I would like to apologize for the lack of new posts in the past few weeks as we were away for two weeks and last week I have been busy with getting the household back in order and helping the newest member of our family (a homestay student from China) settle in. I have also been trying to compile the performance of our SMSF investments for the last financial year for our accountant. Regular readers would already know that I have been generally bearish and have been trying out a few different bear market strategies last year. Some of our investment strategies have worked out better than others. My plan is to work out the performance of each strategy and update our investment strategy for the next financial year. I will then update Part 2 of our e-book which contains a copy of our SMSF’s investment strategy and write about our performance and some lessons learned last year on this blog. At the same time, the deadline for my monthly column for the Superliving magazine is fast approaching and I have decided to write about one of our bear market investment strategies that has worked out well last year. As this topic is part of what I planned to write on this blog, here are some excerpts from the article…

With the growing uncertainty in the global economy and increasing volatility in the stock market since the start of the year, many retail investors are increasing their allocation to the cash and fixed interest asset class. For retail investors, a popular investment in this asset class is to buy a term deposit from a bank. Australian banks have been offering term deposit interest rates of 6 percent or more which is a pretty attractive return. Bank deposits are generally considered “risk free” investments. However, we must not forget that a bank deposit is nothing more than an IOU from the bank so there is a risk of default if the bank goes bankrupt. This IOU is currently guaranteed by the Australian government so even if the bank you put your money with goes bust, you will still be able get your money back. However, after the government guarantee expires in October 2011, this IOU will only be guaranteed by the bank you place it with. Unlike the US, Australia does not have an equivalent of the Federal Deposit Insurance Corporation (FDIC) which provides a guarantee for all American bank depositors. Hence, for term deposits that expire beyond Oct 2011, it is important that you choose carefully which bank you deposit your money with, and you should not make your decision solely based on the yield offered.

Some of the smaller Australian banks have been offering very attractive rates but they may not be as safe as Big 4 Australian banks or highly rated international banks like Rabobank. Until recently, bank ratings were freely available to retail investors so you can have an idea of how safe a bank is, relative to another bank. However, in January 2010, ASIC in its wisdom has decided that bank ratings can only be disclosed to wholesale investors. Ubank (an online banking subsidiary of NAB) used to publish the rating of their competitor banks alongside the interest rate they offer on their website but the rating information is no longer available. Now retail investors can only find out the ratings for a bank through financial professionals who are deemed wholesale investors.

An alternative investment in this asset class would be government or treasury bonds. Just as term deposits are IOUs that are guaranteed by the bank you buy it from, treasury bonds are IOUs that are guaranteed by the government that issues them. In general, a treasury bond should be safer than a bank deposit as a country is less likely to go bankrupt than a bank. We have seen many banks, including mega banks like Lehman Brothers collapse overnight during the global financial crisis but with the recent debacle in Greece, we also realise that countries too can go bankrupt and default on their IOUs. Like banks, not all countries are equal so not all treasury bonds are equally safe. Rating agencies like S&P and Moody’s provide ratings for countries and treasury bonds from countries with low ratings tend to have higher yields compared to countries with higher ratings to compensate for the additional risk. US treasury bonds are recognised by global investors as the safest treasury bonds in the world and demand for them have been high especially with all the sovereign debt problems in Europe.

Treasury bonds are normally auctioned off in large blocks worth millions of dollars and buyers of these bonds are typically banks and institutional investors. It is hard for a retail investor to buy treasury bonds directly from the bond market. You can get exposure to treasury bonds through a mutual fund or super fund. My preferred way of buying US treasury bonds is to buy a bond exchange traded fund (ETF) as these can be bought and sold very easily just like stocks. Some of the popular bond ETFs are IEF (ishares Barclays 7-10 year treasury bonds) and TLT ((ishares Barclays 20+ year treasury bonds).

Treasury bonds have different investment risks and rewards compared with term deposits. While treasury bonds have a lower risk of default compared to term deposits, they have other risks. Unlike term deposits, the price of bonds can go up (or down) so you can make capital gains (or loss) from your bond investments in addition to the interest income. Demand for treasury bonds tend to go up when there is market uncertainty. Last year our SMSF made an investment in IEF, the ETF for 7-10 year US treasury bonds. As you can see from the chart below, prices have shot up since April 2010 when the stock market started to tumble. This investment has provided our fund with a nice capital gain of about 7 percent and interest income of over 3 percent last year. For income investors, another nice feature of this investment is that interest is paid in the form of a monthly dividend.

