How Come Australia Has Less Government Spending than the US and Has Free Healthcare for All?

Following up from my comments on this post of Madame X, I thought I'd have another go at comparing Australian and US government spending:



As you can see from the chart, Australia spends less as a share of GDP than the US does. Only Korea and Switzerland spend less than Australia among the OECD countries for which there is data. Australian government revenue is slightly higher as a share of GDP than the US, because we have a budget surplus whereas the US has a large deficit. But we have more or less free healthcare for all, while the US does not. Australia encourages people to get private health insurance through tax incentives, and around 35% of people do have private healthcare. This makes free healthcare easier to provide than in other OECD countries where there is less private insurance. So how does Australia achieve universal healthcare when the US does not? Here are some suggestions:

1. Our defence budget is smaller. Also we have far fewer people in prison. The US has 4.5 times as many prisoners per capita as Australia.

2. Because we run surpluses our government has net assets rather than net debt. So we don't have to pay any net interest on the non-existent national debt. There are government bonds outstanding just to keep the market open.

3. Retirement benefits are means tested and less generous than average US social security benefits. Whereas the US gives more retirement and unemployment benefits to people with previously higher incomes, Australia does the opposite. Over time retirees will be more and more self-funded due to compulsory superannuation saving in Australia. Since 1992, employers have been required to put at least 9% of salary into a superannuation fund - the equivalent of a 401k. It's much harder to get the money out before retirement too.

4. Our medical care is much cheaper than the US. Reasons include the high level of litgation and consequent insurance and overtreatment in the US and price discrimination by drug companies due to the fragmented nature of demand for drugs in the US. Doctors earn less in Australia.

So, in order to get "socialised medicine" you don't need "socialist" levels of government spending ;)

3i vs SVG

After finding that I couldn't invest in the Bear Stearns and Lehman Brothers funds I considered investing in two large UK listed private equity funds - 3i (III.L) and SVG (SVI.L). 3i is a private equity firm that invests on its own account and also manages funds for investors. SVG has the same combination of businesses but does not originate its own private equity investors, investing instead in Permira's funds. SVG was created in the reorganization of Schroder funds which also resulted in the creation of Permira. This adds an extra layer of costs, which is one reason that I think SVG appears to be underperforming 3i.

3i mainly splits its investments between buyout and late stage venture or growth investments, while Permira is primarily a buyout outfit. Both SVG and 3i have some infrastructure investments as well. 3i is mostly invested in Britain and continental Europe with smaller amounts elsewhere. SVG has a large part of its investments in North America. 3i invests in smaller companies than Permira typically does. This is reflected in the commentary from the chairman and CEOs of the two firms in their most recent annual reports. 3i's management dismiss the credit crunch as mainly affecting deals larger than those in their portfolio, while SVG's management are gloomy about prospects.

Compared to conventional stock or fund investments 3i looks very cheap:

• It trades at a discount to book value. And it is well known that private equity book value is usually conservative. Most realisations of investments yield higher prices than the carrying value - so-called "uplift". Recent book value is £10.60 while the share price is £9.09. A 14% discount. It has traded at a premium in the past.
  
  
• The trailing P/E is only 5.
  
  
• Total investment return after expenses for the 2008 financial year that ended at the end of March was 18.6% on initial shareholders funds. In 2007 3i earned 26.8%. The underlying gross portfolio returns were 23.9% and 34%. From 2004-6 the gross returns were 19.4%, 16.7%, and 24.4%.
  

The buyout line of business has done even better with a 54% gross rate of return in 2008. The IRR of the different buyout funds has ranged from 35-62%. SVG reports that Permira's underlying buyout funds averaged a 20% IRR while SVG's NAV has grown at an average 14% p.a. since listing. It's not surprising that most analysts that track 3i rate it an buy or outperform. The modal recommendation on SVG is "hold".

I bought 200 shares of 3i for £9.06 each. Commission was £6 plus a 0.5% stamp tax which is a transaction tax on share trades in the UK. No wonder CFDs are so popular in Britain. The stamp tax doesn't apply to them. It'd be hard to day trade with a 0.5% tax on top of commissions.

Next I'll look for a second European private equity investment.

The Best Private Equity Funds Show Persistence

There has been endless debate about whether the best mutual and hedge fund managers show real skill in terms of being able to achieve persistent outperformance. A recent paper by the Boston Consulting Group presents evidence that the best private equity funds do show persistent outperformance as shown in the key figure below:



As I argued in yesterday's post it is important to pick good private equity funds as the average fund globally shows high risk but not neccessarily risk-adjusted outperformance compared to public equities. There is plenty more interesting stuff in the paper.

Listed Private Equity Newsletter

LPX is a global index of listed private equity firms and funds. Though I can't find a public source for the fifty stocks composing the LPX50 Index, they do have a monthly newsletter, linked at the left of their homepage which inlcudes the ten largest firms in the index and the top 5 and bottom 5 performers for the month. Going through a bunch of these, one might be able to get most of the index components except the smaller persistently mediocre ones :) The recent performance of the index has been rather poor and it has been volatile over its history. So it is important to pick good stocks, if one can:

UK Listed Private Equity Strongly Outperforms Public Equity

Source. This chart explains why this sector is so interesting :)

U.S. Listed Private Equity

In case you didn't know, there is a U.S. Listed Private Equity ETF. The problem is that many of the companies on the list are not even really private equity firms. For example, Capital Source does provide loans to private equity backed companies but that is just one of its activities. Other companies on the list are private equity management companies such as Blackstone. You are buying a stake in the management firm, not in the private equity portfolio. In other cases, for example, Ares Capital, the firm is mainly making loans, not taking equity. At a quick glance, the following included firms do seem to be genuine private equity investments:

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I'm already a shareholder in MVC. I may look into the remainder of these in a little while.

