop as much as 20% – if the duration of the portfolio is only 10 years.

The decline in portfolio value may not impact earnings since these bonds are often held to maturity, but there could be a large shock to overall book value.

On top of the deterioration of portfolio value, insurance stocks have dramatically outperformed with the Powershares KBW Insurance ETF (NYSE: KBWI) up 31% this year. It’s clear that expectations are now high for this sector.

Despite the lure of easy money, sometimes you have to force yourself to stay disciplined. If you have profits in banks and insurance companies, consider taking a little and directing it to simpler, pure plays that don’t have offsetting profit streams.

Good Investing,

Tom Anderson

Article By Investment U

Original Article: Rising Interest Rates Mean Trouble for Banks, Insurers

By MoneyMorning.com.au

Today’s Money Weekend will embark on a journey into Asia. First stop is to where the world’s money is heading at a faster and faster rate: Singapore.

Bloomberg revealed this week that ANZ is opening a gold vault in the island city to tap further into the market for physical storage. The Singapore vault can hold a cool 50 metric tons, or a couple of billions worth at today’s prices. ANZ already has other vaults in Hong Kong, Zurich and Perth.

Considering gold has had its worse year in over a decade, a move like that now looks telling. But there’s more to this story than precious metals…

Digging and Dealing in the West

ANZ, for one, is bullish on the gold price over the next two years. Of course, for every bank like ANZ that thinks the gold price is going higher, there’s another one that thinks it’s going lower. Case in point is Goldman Sachs, which Bloomberg cites as predicting gold futures at $1,050 an ounce by the end of next year.

That seems to be more in tune with sentiment than against, if the annual Diggers and Dealers conference held in Western Australia is anything to go by. According to reports, there’s to be 400 less attendees than last year and the first time numbers have fallen in six years.

But maybe ANZ has its finger on the pulse of the gold market more than we’d previously considered.

Check this out from the article:

‘Demand for physical metal is robust, irrespective of prices, said Listorti, whose team distributes about 15 percent of the world’s primary gold production. Clients include central banks, sovereign wealth funds and asset managers, he said. The company has a supply agreement with the Perth Mint and is one of the top three providers of gold into China, according to a statement.’

In fact, ANZ seems to be more bullish on the resource sector as a whole than you might expect. Take the fact that ANZ CEO Mike Smith relocated senior executive Cathryn Carver from Hong Kong to Perth before the big downturn in commodities. Here’s the news: she’s not going anywhere.

She’s staying put under the assumption Australia has entered a ‘new normal’ that kind of looks a lot like the old normal: a growing Asia that needs resources. It’s more a case of things being off the boil than being over for good.

Money talks the most, as they say, and Ms Carver is hiring and looking to fund the right project. Here’s the catch: it better be good: ‘For the juniors it is always going to be hard because they are smaller and in this environment that we are in today it is just tougher. But if you have a humdinger of a project I think you can get the money…I’ll probably get a lot of calls now.’

That sounds a lot like our own Kris Sayce’s position at Australian Small-Cap Investigator. He thinks the cycle is turning back in the favour of mining stocks. His latest three mining plays are up around 42%, 13% and 2% for now. The early stages of the new financial year suggest he might be on to something: the material sector was up 9% in July, the best performing sector.

Does this signal ANZ is on the right track?

The Rise and Rise of the East

Maybe. It does agree with ANZ’s stated business focus of diversifying into Asia. It’s been that way for a while now and the company clearly intends to stick with it. And no wonder. That’s where the money’s growing, and increasingly, staying.

The Australian Financial Review reported last week that Singapore’s assets under management rose 22% in 2012 to $US1290 billion. It’s not quite Switzerland, but it’s getting closer. Boston Consulting Group says private wealth in Asia (ex-Japan) rose 13.8 per cent last year, just under double North America.

The key point is this: ‘Asia was the biggest destination for investments from funds handled out of Singapore.’

Where capital goes, growth will follow. If you’re on the hunt for growth, follow the money. If Singapore and Hong Kong continue to take market share as wealth management hubs from Switzerland and London, there will be a huge pool of money that can finance the growing economies of Asia. We’re not just talking about the big boy China, but the smaller, periphery countries.

This is a trend Nick Hubble, over at the Money for Life Letter, hasfound two ways to capitalise on. The first you can read about here.

The second has a lot to do with this image:

Source: The Money For Life Letter

Nick says more people live inside this small circle around South East Asia than outside it. That’s a lot of people. But you need more than just people. What’s needed is to throw a 798 year old idea into the mix. But we’ll let him tell it in his latest issue if you’re interested.

Until next week!

Callum Newman+
Editor, Money Weekend

From the Port Phillip Publishing Library

Special Report: The Sixth Revolution

Daily Reckoning: The Global Trend Towards Wealth Protection

Money Morning: Two Approaches to Investing…

Pursuit of Happiness: Learning to Avoid the Governments ‘Noble Wealth Trap’

By MoneyMorning.com.au

TECHNOLOGY:

If Wine Is Your Investment, This is Your Wine’s Annual Report

 
Wine can make a good investment if you’ve got wads of cash. To get into the arena where wine becomes an investment you need to be well on your financial way.

However, it’s not uncommon for people to occasionally buy a nice vintage bottle of wine as a one off. The intention is usually to drink it. But the motivation is often sentimental or nostalgic.

Regardless of the reason at some point wine needs drinking. Unless you’re a teetotaller or Scrooge McDuck it’s likely you’ll drink that one off purchase.

Let’s say you splashed out $3,300 on a bottle of Penfolds Bin 14 1955 Grange Hermitage. And the time rolled around to drink it. You open it up, pour it into the decanter, and realise very quickly it’s corked.