We came back from our holiday on Saturday just in time to hear the announcement of the next election on August 22. Will Julia Gillard continue to be our Prime Minister or will she break the record for the fifth shortest serving Prime Minister? Since taking over as PM on June 24th, she has made some great speeches but I have not really seen much achievements in her action.

Her main achievement was supposed to be the quick resolution of the pesky RSPT problem. While initially seen as a “win” for the new leadership team, I was a little skeptical when I saw how happy the mining magnates were with the deal. As this is a zero sum game, if the mining industry think they have won, this means that the other side must have lost and true enough, after a week or so, it was found that the government has lost to the tune of $7.5 billion! Wayne Swan got his numbers wrong again – based on his flawed calculations, he thought the government only lost $1.5 billion at the time the deal was struck.

Our treasurer now claims this $7.5 billion shortfall can be easily be made up for by rising commodity prices and/or volumes. However, from what I read in Eureka report, iron ore production capacities have been increasing globally and demand from China is not growing so it looks likely that supply will exceed demand in the next few years. We all know from the price of bananas what happens when supply exceeds demand – prices definitely do NOT go up!

I also don’t know how much I can trust what Julia says. She repeatedly told the media that she has no intention on challenging Kevin Rudd but her actions on June 24th was the complete opposite to what she said. Not only did she kick him out, she did so in the most ruthless way. Even people like me who never liked Kevin much felt sorry for him. He was our Prime Minister and I think his removal could have been done a little more respectfully. I believe what goes around, comes around. If Julia can do this to Kevin, she should not be surprised if she loses her leadership in an equally unceremonious way. If Labour loses this election, I doubt if she will be retained as the leader of the Labour party.

She also told the media that there will be no early elections. I remember her saying “there is plenty of governing to do before the elections”, yet she called the election in less than a month after she took over as Prime Minister, which makes me wonder if she is doing what she believes in or doing the bidding of some faceless group of ALP men? It looks like the people who put her in power are not confident she can prove herself as a worthy Prime Minister, so they better call an election quickly before the people find out!

The polls currently indicate that Julia is the favourite to win. However, if Marion can get eliminated on satay sauce in Masterchef, I don’t think there are any guarantees for Julia either. Perhaps the Liberal Party should persuade Peter Costello to take on a key leadership role on their team. To me, this would be a winning strategy for Liberal as the Australian people won’t have to chose between two unproven leadership teams.

Yesterday was “grand final day” for fund managers as they scrambled to close the 2010 financial year with the best results possible. Despite valiant attempts to push the market higher throughout the day, fund managers were unable to maintain the double digit performance which was touted right up until May 2010. On 30 June 2010, the ASX200 closed at 4301 which is roughly the same level as where it was at 11 months ago. The index peaked at 5000 in April 2010 and since then, 67% of those gains have been wiped out in a few short months. This represents an increase of 346 points or 8.7% from 3955 which was the closing price of the ASX200 on 30 June 2009. A typical balanced fund with 60% stocks and 40% fixed income, should show an average return of 7% if their stock portfolio tracks the ASX200 index and their fixed income portfolio is able to provide a return of 5%. I have been busy preparing for our upcoming trip to Malaysia so I have not really had time to work out our fund performance. When you have your own DIY fund, you don’t really worry about ‘window dressing’ each year’s performance as the only members you need to impress are yourselves. Our view of the market has been bearish since Oct 2009 and we have rebalanced our allocations accordingly to reflect this. We favoured safe investments over higher yielding riskier ones. Most of our bearish investments did not start to make money until the markets started to fall which was only in the last few months of the financial year. For our fund, the last quarter of FY 2010 was the best quarter for us whereas it was probably the worst quarter for most other super fund managers. Last year’s performance is history and what is more important now is how well you are positioned for the next financial year.

Although I am pretty tied up with other things, I decided to make time to write a blog post today because the SMSF Investment Strategies blog turns 1 today! The sli-smsf.com blog site was created on 1 July 2009 and since then we have posted over 100 blog posts and the SMSF Investment Masterplan e-book which we hope have been useful resources to other SMSF Trustees and retail investors. A big thank you to all readers who have taken the time to drop us an email or leave a comment on the blog. It is always helpful to get feedback so you know if you are doing something right or not.