Interactive Brokers Can't Add Private Equity Stocks

Unfortunately, Interactive Brokers can't add the two private equity stocks I discussed on Tuesday and Wednesday. The reason given for the Lehman Brothers fund is that it is traded in dollars on the Amsterdam exchange. Regarding the Bear Stearns fund, they just stated "we do not offer this segment on the LSE". It's not surprising that volume in these two funds is as low as it is. The following listed private equity funds are available for trading through Interactive Brokers:

hgt.l
elta.l
gpe.l
pin.l
svi.l
dba.f
pey1.f
sep.l

.l indicates a London listed stock and .f a Frankfurt listed stock. I'll report on these funds in the coming days. Please let me know of any others you'd like me to look at.

I got 50 unique pageviews for my post on the Lehman fund and my traffic from New York and London is up significantly in the last few days - usually the cities where I'm most popular are Sydney and Canberra. But I don't know how everyone got here. According to Google Analytics a lot of people searched for Lehman Brothers ticker:



But when I put those keywords into Google (which totally dominates the list of search engines produced by Google Analytics) my blog doesn't come up in the results. So I'm mystified as to how the visitors actually got here.

Bear Stearns Private Equity

I bet you thought that Bear Stearns ceased to exist? This fund, though now managed by J.P. Morgan, retains the Bear Stearns name. Like the Lehman fund I discussed yesterday, it is managed by an American investment bank, listed on a European exchange (in this case London) and its price is quoted in dollars (rather than Euros or Pounds). It also currently trades at a discount, though not as large due to a biannual redemption feature. Whereas the Lehman fund is mostly invested in North America, this fund is invested 60% in Europe, 28% in North America, 9% in Asia, and 3% elsewhere. The two funds nicely complement each other geographically. Like the Lehman fund, the fund is mostly invested in buyout funds, though they have a somewhat higher proportion allocated to venture capital. Again, like the Lehman fund they invest both in private equity funds and direct coinvestments. An unusual characteristic is the fund's desire to buy out other funds of funds that trade at a discount.

The Bear Stearns fund now has a three year track record during which it has recorded very good performance, especially since the start of the credit crunch:



It has returned 18% since the start of the subprime crisis, while Lehman has returned 8%. Lehman was only half invested though at the start of the subprime crisis and seems to have picked up the pace more recently.

The fund is leveraged through the issuance of preference shares. Fees include a base management fee of 1.125% to 1.05% p.a. (depending on fund size) and a 7.5% performance fee above the performance hurdle of 8% NAV growth.

BTW, Interactive Brokers got back to me. They are going to look into including these two tickers in the their database. So if you are interested in investing in Private Equity and have an Interactive Brokers account - and if you either want to trade futures, invest internationally, or just pay low brokerage fees, you should - maybe you'll soon be able to invest via these two funds.

Lehman Brothers Private Equity

Lehman Brothers Private Equity is a closed end fund trading on the Amsterdam/Euronext exchange. It's only a year old. As the chart above shows the NAV has increased since inception in a period of very volatile markets though about half the fund has been allocated to investments since the IPO, which will have smoothed returns. The share price has been all over the place but now is trading at a very substantial discount to NAV. The firm mainly invests in private equity funds. 64% of those funds are managed by managers whose previous funds were in the top quartile of returns. A smaller portion of the fund consists of direct "co-investments" in companies alongside private equity funds. 75% of the firms investments are in North America, 22% in Europe, and 3% in Asia. The majority of investments are of the buyout variety, with smaller amounts allocated to "special situations" and venture capital. There is no debt at the fund level. The firm has an unused credit facility.

I tried to trade it in my Interactive Brokers simulation account but got the message that there is no such ticker symbol and it isn't included in IB's product listing either. So I've sent a "trouble ticket" to IB and e-mailed the company to see if it can be included.

The firm is listed in Amsterdam, I suppose because it is an investment fund that charges a performance fee. The SEC forbids charging performance fees to non-qualified investors. Other governments (including Australia's too) aren't worried about this.

P.S.

I already got a response from the company. They contacted IB and IB told them that the request for a new listing has to come from a client. This morning I added a request for BPLE.L to my so far unprocessed ticket.

Listed Private Equity

I'm researching potential listed private equity investments. Currently I have a little under 7% of net worth allocated to private equity. My main investments are:

Leucadia National (LUK) Though people don't think of Leucadia as a private equity firm - it's usually mistakenly called an "insurance company" or a conglomerate - their model is to invest in or takeover struggling companies, turn them around and resell them, or provide venture finance - for example in helping Fortescue Metals get going - as well as invest in other funds, real estate and infrastructure development etc.

ING Private Equity (IPE.AX) This is a fund of funds, investing in Australasian private equity funds. It currently trades below book value, but recent asset sales have been at above book value.

Allco Equity Partners (AEP.AX) This company has a few large investments. Its biggest investment is in publicly listed IBA Health. But it also has smaller private equity holdings which it intends to eventually sell on. It trades at way below book value. The company hasn't tried to address this issue so far. They have no debt and are not entangled in the Allco Finance house of cards.

MVC Capital (MVC) This is a direct private equity fund with mainly US and some European investments.

MVC seems pretty unique as a US listed private equity fund. Another listed fund is Equus. Many funds and funds of funds are listed in London. The IPEIT website highlights several of them. And then there is a Lehman Brothers fund of funds listed in Amsterdam.

I'm looking to invest in a couple of them. But I can only invest $US4,000-5,000 without falling afoul of the Australian FIF regulations as I already have about $A8,000 invested in a Man managed futures fund. If a fund or stock is not exempt from FIF you must mark it to market each year for tax purposes and pay tax on the unrealised capital gain. This means you lose the long-term capital gains rate concession. While US mutual and listed funds are exempt from the FIF regulations, European ones are not. Under the FIF regulations you can invest up to 10% of your portfolio of foreign stocks and funds of funds which normally would not be exempt from the rules and still be exempt from them.