Imagine spending $3,300 on a dud bottle of wine. You can’t get a refund either. It’s buyer beware. However if you’d been able to drink it a year earlier it might have been fine. But you’ll never know because you couldn’t sample the bottle without removing the cork. And you were keeping it for that special occasion.

However you can now pour wine from a bottle without removing the cork. It’s thanks to an amazing invention called the Coravin system.

Sounds like a Dynamo trick doesn’t it? Pouring wine without removing the cork…well it’s no trick. The technology behind the device is simple yet ground-breaking.

You attach the device to the top of the bottle. A thin needle penetrates the cork to access the wine. The bottle is then pressurised with Argon which helps the wine flow through the needle and into your glass.

Importantly the use of Argon allows the wine to continue to mature as it would normally as it never comes into contact with oxygen. And the Argon has no impact on the wine whatsoever.

This means you can sample your wine anytime to ensure it’s still drinkable and potentially still worth something. Think of it like an annual report for your investment. A little sip each year just to make sure it’s performing as it should be.

You might be lucky enough to have a ’79 Romanée Conti Grand Cru Double Magnum lying in the cellar. If that’s the case the Coravin is right up your alley. But you might just want to take it one glass at a time…when the current fetching price per glass is about $3,154.

HEALTH:

How the Cloud Might Help Treat Cancer

One of the things that’s going to help usher in a new era of healthcare and medicine is software. It will come in a few different forms though. One of those is through online platforms that gather, interpret and predict illness and disease in people.

What these platforms rely on is data, lots of it. The more data the better. And here’s why.

If 100% of the Australian population has their DNA collected at birth we’d have a database of 23.1 million DNA types. When you gather that amount of data you can analyse trends and patterns.

This allows doctors to do their job better as they can be more accurate and personalised with treatment of patients.

A huge database of genetic information would be priceless. Doctors would be able to treat illness and disease before it became serious.

Think about it like this. The BRCA gene is the infamous gene that increases the risk of breast and prostate cancer. It’s a medical fact variations of this gene significantly increase the chance of getting one of these types of cancer.

The other important part of this use of online medical databases is data sharing. Doctors around the world would be able to share information about treatment and treatment response of patients. It all goes a long way towards proactive medical treatment.

There are a few companies that have switched on to the fact that medical software will be big business.

One of those is AthenaHeath [NASDAQ: ATHN]. Athena provides electronic records, online patient management and analytics for medical professionals. Another is Syapse, a ‘cloud’ based platform designed to help diagnose and treat patients. Like Athena they collate and analyse data and information to help personalise the treatment of patients.

The medical profession is undergoing a huge technological shift. Stem cells, RNAi technology, personalised and regenerative medicine are all aspects of this new era. Now with companies like Athena and Syapse, the cloud is also helping to provide better healthcare to people in a much more personalised way.

ENERGY:

Why L.A is Basically the Same as Greenpeace

If you live in a typical Australian household you’ll be well aware of the increasing cost of energy. And if you’ve been reasonably proactive about it you will have implemented some basic cost saving measures.

Power boards for multiple electrical devices, kill switches for entire sections of the house and possibly (and hopefully) replacing lights with LED’s.

You see the average household is smart. You know that if you make a number of simple changes around the house it’ll add up over the year to make some handy savings.

When it comes the State Government they typically don’t adopt the same approach when it comes to energy saving. First they release a study paper. Maybe consult with ‘industry bodies’.  Turn the project into a 5 year plan and if their lucky (and still in power) go over budget and do it all wrong anyway.

If you apply the Keep It Simple Stupid (KISS) approach to an energy saving initiative like lighting the city streets we’d all be basking in the clear light of LED’s.

Thankfully one Australian city is at least having a crack. The LED Lighting Project in the City of Sydney is the ‘first of its kind in Australia’. It’s replacing about 6,500 street and park lights with LED’s over…the next 3 years. The City of Sydney website says,

‘The $7 million project is expected to save the City nearly $800,000 a year in electricity bills and maintenance costs due to the longer lifespan of LEDs.’

That’s not bad. There are 22,000 public lights installed in the City of Sydney. That makes it about 29.5% of street lights they’re replacing.

Look at the City of Los Angeles (L.A) if you want to see what real progression looks like. Compared to Sydney, L.A is as good as Greenpeace.

L.A has managed to roll out LED’s into 141,089 street lights. They estimate they’ll save $7,161,765 in electricity per year plus another $2.5 million per year in maintenance.

Greenies will be happy too as the annual reduction in CO2 is 47,563 metric tonnes.

These kinds of initiatives are good for the planet. There’s no doubt that action taken sooner is better action. Why is it going to take Sydney three years to roll out their project? I don’t know. Why isn’t every city in the world following L.A? I don’t know that either.

Adoption of technology is always going to be slow, especially when it comes to adoption by government. But in the meantime, in your household, you can make swift changes. Think about it next time your electricity bill comes in.

Sam Volkering+

Technology Analyst, Revolutionary Tech Investor

Join Money Morning on Google+  

From the Archives…

Is This the Spark to Send Australian Property Crashing?

26-07-2013 – Kris Sayce

Why it’s Deflation…Not Inflation, that’s Heading Our Way

25-07-2013 – Vern Gowdie

Why You Must Avoid This Big Investing Mistake…

24-07-2013 – Kris Sayce

The Dark Side of Technology: Part 2

23-07-2013 – Sam Volkering

The Dark Side of Technology: Part 1

22-07-2013 – Sam Volkering

By www.CentralBankNews.info

By Market Trend Forecast

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