I also wanted to give a quick update on our outlook for the 2011 financial year as many other SMSF trustees like ourselves would be doing their annual review of their investment strategy soon. This year we will be doing our annual review for our SMSF in Kuala Lumpur, probably over a mug of margarita at Chillis (can’t wait). I will publish our updated investment strategy and minutes of the meeting after we get back from our holidays.

Our outlook for FY 2011 is not very different from what I wrote in My Outlook for 2010 at the start of this year. The same macro problems are still there e.g. the sovereign debt problems, China’s slowdown and the ending of a stimulus driven recovery. If anything, things are expect to deteriorate even faster in the second half of 2010. The Economic Cycle Research Institute (ECRI) publishes an index known as the Weekly Leading Indicators (WLI) which is used by many economists and fund managers as a reliable economic predictor. The WLI is based on six components: money supply, JoC-ECRI Industrial Materials Price Index, housing activity, bond market measures, stock prices, and job market measures. ECRI uses a pragmatic mix of indicators for most components, looking at a broad array of measures.

As you can see from the chart below, the WLI correctly predicted the 2009 recovery but it has turned down since October 2009, and has been plunging sharply since May 2010. As of 25 June 2010, the index is at -6.9 and based on studies done by economist David Rosenberg, a recession has occurred every time the WLI drops below -10 in the last 42 years. We are now dangerously close to that level and although ECRI is not ready to call for a double dip recession yet, they agree the reading is not a good sign. Mish’s Global Trend Economic Analysis and the ZeroHedge blog track this indicator closely so you can get the latest weekly updates there.

Source: Mish’s Global Economic Trend Analysis

There is also plenty of evidence that the effects of the stimulus is fading repidly. Existing and new home sales in the US have plunged ever since the expiration of the tax credit in April 2010. Banking analyst Meredith Whitney believes a double dip in housing is already confirmed and many other investment advisers like Barry Riholtz and Gary Shilling concur with her. Despite record monetary stimulus (remember the printing of an extra trillion US dollars in 2008?), bank lending is down 25%, and M3, the broad money supply is shrinking.

Last year when everyone was convinced that recovery from the Great Recession has started, the most common question was what will be the shape of recovery? V, L, square root (V followed by a flat line) or W (double dip)? Robert Prechter from Elliott Wave International (EWI) has proposed another shape which is “lightning shape” going from top down, left to right which was the shape of the recovery during the 1930s Depression. EWI has devoted two issues of their flagship publication The Elliott Wave Theorist on a detailed comparison of the unfolding Great Recession with the 1930s Depression. Check out A deadly bearish big picture for a summary of what he said. An increasing number of people are also seeing similarities with the 1930s and one of them is hedge fund manager George Soros who sees Act II of the Global Financial Crisis just starting, and check out REMEMBER: In 1930, They Didn’t Know It Was “The Great Depression” Yet for an excellent compilation of comparisons done by Dan Alpert of Westwood Capital.

I am sorry I do not have better news for the next financial year. However, I am a believer that if life gives you lemons, learn to make lemonade. If we are going to be in a bear market for the next few years, we need to learn new investment strategies that can help us improve our returns in a bear market. I have been trying out various strategies in the past year and some have worked out better than others. I will be sharing what I have learned and the investment strategies that have worked for us on the blog. In the next financial year, I expect I will be focusing more on bearish strategies.

I am encouraged to hear that some readers have decided to take action to protect their wealth by increasing their allocation to cash and/or buying put options to hedge their stocks. For those who are new to options and need a little help to get started, please take advantage of the 30 minutes of free consultation that I offer to readers of this blog. My contact details are on the Contact Us page.

What a week we’ve had! Since last Friday, we have had a series of unexpected losses. Two top CEOs resigned unexpectedly, the entire board of a major mining company was lost in a plane crash in Africa, and as if that was not enough shock, we lost Kevin Rudd as our Prime Minister yesterday!

Yesterday was a day of mixed emotions for me as I watched Julia Gillard get sworn in as Australia’s first female Prime Minister. As a woman, part of me felt happy to see a woman being entrusted with the top job in the country but I also realise that she was part of the team that came up with a lot of the government policies that I don’t agree with. Like Tony Abbott said – different salesperson, same product.