Anyway, I'll be posting soon some comparison of these European listed funds.

Good News for Temporary Residents

On Friday the Australian government announced that they are backing down on their plan to grab temporary residents' superannuation contributions. Instead, if temporary residents leave Australia and do not claim their super within 6 months the money will be transferred to the government for safekeeping. This is much more sensible. People will still be able to claim their money back at a later data if they realize they "lost" it.

What's amazing is that Senator Sherry is quoted in the AFR today as saying that the rate at which departing people claim their super balances is "incredibly low". Financially non-aware people are just throwing away 9% or more of their salary.

The Rich Don't Focus on Real Estate

The Australian data above from the Tax Review as well as US data I've seen before refute a myth popular in get rich quick circles that the rich focus their investments in real estate. The table shows that only 4% of rental income is received by the richest 1% of income earners which is less than their share of salaries - 5.3% (i.e. salary income is 5.3 times average salaries in the top 1% of taxpayers). The bottom 20% of income earners collected 18.8% of rental income compared to their 2.4% share of wages. The bottom 50% of the income distribution share of rent was twice their share of salaries.

OTOH the richest 1% had 38 times the average level of capital gains and and 35 times the level of dividends. Their business and partnership income was 22-23 times the average. The lowest quintile lost money in business.

The truth is that people mostly get rich from incorporated or unincorporated business and mostly invest their wealth in businesses not in real estate. The average landlord is right in the middle of the income spectrum. The average stockholder (weighted by shares held) in the top couple of percent.

Arkmile Calls Off its Wind-Up Action

Challenger and Arkmile call off their legal action against each other and Arkmile drops its call for a meeting of shareholders and promises not to call one for another 12 months. What did Arkmile get in return? Nothing apparent. Why did they agree to that?

Picked up my passport with a Chinese visa in it. Has a nice picture of the Great Wall engraved into the background like this:



Saw my first snow of the winter - on a mountain range in the distance as I crossed over the lake to the Chinese Embassy and back. When I asked Snork Maiden what it felt like to have winter without snow, she just giggled :)

Why is "The Motley Fool" Still in Business?

I've always wondered how "The Motley Fool" remains in business since the 2000-2002 bear market. Many of the companies they praised in the late 1990s bull market as "breaking the rules" ended up crashing and burning. The model seemed totally broken. And then there was the nonsensical strategy called "The Foolish Four". Most of their comments that I read either state the obvious or seem to lack the relevant context. When I saw their headline: "Buyout or Sellout?" under the headlines for PeopleSupport, I was hopeful that someone else was outraged by this takeover. Don't know why I gave them the benefit of the doubt. They rated PeopleSupport highly but were really happy about the buyout. They completely omitted any reference to the previous $17 buyout that was rejected by management.

As I was thinking about how useless TMF is, someone pointed out to me two adjoining Motley Fool stories about Capital One Financial with diametrically opposing conclusions. Either Capital One Financial is a huge value trap that should be avoided or a low-rated stock that deserves your support. Certainly amusing, not very educational, and definitely not enriching.

In more positive takeover news, Newscorp raised their takeover offer for NDS to $63. That's a nice gesture with no other competition to buy out the company!

Breakout

The NASDAQ 100 finally broke out the range it was stuck in for the whole of July. If this was an inverted head and shoulders formation (It does look a little weird, the shoulders each have 2 subshoulders), we should expect a move to just short of 2000. Bears will be thinking that the last couple of days is a C-Wave in a corrective move off the July 15 bottom. The monthly chart, McClellan Summation and other indicators don't support that interpretation either:



This move could fail, of course, but starting from such a low level and being to powerful so far, I'd expect the stochastics to go the full way to the overbought zone. In this chart, I've highlighted a few comparable situations in terms of candles and stochastics:



I looked for a breakout from a bottoming area with a nice white candle and nice smooth stochastics reaching above the 50% point. The December 2007 rally failed. One difference is that it really wasn't at all promising looking in terms of the MACD. But then March 2007 didn't look too promising either... Neither of those rallies had as strong moves in terms of the McClellan Summation. I think the odds are good for a decent rally here.

Distribution of Australian Net Worth

Another highlight from the tax review are these charts of the distribution of net worth and income in Australia. The chart above shows the mean net worth of each income and net worth quintile in Australia. The median net worth is far in excess of the level in the US at around $A350k vs. $US93k in the United States. There is less difference in the means - $A563k vs. about $US450k - reflecting the greater degree of wealth inequality in America. Interestingly, the second income quintile has higher mean net worth than the third income quintile. Obviously a lot of retirees with low income but high housing wealth and some superannuation are in this second income quintile.

Our net worth places us about on the border between the third and fourth quintiles with 40% of Australian households wealthier than us. The long-term perspective, including expected inheritance money, puts us exactly at the mean of the top wealth quintile with less than 10% of households better off than us.

The following chart shows how your net worth should relate to age:




The average 43 year old household should be at close to 100% of average net worth. The average 33 year old household should be at 57% of average net worth. So we are ahead of the game on an age basis too.

Architecture of Australia's Tax System

The first stage of the Commonwealth Government's tax review was released today. The 366 page document describes Australia's tax and transfer payment system and compares it to other countries. These comparisons make it a worthwhile read for non-Australians too. Hard to imagine the US Federal Government doing something as systematic as this. There's so much here that I really can't begin to summarize!

But here's an interesting chart that surprised me:



According to this, only about half a million employees or 5% of the workforce make pretax contributions to their retirement accounts ("salary sacrificing to superannuation" in Australian jargon) in addition to money contributed by their employer. Employers have to contribute 9% by law. Many in the public sector contribute more than this for example 15.4% at one quasi-governmental employer. So there is less incentive to make extra contributions than would be the case in the US. We don't have the "matching contribution" approach that is common in the US. And you really can't get it out again until you are in the 55-65 age bracket (depending on circumstances and when you were born). I've commented before that to simplify the system they could just get rid of pre-tax contributions. Makes even more sense when we see the low percentage of people that would be affected.