Without a doubt, the change in party leadership was due to the controversy over the resource tax and there is no shortage of commentary about what is going to happen to the RSPT now that Kevin Rudd is out of the picture. I think as a minimum, everyone expects it to be watered down in some way and many people are rejoicing over this. Most of the market commentators seem to see this as a positive but I would like to share some of our thoughts as average middle class taxpayers.

The RSPT was the government’s planned method for paying back all the money that they borrowed to provide the stimulus spending in the past two years. When the government freely gave money away to everyone in 2008, we knew that higher taxes would be the result in the years to come. The typical Labour government mentality would be to tax “the rich”, except we did not know who would be considered part of “the rich”. We soon found out that middle class families like ourselves were considered one of “the rich”. The policy changes to super contribution caps and family tax benefits announced in the May 2009 budget cost our family over $13,000 this financial year (for detail, see my blog post How much are the new super rules costing you?). As the government budget was still in deficit in 2010, we were bracing ourselves for more taxes to hit us in this year’s budget. However, this year the miners were the unfortunate ones to get hit. They were deemed “the rich” who would pay for the government’s previous reckless spending and all the future “goodies” promised for 2012 and beyond, provided we vote for them in this year’s elections. We were relieved when the RSPT was first announced as we felt as if we had dodged the bullet this year but unfortunately, the RSPT totally backfired on the government. They had underestimated the might of the mining industry, and now have to back down on it. Poor Kevin Rudd had to be the fall guy to take the blame for the RSPT and it has been made to look like this was all his bad idea. Let’s not forget it was proposed by Ken Henry and approved by Wayne Swan, who are still very much part of the new leadership team.

I think taxpayers should not be too happy that the RSPT may now be abolished or at least reduced. Unless the government also plans to reduce spending, someone else will have to come up with the money to fund it. Unlike the mining industry, the middle class taxpayer cannot afford to take out a $30 million advertising campaign to fight back. If you are one them, I would be afraid, very afraid of what might be proposed to make up the shortfall of a reduced RSPT.

Kevin Rudd spent too much of his time in the US and got the idea that you can spend your way out of a recession. I would like to suggest sending Julia Gillard for a trip to Europe – perhaps she could pick up a few ideas from European leaders like Angela Merkel about adopting “austerity measures” to reduce government spending. Saving is the new spending in Europe, perhaps its time Australia does the same.

Investors need to keep up with the financial news which may affect their investments. With the internet, it is now very easy to get breaking news, literally seconds after it happens on the many free finance news portals. My favourite international news portal would be Bloomberg. I normally check the Bloomberg headlines and key US market indexes on Kingsley’s iphone as I wait for him to make me the best cup of coffee each morning.  I also like Yahoo Finance and CNBC especially for the interviews they conduct with top market analysts, investors and fund managers. Many of the people whose opinions I value, like banking analyst Meredith Whitney and hedge fund manager Jim Chanos are regular guests on CNBC’s Squawk Box. Market forecaster Robert Prechter and investment adviser Gary Shilling are frequent guests on Yahoo Finance’s Tech Ticker. The international news headlines will give you a good feel of what is important to global investors and it always interesting to see how they view Australia. In a recent interview with Gary Shilling, he sees Australia as a colony of China. As both he and Jim Chanos are bearish on China, they are shorting Australian mining stocks and the Australian dollar as a proxy for playing China as foreign investors cannot easily get access to the Chinese stockmarket. I don’t know about you but I would feel pretty nervous about holding the same mining stocks that I know savvy global hedge fund managers are shorting!

The two Australian news portals I use are The Age’s BusinessDay for news and The Business Spectator for both news and market commentary. From some of my earlier blog posts, you would have gathered that I don’t normally agree with a lot of the market commentary published on BusinessDay, especially when they come from people who work for brokerages or retail equity funds as the organisations they work for have a vested interest to get you to buy shares. I prefer to get the views of independent analysts like the KGB (Kohler, Gottliebsen and Bartholomeusz) who provide the main market commentaries on The Business Spectator. Although I have classified them as a local news portal, they do cover global news as well but focus mainly on news that would be of interest to the Australian investor. If I had limited time to keep up with the financial markets, I think I would just look at the headlines on The Business Spectator as it seems like a good information funnel for an Australian investor.

Well, this concludes I have to say about my favourite sources of fundamental information. There many good financial sites on the internet but we don’t want to waste too much time reading the financial news. It is easy to get caught up with reading just for entertainment value. For example, even though I don’t own a single share in David Jones, I recently found myself spending too much time reading articles about Mark McInnes’s “shocking resignation” as their CEO. Over time you will find your own set of favourite columnists whose views you respect and it usually suffice to read what they write rather than read every single article that is published on the latest “hot topic”.

Some of you may be surprised that I have not mentioned anything about the most famous fundamental investor of all – Warren Buffet. Some people are even willing to pay AUD3 million to have lunch with Warren Buffet so how could I have excluded him? We have many Buffet investment books on our book shelf at home but since the global financial crisis I have been more interested in the views of people who correctly predicted the crisis and sadly, Warren Buffet was not one of them. In early 2007, he was one of the people who said the subprime crisis will not have much of an impact on the US economy. He is also not the “value investor that buys wonderful businesses when the price is right” that most people believe him to be as he does a lot of the same things that hedge fund managers do to make money like buying distressed assets and selling derivatives. In recent times he is more well known for his close association with the “too big to fail” bank Goldman Sachs and ratings agency Moody who are both currently under investigation by the SEC for the role they played in causing the global financial crisis. Many retail investors aspire to invest like Warren Buffett but the reality is we cannot do what he does. I like what Marcus Padley recently said “The concept that Buffett can be emulated has cost investors more than it has ever made them. No one has ever managed to replicate his performance. The idea that you can is the biggest drawcard the equity market has and it is a lie. We all keep buying the dream.”

In Part 4, I will start on my favourite sources for non-fundamental information.

In Part 2 of this series, we continue with more of my favourite sources of fundamental information. Another book that has greatly increased our understanding of what to expect in the future is Harry Dent’s The Great Depression Ahead: How to Prosper in the Debt Crisis of 2010 – 2012. He bases his predictions for the future on demographics. The United Nations already has data on the age of the population of the whole world and there is a predictable spending pattern for each age group. By applying the spending patterns to the demographic data, Harry creates what he calls “Spending Waves” for each country. I wrote a post called Australia’s Spending Wave and outlook for 2010 and beyond based what I learned from this book in October 2009 and it remains one of the most popular posts on this blog.

Another great resource on the impact of demographics on the future is the report “The future of public debt: prospects and implications” from the Bank of International Settlement. You can read my insights and get the link to download the report in this post BIS report does not bode well for world economy. I have to warn you that the conclusions are pretty depressing especially if you are a tail end babyboomer like ourselves. Governments globally will not be able to afford to continue to provide the current level of pension payments. As cutting pension payments will either cause riots or get governments voted out, the most likely scenario is that they will continue to raise the retirement age so they can delay payment of pensions for as long as possible.

I also subscribe to a number of financial blogs which lead me to a lot of good information. Bloggers are constantly scanning the media for information that may be of interest to their readers. When they find a good article or video, they will create a blog post with a link to that information. There are two main categories of financial blogs. The first category are “reporter style” blogs that just reports the information. Some popular reporter style blogs I subscribe to are:

1. The Big Picture Blog (good one if you like to watch videos rather than read)
2. The Zerohedge Blog

The second category of blogs are “analytical style” ones where the bloggers would also provide some of their own insights and analysis as well. Some of my favourite bloggers in this category are:

1. Mike “Mish” Shedlock’s Global Economic Trend Analysis Blog. Mike covers general economic issues both in the US and globally and keeps a close eye on developments in Australia and China.
2. Greg Atkinson’s Shareswatch Blog. Greg is an Australian who is lives in Japan and provides a global perspective on developments in Australia which is refreshing compared to the Australian-centric views that you get in the local media.
3. Simon Johnson’s The Baseline Scenario. This blog was a great resource that helped me understand the implications of the European debt crisis and it provided a lot of information that I used in the series of blog posts I wrote about the crisis starting with this post in Feb 2010 Should Australians worry about the European debt crisis? As an MIT economics professor and a former chief economist of the IMF, Simon had a very good understanding of how serious this debt crisis is and how it is likely to play out. It was amazing to watch things unfold exactly as Simon said they would in the first few months of 2010.