Only around 2% have a company car included in their salary package. I'm not surprised about that.

Carpet Cleaning

I hate wall to wall carpets. Some people tell me: "all you need to do is vaccuum clean them" but I find they are extremely hard to keep clean. To my mind it's a very stupid thing to put on the floor. If you are going to put a fabric on the floor it ought to be possible to lift it up and wash it. While older apartments in the US usually have wooden floors, almost all rental apartments here in Australia (at least in Canberra) have wall to wall carpets. I've noticed that at least one of our neighbours has wooden flooring, but landlords think carpeting is a cheaper option. On the other hand, most houses here do have wooden flooring (at least older ones). In the Middle East, where I've also lived, everyone has ceramic or stone tiling. That's the most sensible option in my opinion though wood feels much warmer in cold climates. The floor can be cold in Jerusalem (800 metres above sea level) in the winter.

Our kitchen is an island in the middle of our huge living room and though the kitchen has marble like or ceramic floortiles the carpet comes right up to the edge of the island containing the sink and the largest workspaces and those areas are particularly hard to keep clean. Anyway, last weekend we bought one of the machines pictured above ("Bissell Petwash"). I just used it for the first time and so far the results look great. Skeptics would be amazed how much detritus as well as dirt came out of a freshly vacuumed carpet. The cost was $A299 at Harvey Norman. Yeah you can hire a machine for $A40 a pop and then add on $A10-20 or so for the chemicals. Getting professional cleaning done costs at least $A200 a go. The latter is clearly the least frugal option. I reckon it's about even between buying and renting a machine. We've been here less than a year so I'd want to be cleaning every six months probably. In that case, buying probably wins.

P.S. No we don't have pets. Don't be put off by the name of the machine and think it isn't suitable for general carpet cleaning. It is.

PeopleSupport Sells Out for Lower Bid

PeopleSupport received a takeover offer for $12.25 per share from Indian conglomerate Essar. This is a premium to recent prices but below a previous offer for at least $17 share which the board rejected. It's also less than my cost basis.

Seems someone else is also suspicious.

July 2008 Report

Another bad month but not as bad in terms of absolute returns as July. However, the month was worse in risk-adjusted terms. In the chart, month's above the red line have risk adjusted excess returns, while those above the blue line have above average risk adjusted returns:



The gap between the blue and red lines is alpha, which is shrinking towards zero in this sample. July clearly has a more negative residual than June did. In other words underperformance relative to the market was worse.

So there was again negative progress on our annual goals, which is reported on in the first part of this report. Other statistics appear towards the end of the report. All amounts are in U.S. Dollars unless otherwise stated.

1. Net Worth Goal: Reaching $500k In US Dollars we fell back $28,707 to $404,772, while in Australian Dollars we lost $A23,504 to decline to $A429,832. We are down on the year so progress on this goal is very negative.

2. Alpha Goal: Alpha of 8.5% The point of this goal is to earn at least an average wage from risk-adjusted excess returns. Using my preferred time-series method our returns had a beta of 1.09 and an alpha of 6.43% with respect to the MSCI World index, which lags our annual goal and is worse than last month. The risk adjusted excess return for July based on this analysis was -3.5%. Multiplying this by net worth gives a loss of $14,812. For the year so far the risk-adjusted excess return in dollar terms has been $6,794. Using the estimate of alpha the smoothed annual income is $26,970. In Australian Dollars terms returns are somewhat lower, while they are higher using the S&P 500 as a benchmark.

3. Increasing Non-Retirement Net Worth by More than the MSCI Index The point of this goal is to make sure that we only spend out of non-investment income and excess returns and don't use the normal market return on investments to fund spending. In other words, this makes sure we have positive saving. So far this year these accounts have declined by 3.04% more than the MSCI return. In other words, we are now dissaving, by this measure.

4. Achieving Break-Even on U.S. Taxable Accounts After reaching this goal in May we fell back steeply in June and July, though the pace of loss was lower in July than in June. At the end of the month we were $11,665 below the breakeven point with a loss of $2,901 for the month. This means that no net progress has been made since February 2007. The rate of return on these accounts was -3.86%. One positive point was a positive 1.27% return on my Interactive Brokers account. The NDX gained 0.66% for the month.

5. Make at Least $10,000 from Trading Realised gains this month were -$1,783 (a loss) and so far this year $2,089. This negative result follows a record five positive months in a row. Even though I didn't do any active trading I closed out an options position at a loss and I mark to market my CFD position.

Background Statistics

Income and Expenditure



Expenditure was $7,784 in line with recent numbers. Spending included $A1,107 of implicit car expenses as our car depreciated by $A1,100 according to Redbook. We also spent $A3,814 on the China trip. Half of this will be refunded after the trip. Excluding these expenses, core spending was only $3,252. In addition to her ordinary pay Snork Maiden received her Vermont tax refund and Moom received his US Federal stimulus check boosting non-investment income to $4,657

Non-retirement accounts lost $14,249 with the fall in the Australian Dollar adding $2,411 to the loss. Retirement accounts lost $13,236 including $2,303 of exchange rate losses.

Investment Performance

Investment return in US Dollars was -6.34% vs. a 2.57% loss in the MSCI (Gross) All Country World Index, which I use as my overall benchmark and a 0.84% decline in the S&P 500 total return index. Returns in Australian Dollars and currency neutral terms were -4.90% and -5.25% respectively. So far this year we have lost 11.31%, while the MSCI and S&P 500 have lost 12.71% and 12.65%, respectively.

The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. More than half the total loss was due to the CFS Geared Share Fund which is our biggest investment. Resource stocks and broad exposure to the Australian stock market also performed poorly. Airlines and US financials were strong performers, though Australian private equity fund of funds, IPE, was our top performer.