Some blogs publish a large number of posts per day and one can suffer from information overload if you subscribe to too many blogs. A good method I like to use to keep abreast of the latest postings is to subscribe to their RSS feeds and use Google Reader to keep track of my blog subscriptions. When I have a spare hour or two, I will go into my Google Reader and just scan all the new postings in each blog. I read only the posts that are of interest to me and then just click on the “Mark as read” button. I try to clear the unread items in my Google Reader every few days, just like my email inbox. If you do not know what RSS or Google Reader is, don’t feel bad as most people don’t. I also did not know what it was until I got started in the world of blogging. Below is a video put together by Gideon Shalwick, one of my blogging mentors that will explain what RSS is and how you can set up your own Google Reader account. Its a great way of keeping up to date with your favourite blogs / websites and you can use it to keep track of updates of this blog as well. Click on this link to sign up for your RSS Feed for SMSF Investment Strategies blog. Enjoy!

I remember first hearing about the US subprime crisis around July 2007, three years ago. At that time we had no idea of its implications – was it a small problem that would be quickly resolved or the beginning of something much bigger? As new SMSF trustees, I remember feeling very fearful about what the future held and worrying about whether we would make the right investment decisions. It is hard to make the right decisions if you do not understand what is happening. Today, three years later we are going through another period of volatility but this time we feel very different. We no longer feel fearful and uncertain because we have a much better understanding of the unfolding debt crisis, and even though we believe the next few years will be tough for investors, we are a now lot more prepared.

In the last three years, I have spent a lot of time researching the causes of the Global Financial Crisis. Thanks to the internet, I have found a great wealth of information and most of it is free (the preferred cost for a small SMSF with a limited budget for investment research). I plan to write a series of blog posts to share some of my favourite information sources and to give proper credit to the right people who have helped us on our investment journey by sharing their knowledge so generously.

I like to use both fundamental and technical analysis to help me with my investment decisions so my information sources consist of two broad groups:

1. Fundamental – This group comprises mainly of economists and analysts who look at what is happening in the global economy, and
2. Technical – This group are mainly technicians who look at charts and various technical indicators like price pattern, volume and sentiment.

I believe that both groups are equally important and have a part to play. Fundamental information help me understand why certain things happen and the Technical information help with the timing of when they are likely to happen.

In Part 1 of this series, I will talk about some of the key sources of fundamental information that has helped us with our investment decisions.

My favourite fundamental analyst would have to be John Mauldin, a best-selling author and recognized financial expert himself, who is also the editor of the free “Thoughts From the Frontline” newsletter that goes to over 1 million readers each week. John is a great information funnel as he gets access to a lot of good information from sources that are not readily available to retail investors, like myself, and he either passes good information resources directly on to his readers or writes his own analysis for his readers. His writing style is easy to understand for an average investor who does not have a background in economics. I get two free newsletters a week from him and get a lot of great insights from these emails. You can sign up for his newsletters on the Thoughts from the Frontline and Investor Insights website. Each year he also organises a strategic investment conference and this year the focus was on the “The End Game” i.e. how this ongoing global financial crisis is going to end. Some of my other favourite analysts/economists such as Dr Gary Shilling, David Rosenberg, and Dr Niall Ferguson, were the speakers at this year’s conference. Of course I could not afford to attend this conference but John Mauldin is currently writing a book called “The End Game” which I am sure will be a great summary of all the insights he gained from this conference.

My second favourite fundamental resource this year would probably be the book “This Time is Different – Eight Centuries of Financial Folly” by Carmen Reinhart and Ken Rogoff. John Mauldin and a number of other economists frequently quote from this book so I had to buy a copy for myself as well from Amazon. Niall Ferguson, author of The Ascent of Money says “this book is quite simply the best empirical investigation of financial crises ever published”. The book looks at all sorts of financial crises that have happened in the last 800 years and guess what – they are not that different even though with each crisis, the people involved always thought it would be different for them. The authors call it the “This-Time-Is-Different Syndrome” and this is described in the book as:

“The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from our past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many booms that preceded catastrophic collapses in the past (even in our own country) is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes.”