Asset Allocation

Allocation was 46% in "passive alpha", 73% in "beta", 2% was allocated to trading, 10% to industrial stocks, 4% to liquidity, 3% to other assets and we were borrowing 38%. Due to the use of leveraged funds, our actual exposure to stocks was 134% of net worth. Leverage increased mostly because of the decline in the value of our assets. Our currency exposures were roughly 55% Australian Dollar, 22% US Dollar, and 23% Other and Global.

Applied for Chinese Visa

I finally got everything I need together and went to the Chinese Embassy (pictured above) today to submit my visa application. This is the first time I've had to apply for a visa for a short-term visit to a country. I've applied for visas before for long-term stays, studying, working, and immigrating to the US and Israel. To get a tourist visa for China you need to provide evidence of which hotels you'll be staying in during your trip or get an invitation letter from relatives etc. if you'll be staying in a private residence. So I had to submit:

A two page application form
Photograph
My passport
Letter from Snork Maiden's mother confirming I'll be staying with them
Copy of our marriage certificate
Copy of Snork Maiden's passport (to show she's a Chinese citizen).
$30 fee.

Compared to other experiences I've had dealing with consulates and interior ministries the place was deserted. Two women behind the desk - one reading a book and one who dealt with my application - and one other guy sitting in the waiting room. Out the front of the embassy across the street is a permanent Falun Gong demonstration (it was there in 2001) consisting of one guy huddled against the cold sitting beneath huge banners proclaiming "Falun Gong is Good" and other slogans and facing him one Australian security guard manning the main gate to the compound.

I have to return on Friday to pay and pick up my passport with the visa.

It's interesting that the PRC charges Australians who apply here $30 and Americans $155. Citizens of all other countries are charged $50. The fees are similar at the Washington Embassy. $130 for Americans and $30 for everyone else. The fees aren't correlated to what each country charges Chinese seeking visas. Australia charges over $100 to Chinese wanting to visit Australia while the US charges $131 which is not as big a difference. Interesting.

Was Snork Maiden's Superannuation Grabbed Already?

No contributions were paid into Snork Maiden's superannuation (retirement) account during July. We checked her payslip online and contributions were made, but they're not in the account. It might just be to do with her employer's transfer to a new computer system. Or is it the result of the implementation of the outrageous policy that was supposed to be implemented from the beginning of this tax year, where temporary residents' superannuation contributions will be paid to the ATO (tax office) and held until the worker either becomes a permanent resident or leaves the Australia permanently?

We're checking with the human resources/payroll department to eliminate the computer/bureaucracy slipup option. As I just discovered, Snork Maiden isn't a temporary resident for tax purposes as she is married to me, an Australian citizen. If it turns out that her contributions have been sent to the ATO we will be making the case that she isn't a temporary resident and this should not have happened.

If this is what happened, it hasn't solved any supposed bureaucratic problems as her previous superannuation savings are still in her account. So there isn't one less account for the authorities to track. It's just caused more bureaucratic chaos.

Frustrating Month

But at least it was better than last month. On the other hand I'm going to record "trading" losses for the first time in six months. I didn't really do any active trading apart from dealing with an expiring short options position but I mark to market my still open CFD position (SPI (ASX 200 Futures)). The Australian Dollar fell, reinforcing below market returns in US Dollar terms. Full details coming soon. The chart above though could be construed as an inverted head and shoulders formation and weekly charts definitely look like a near term bottom is in place.

I started working on our Australian tax returns. Putting together the spreadsheet for calculating Snork Maiden's tax return. It's the easier of the two but still plenty to learn about. For example, she's not a temporary resident for tax purposes because she is married to an Australian citizen. This means that interest received on her HSBC savings account must be included. However, foreign interest doesn't enter the "interest" box on the tax return but is included in "foreign source income". I vaguely remember that sort of thing from the last time I did an Australian tax return in 2002 (I previously lived in Australia from 1996 to 2002). However, I won't be able to submit Snork Maiden's return until I've completed mine. If my net income comes in sufficiently low we might be able to claim the spouse offset (offset = tax credit in US jargon). I won't be able to complete my tax return till I get full details of distributions from EBI and CIF in late August. But if my income is already over the limit before including those distributions we'll be able to submit Snork Maiden's return fairly soon. She should get a refund as she only worked for 9 months of the year, but has had tax withheld at the rate that would apply if she worked the full year. Unlike the US you don't actually compute on your tax return how much money you either owe the government or they owe you. But the tools are provided to allow you to estimate it.

I stopped by the ATO "shopfront" this morning and picked up a bunch of extra forms and information booklets. I still prefer to have a hard copy rather than a pdf. Also we have to submit our returns on the paper forms as electronic filing is only available if you have previously submitted a return and also the software doesn't work on Apple computers...

Arkmile Sets Up Challenger Infrastructure Fund Website

Arkmile is calling for the winding up of the Challenger Infrastructure Fund (CIF.AX) - sale of the assets and the distribution of the resulting funds to shareholders. I own 3000 shares. A meeting is now scheduled for late August for shareholders to vote on the proposal and Arkmile have set up a website laying out their case. CIF trades at a massive discount to the supposed value of its assets. Recent sales of smaller assets by the managers realised prices in excess of the carrying values, so I think that Arkmile are correct that this proposed action could eb good for shareholders. Even better from my perspective, though, would be delisting the fund - turning it into an open ended fund - this would push the price up to the net asset value while allowing me to remain exposed to the infrastructure sector. All the same, in the absence of an alternative proposal, I'd vote in favour of Arkmile's proposal. This guy, though, is skeptical that other shareholders will vote Arkmile's way. Chalenger holds 32% of the shares, which makes Arkmile's task hard.

In other news, Snork Maiden got the new temporary resident visa stamp placed in her passport and Medicare membership all in the course of about an hour. Sometimes government can be pretty efficient :) She's now trying to get her private health insurers to refund her unused insurance. If she becomes a permanent resident in two years time, she'll be on track to becoming an Australian citizen four years after arriving here. This is at least twice as fast as it would take to become a U.S. citizen.

:(

61 of 84 Starbucks stores in Australia will close, including all stores in the Australian Capital Territory :( These are the only non-US stores that Starbucks is planning to close. I like to occasionally get a largish cheapish filter coffee at the Starbucks branch pictured, rather than the more expensive espresso coffees available everywhere else here, and lounge around in their nice comfy chairs. More empty retail space to add to the increasing amount of empty commercial property I'm seeing.

Snork Maiden Granted Temporary Visa

Some good news - Snork Maiden got a letter today from the Australian Immigration Department granting her a temporary spouse immigration visa for the next two years. At the end of two years they will grant a permanent residence visa, subject to more evidence. As she has a 457 work visa valid for the next two years the only practical change in the meantime is that she will now be eligble to get subsidised government healthcare through Medicare. We can stop paying $A230 a quarter in health insurance for her as soon as she has a Medicare card.

Superannuation Handbook 2007-08

I just finished reading The Superannuation Handbook 2007-8 by Koken and Smith. It is a pretty comprehensive coverage of Australia's very complex superannuation or retirement system. I think my understanding of the system improved somewhat after completing the book, though it is still hard to keep all the facts and rules organized in my head.

Australia's superannuation system is complex for a number of reasons. First and foremost, governments have continually changed the rules while trying to grandfather in existing super investors in many cases. And there have been very significant recent changes. In the US, new rules have often meant the creation of new types of retirement account such as the Roth IRA or Roth 401k. In Australia there is only one type of account and all the various rules have been applied to that same account class. So we have pre-tax and post-tax money going into the same accounts, for example. In the US defined benefit pension schemes are an entirely separate beast to defined contribution retirement accounts. Not so in Australia.

Second, while the US does not tax money in retirement accounts Australia does (the US taxes payouts from accounts that had pre-tax contributions like the 401k). This I suppose is why self-managed superannuation accounts in Australia are subject to such a bureaucratic regulatory nightmare compared to IRA accounts in the US.

Third, there are several different age thresholds (55, 60, and 65) at which investors have different rights to access their super and varying taxation obligations if they do. In the US there is a single age threshold of 59 1/2, though you can access your money before then subject to tax and penalties (unless you do a 72t or annuity).

Fourth, eligibility for social security in the US does not depend on assets whether in retirement accounts or not. Access to the age pension and other benefits in Australia does depend on income and assets tests and sometimes it matters if the source is from super or not (but less than in the past).

Fifth, in Australia, how much tax you pay depends on how you take the money out of your super account - whether as a variety of different "income stream" products or as lump sums.

Well, there are probably more reasons that don't immediately come to my confused mind that result in the Australian system seeming more complex to me.

The book does an admirable good job of covering this very confusing topic. There are three points though which are somewhat weak. Not all terms are clearly defined. For example, the entry in the glossary just says that a "complying pension" complies with certain regulations. It'd be nice to spell out some of these more clearly.

Second, the authors often gloss over details and technicalities. Footnotes or appendices to chapters could cover these if they don't want to complicate the text further. For example, there is a rule that a low-income self-employed person cannot get a government co-contribution if their "business income" is less than 10% of their total income. In other words the rest of their income is from investments or superannuation etc. This is the kind of point that was glossed over that I wanted to get a straight picture on.

Third, there are plenty of worked examples in the text, but most of these only cover the first year of any investment program. In some cases they comment that the difference between investing in superannuation or outside superannuation isn't that big. But that's the result after only one year. The results of investing in superannuation or outside superannuation could look quite different in the long-term than in the short-term.

Bottom line, I'd recommend this book as a very solid background to the topic though you might need to consult the ATO website and other resources along the way.

Thinking Things Through

I'm continuing to think things I discussed in recent posts. I clearly can't handle the medium term (from more than a day to month) type of trades very well. Even though there are periods when I've done OK with them, there are plenty of other periods when I've gone off the rails. Bruce Hong listed some of the character traits that make people less suited to trading. I clearly have some of these to some degree. Brett Steenbarger, of course, has written extensively on this. The key personality traits that can lead to poor trading outcomes are: neuroticism, extroversion, and openess to experience. In the Myers-Briggs test I come out as an ENTP - Extrovert, intuitive, thinking, perceiving - which means I am analytical which could be good for trading but am extroverted (though not so strongly) and open to experience and changing plans (very strongly). I also do seem to have a degree of neuroticism - moodiness - tendencies to emotional extremes - particularly negative extremes - I have been treated for depression in the past. I thought that was due to an undiagnosed thyroid condition which is now being treated, but maybe only partly so.

If I could stick to strict daytrading I could eliminate the worst emotional aspects of trading - by controlling the amount of time that I am trading. But sticking to strict daytrades is hard - you need a lot of patience and not be open to changing the plan. Also as the US stockmarkets are the most important drivers of global stockmarkets, so that trying to trade the Australian market on a purely daytrading basis, misses much or most of the opportunity as overnight moves account for at least half the movement in the market and a lot of the other action is close to the open. Most days it's not much of a market for daytrading with any reasonable level of risk.

So probably, I need to go back to my previous career or find something new to do. And I'm going to be increasingly thinking about what that is.

Tonight, I'm going to have to trade to get out of the short options position I'm in. I don't have enough margin available to be putted the stock. Things were going well and it looked like we were in a new uptrend until Merill Lynch and Google released supposedly disappointing results after the US market close and the market lost more than its gain for the day on Thursday.

By the way, today is twenty five years to the day that I first travelled out of my home country (Britain). I went to work on a Qibbutz in Israel for the summer I finished high school (you don't "graduate" it in Britain). It's amazing it's a quarter century. I can remember so much in so much detail.