Sounds familiar? Over-leveraged subprime borrowers triggered off the housing crisis in the US. Despite having the highest level of household debt in the world (yes, even higher than the debt levels in the US before their crisis), most Australians do not believe that the housing crisis that happened in the US and so many other developed countries can happen here. The reasons given are high immigration, a housing shortage etc. will keep property prices going up forever in Australia but the reality is that things are not that different here compared to the US before their crisis. Highly leveraged households are always economically fragile. If, for any reason, there is not enough income to service the debt, some assets will have to quickly liquidated. One housing foreclosure can bring down the prices of all properties in the neighbourhood. When that the average house price is now 7-8 times the average salary, many home buyers have to borrow more than what they can comfortably service. I have heard that after six interest rate rises in the past year, 50 percent of new home buyers who bought last year are already under mortgage stress.

The book also tells us that banking crises are always followed by sovereign debt crises. When there is a banking crisis, governments have to bail their banks out by buying their non-performing assets so the problem gets transferred from the banks to the governments. Governments also have to provide stimulus measures to prevent their economies from falling into recession. If they do not have reserves to do this, they will have to borrow to get the funds for the bailouts and stimulus measures. As we have seen with countries like Greece, governments who borrow too much will soon run into the same problems as the overleveraged subprime borrowers except their problem is on a much bigger scale. Hence, sovereign debt crises take a lot longer to resolve and it is not uncommon to take ten years or more to get back to pre-crisis levels.

Well I have crossed the 1000 word limit, which according to blogging experts is the recommended maximum for a blog post.  I will stop here today and continue with more fundamental information sources, including those that have more focus on Australia in Part 2. Stay tuned.

Explosive sales of the Apple iPad has been making headlines everywhere ever since it was launched in the US on April 3. Also making headlines at the same time was the news about the high rate of suicide among employees of a company called Foxconn in Shenzen, China. I had never heard of Foxconn before until this news started to hit the headlines in news portals like Yahoo Finance. I did a little more research and found out that Foxconn is the company that assembles a lot of Apple’s popular products like the iPad and iPhone. Due to the success of these products, Foxconn workers have been forced to work an excessive amount of overtime to meet production demands. Excessive forced overtime and other abusive employment practices have caused 13 employees to attempt suicide from Jan-May 2010, resulting in 10 deaths and 3 critically injured workers.

Foxconn has of course denied any wrongdoing but has also suddenly agreed to give their employees a 60 percent pay increase! Less than a week ago, they announced a 30 percent pay rise but that was apparently not generous enough so they announced another further 30 percent pay rise yesterday. “This wage increase has been instituted to safeguard the dignity of workers,” said Foxconn Chairman Terry Gou (Taiwan’s richest man) in the statement. “We are working diligently to ensure that our workplace standards and remuneration not only continue to meet the rapidly changing needs of our employees, but they are best-in-class.”

Before you commend Terry Gou on his apparent generosity, the basic salary at Foxconn’s China plants is currently only 900 yuan (USD$130 or AUD$161) per month before the first 30 percent raise, and new recruits are paid 1,200 yuan  per month. Salaries would be raised to 2,000 yuan per month for workers at its plant in the southern Chinese city of Shenzhen in October 2010. When contacted for his comments on the Foxconn suicides, Steve Jobs, CEO of Apple said that he believed that Foxconn is no sweat shop. If working long hours on a low pay is not considered “sweat shop”, I don’t know what is. Considering the price we pay for an iPad, I am sure there is adequate profit margin to pay the worker who makes it a lot more than US$130 per month, as evidenced by the generous pay rises that Foxconn has been shamed into giving its workers recently. Personally, I was quite disappointed with Steve Job’s response. I had expected he would have been more concerned about the suicides. People don’t just kill themselves for no good reason. He should use Apple’s clout to force Foxconn to admit there is a serious problem and get them to do something about it without delay.

Apple has some great products. Both my kids love their iPods and I think my husband cannot live without his iPhone, however, I think their success is starting to spoil Apple. They were once the underdog against big bad Microsoft with their proprietary Windows product but now they are really no different as they have made everything proprietary as well. What is most worrying is Apple making the format of consumables like music and books proprietary. Even my 12 year old has noticed this and yesterday she innocently remarked “Mummy, I think Apple scams people” as we are all at the mercy of Apple’s pricing on content once we buy their hardware. I thought I would do my bit to make more people aware of Apple’s connections with Foxconn. Before you buy your next iPad/iPhone/iPod, check out the stories on Foxconn and vote with your wallet. More information about the suicides and other prior mystery deaths of Foxconn employees can be found in this Wikipedia article.