How Much Will It Cost to Visit China?

More than I was expecting... We decided to fly via Hong Kong as Snork Maiden doesn't need a visa to visit there (she's a PRC citizen) and it was cheaper than either a direct flight or a trip via Bangkok, our other favored destination. We'll be in Tianjin and Beijing for a week each roughly and three days in Hong Kong on the way back. In the end each of our airfares is coming to $A1,888.00 - paying by credit card costs an extra 1.9%. I made a deposit of $A300 using a credit card but plan on paying the rest via BPay (an Australian online electronic payment system) - we can pay BPay from our credit card account - not sure if that results in avoiding the fee or not... The basic flight cost is $A1,240 and then there are $A397 in taxes and fees and $A251 to fly between Sydney and Canberra roundtrip...

Then we need to pay for a hotel in Hong Kong and thinking about travel insurance. I always make sure I have health coverage when visiting the US, but otherwise have usually not taken out travel insurance. Not sure if it is worthwhile for China/HK. The only thing I think it is worth paying insurance for are health issues where expenses can become astronomical if you are unlucky. Three nights at a decent hotel in HK seems likely to be around $A600 in the period we are visiting in. I already rejected one of the cheaper options the travel agent suggested as people much shorter than me were complaining about the length of the beds on Trip Advisor. I also need to pay $A70 for a PRC visa - the first time I will ever need to get a visa for a short term trip... (I'm a UK and Australian citizen).

The good news is that Snork Maiden's airfare will be paid for by the organizer of the conference she is going to and so will our hotel (except the final night) in Beijing. In Tianjin we will stay with her family.

So bottom line before incidental costs will be $A2,560. But we have to wait till after the trip for reimbursement of Snork Maiden's costs.

June 2008 Report

This was the worst month since the 2000-02 bear market performancewise and in terms of absolute dollar loss of net worth the worst ever.



The MSCI index matched its January performance (-8.18%), but this time we underperformed the market on a risk-adjusted basis. In the chart, month's above the red line have risk adjusted excess returns, while those above the blue line have above average risk adjusted returns:



And July is not shaping up very well either yet. (Lack of) progress on meeting our annual goals is assessed in the first part of this report. Other statistics appear towards the end of the report. All amounts are in U.S. Dollars unless otherwise stated.

1. Net Worth Goal: Reaching $505k In US Dollars we fell back $48,878 to $433,409, while in Australian Dollars we lost $A51,751 to decline to $A453,262. We are down on the year so progress on this goal is very negative. I'm lowering the goal again to $500,000.

2. Alpha Goal: Alpha of 8.5% The point of this goal is to earn at least an average wage from risk-adjusted excess returns. Using my preferred time-series method our returns had a beta of 1.12 and an alpha of 7.02% with respect to the MSCI World index, which lags our annual goal. The risk adjusted excess return for June based on this analysis was -1.05%. Multiplying this by net worth gives a loss of $4,814. For the year so far the risk-adjusted excess return in dollar terms has been $21,508. Using the estimate of alpha the smoothed annual income is $32,129. In Australian Dollars terms returns are somewhat lower, while they are higher using the S&P 500 as a benchmark.

3. Increasing Non-Retirement Net Worth by More than the MSCI Index The point of this goal is to make sure that we only spend out of non-investment income and excess returns and don't use the normal market return on investments to fund spending. In other words, this makes sure we have positive saving. So far this year these accounts have grown by 1.97% in excess of the MSCI return.

4. Achieving Break-Even on U.S. Taxable Accounts After reaching this goal in May we fell back steeply this month. At the end of the month we were $8,861 below the breakeven point with a loss of $9,613 for the month. The rate of return on these accounts was -11.39%.

5. Make at Least $15,000 from Trading Realised gains this month were $231 and so far this year $3,873. I've now had five positive months in a row, which is a record. I doubt July will be positive. I'm lowering the goal to $10,000.

Background Statistics

Income and Expenditure



Investment Performance

Investment return in US Dollars was -10.24% vs. a 8.18% loss in the MSCI (Gross) All Country World Index, which I use as my overall benchmark and a 8.43% loss in the S&P 500 total return index. Returns in Australian Dollars and currency neutral terms were almost identical as the AUD hardly moved over the month. So far this year we have lost 5.43%, while the MSCI and S&P 500 have lost 10.41% and 11.91%, respectively. Over the last 12 months we lost 5.18% while the MSCI lost 8.79% and the SPX 13.12%.

Asset Allocation

Allocation was 43% in "passive alpha", 69% in "beta", 4% allocated to trading, 10% to industrial stocks, 6% to liquidity, 3% to other assets and we were borrowing 35%. Our currency exposures were roughly 57% Australian Dollar, 20% US Dollar, and 23% Other and Global. In terms of asset classes, the distribution was:




Due to the use of leveraged funds, our actual exposure to stocks was 119% of net worth.

Outrageous Superannuation Grab!

I just read about this in the Australian Financial Review today. The government plans to grab the superannuation contributions of temporary residents and only let them have it back if they become permanent residents or leave the country. In the meantime the contributions will earn no interest! At least they could pay interest! The superannuation industry is saying that it might be unconstitutional. It hasn't been implemented yet, but Nick Sherry, the minister responsible, says they are going to go ahead with it. Snork Maiden will likely be a temporary resident for another two years at least before she gets permanent residence. This would be extremely annoying. Hopefully, Snork Maiden's employer will not notice this... or the super industry and universities will sue the government.

P.S.

I sent an e-mail to my member of parliament (a Labor member) about this issue.

Most Frustrating Market in Seventy Years

At least it's not just me having a hard time trading. And Bespoke provides evidence that it is the most frustrating market in 70 years. Someone should run this for the entire history of the Dow Jones Industrials...

At a Crossroads?