I was not sure if I should write this post as I am definitely no expert on resource stocks, but I felt concerned when I read what some advisers are saying about the recent correction in mining stocks. Most of them have attributed it to the Resource Super Profit Tax or RSPT announced in early May 2010, and after the correction some think that it may be a good time to buy because the market has overreacted to the RSPT and it is widely expected that the government will eventually back down on the RSPT. However, I had already noticed a bearish pattern emerging in the global commodities index well before May. Although I don’t closely follow the commodities market, I do keep an eye on the Reuters/Jefferies CRB index which is a good benchmark on the performance of commodities globally, and not just Australia. I mentioned in my Feb 16 post that the Marketclub tools had already showed a bearish monthly trade triangle, which is a long term sell signal.

A few days ago this Bloomberg article Commodities’ Biggest Drop Since Lehman Is Bear Signal also noted that the Journal of Commerce Industrial Price Commodity Smoothed Price Index  that tracks the growth rate of steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth. I took another look at the Reuters/Jefferies CRB index and noticed that the index had peaked in Jan 2010 and we can see a very clear bearish “head and shoulder” pattern on the weekly chart as shown below. It was a similar pattern on the S&P 500 that made us decide to liquidate all our stock positions in December 2007.

The reasons given for the commodities slump was the slowdown in China and Europe, which is no big surprise. When I read that article, I felt prompted to write a blog post to alert readers who may be considering picking up some cheap mining stocks. I still procrastinated on writing this post but when I read Robert Gottliebsen’s article The new danger for our miners in today’s edition of Eureka Report, I felt I should not delay writing this post any longer. Robert looks at different data like China’s electricity consumption but his conclusions are similar to mine which is the fall in mining stocks is not just due to the RSPT but rather to a slowdown in demand for commodities globally. He is far more knowledgeable and provides a more comprehensive analysis. If you are thinking of buying mining stocks, do check out his article before you do. Eureka Report is a paid subscription but you can sign up for a free 21 day trial subscription.

June 30 is fast approaching so this is the time of year when we start thinking about the tax, accounting and audit requirements for our SMSF. Many thanks to everyone who answered our survey question “What help do you need most with your SMSF?”. The answers will help me decide on what to write about. Most people said “Investment Strategy” which is what this blog tries to provide but quite a few people mentioned “Administration and Compliance” as well. For our SMSF, we choose to use the services of professionals to help us with the administration of our SMSF as we prefer to focus our efforts on managing our investments. Every SMSF trustee must understand the compliance requirements but the investment rules are not hard to comply with. The key ones are clearly stated in the document Running Your Self Managed Super Fund – your role and responsibilities as a trustee from the ATO website. SuperGuide.com.au is good website that provides a lot of good independent information on super rules but if you want to try investing in something that you are not sure would be compliant, then do seek the advice of a good accountant before you do it.

Last year I spent quite a bit of time looking for a good accountant for our SMSF. I wasn’t happy with my old accountant whom I felt had become more interested in selling products to his clients rather than on improving his accounting and tax expertise. I looked at a few “full service” SMSF administrators who give you tools to manage your investments but they usually require you to be tied to a specific broker and bank. I suspect these companies get paid commissions by those brokers/banks. I prefer to have the freedom to choose my broker and bank so I can change them if there are others who can provide me with better fees or service. Furthermore, as we invest in the US markets, we have accounts with US brokers and I doubt any of them can provide direct integration with those broker platforms.

I found a good accountant that I liked but unfortunately he was not very familiar with investment strategies involving exchange traded options and was honest enough to tell me that. Some of our friends have told us that their accountants have told them that SMSFs are not allowed to invest in options, simply because the accountant himself does not understand options. Fortunately, a partner from a well known accounting firm has written a document on the tax treatment for options and made it available on the ASX website. You can find the link in the Resources area of this blog.

I decided to use DIY Super Fund, a no frills accounting service who specialise in SMSFs and was also familiar with my options based investment strategies. I collate my investment transaction into spreadsheets myself to reduce the work that the accountant needs to do and hopefully that also reduces the cost as well. So far I am pretty happy with the service and best of all, they stand behind the work they do. My old accountant asked us to buy audit insurance (for which they get paid a commission) in case we get audited by the ATO. My new accountant said that if we get audited by the ATO, they would do the audit for free as part of their service. I was very impressed with that as it goes to show that they are confident with the service they provide. Hope this helps those of you who are looking for help with administration and compliance.