I feel today like I'm getting close to giving up on trading. There are periods when I trade well, but this isn't one of them. I'm trading terribly. It's very possible, that I am just not mentally and emotionally suited to being a trader. The market is going relentlessly down - no crash and no bounces. Like the slowly boiling proverbial frog. Eventually, of course, it will turn around. If the market doesn't turnaround substantially in the next couple of days, I may well just call a halt there and then before I lose too much money. If the market does turn, then once the immediate crisis is over, I'll likely take a break from trading for a little while and get more organized in the other areas of my life. If I decide to give up, then there is the question of what I will do next. I don't want to go back to the kind of academic job I had before, in the unlikely event that one was available here in Canberra. One reason I decided to make the move here is because I was not happy with my career path in academia. After a couple of decades I had gotten bored with the material and was not keeping up with changes in the field to the degree I would have liked. But I don't know what else I might do apart from academia and trading. Unless I come up with a radical idea soon, I guess it's going to be in the area of energy, environmental, and resource economics, which is of course becoming more and more prominent. I guess I'd be in a research oriented position, but I don't want to be in a position where I need to provide leadership at this stage. Given my apparent seniority, that might be a hard sell, though I've had suggestions a few months ago for positions that might fit that description and so similar jobs might be likely to be forthcoming.

Of course, whatever I do, I will still try to manage our finances in a reasonably sophisticated manner including monitoring performance and reporting in this blog.

On the other hand, maybe I am just exhausted by these market conditions.

One Conclusion and an Update

I really came to this conclusion before but when I started making money in the last few months before June I drifted away from it: I'm not emotionally equipped to hold large trading positions overnight, I really need to focus on daytrading. I can't be awake 24/5. If I can't make sufficient money doing that, then I need to find a different line of work. My first priority now is extricating myself from the positions I got into. After that I'll focus on daytrading.

If you're wondering where June's report is, I need to get the distribution data from our Australian funds for the end of the 2007-8 financial year, before I can do it (THe Australian tax year ends on 30th June). Hopefully, we'll have the actual distributions next week together with an estimate of the associated tax credits. Towards the end of the month we should get an actual tax statement and be able to start on our Australian tax returns. In the meantime we're in a bit of a cash crunch with our Australian credit card maxed out due to covering Snork Maiden's immigration fee and available cash needing to be directed towards paying the rent next week. The next big expense after that will be buying tickets to go to China. Snork Maiden will be paid on Wednesday too. So from some point next week things should get easier cash wise. Of course in a real emergency we could borrow more or sell investments. But I don't want to do the former and the latter is a bad idea at this point in the market.

With losing so much money in the last month I really haven't felt like doing too much blogging among other things. The number of posts is probably a good indicator of my mood.

June Finally Over

Trading realised gains were $223. Everything else looks horrible. The only other positive spots were: NNDS, TFSMX, LUV, and LGDI. A few other investments were breakeven ish.

"Gurus" Lose Even More Money

Interesting league table of returns of "gurus" over the last 6 and 12 months. I estimate I'm down 10% over six months and 5% over 12 months. That's similar to Soros and would be one of the best returns in the table. Real numbers coming in a few days.

Worst Since the Great Depression

There is a lot of talk that this is the worst June for the Dow since the Great Depression and the worst month since the 2000-02 bear market. I haven't run the numbers in a while, or posted that much, as they are so bad, but clearly this is my worst month since the 2000-02 bear market. I didn't bet on such a major retracement in the indices - about a 50% retracement of the March-May rally in the NDX, a new bear market low for the Dow, and a pretty much 100% retracement for the SPX. I've been trading on the wrong side of the market for the whole month, somehow, despite this, my trading result should be a little positive unless something real bad happens on Monday but that is offset by horrible investment returns. Friday night in the US my trading positions did go in my direction as the market reversed to the upside in reaction to a collapse in the oil price from a new all time high. The price of oil really drives the US stock market now, second by second. We are going to need to see a substantial fall in the oil price to get any rally going in stocks. I think that's possible. Recent highs in oil seem weaker as they are being made on lower volume etc.

On another positive note, after the close Friday, News Corp announced that it plans to privatise NDS at $60 per share. I currently have 100 shares. My brother is employed by NDS, which is how I heard about it in the first place. It's always been a bit hard to understand why the company was public given the overwhelming majority stake News Corp held. One excuse I heard was that it was to provide incentive options to staff who owned many of the remaining shares. Also, I've not yet seen any explanation as to why News Corp wants to take the company private now.

Three Bad Trades: Two (?) Down, One to Go

Last week I was in three bad trades on each of which I was down significantly. One was long NASDAQ futures, another short QQQQ puts, and the third long SPI (Australian stock futures via CFDs). I managed to close out the long NASDAQ position for a small profit. Tonight, I will close the QQQQ puts position. We will see if for a small profit or a small loss. I could have closed last night for a small profit, but didn't pull the trigger. The long SPI position is still bad, though no worse than it was. I guess I am resigned to waiting for the index to eventually go up, which is a safer bet when you're long than when you are short. I am learning, I hope from the mistakes I made on all of these trades. Otherwise, there are only a few bright spots - Legend International and Southwest Airlines are a couple of them. I took some profits in both of them. Another good recent trade is selling June covered call options on Interactive Brokers. I got $100 for two of the $35 calls just a couple of days ago and the stock promptly sank. I can't see it coming back to $35 tonight.

By the way, I think we may have seen the top in crude oil for a while. Last night's decline in the wake of the Chinese petrol price increases was pretty spectacular and certainly fueled the rally in stocks, which saved my QQQQ trade. If the downtrend continues, it will be the catalyst for the next upwave in stocks. At least in the US. Australia is another question.

On top of struggling with trading this month, yesterday I had a computer mishap when trying to back up my files. I lost a bunch of financial files or now only have the version from September last year. Luckily, none of the most crucial core files was affected. But I did lose my last couple of tax spreadsheets, including the one I have been putting together for 2007-8 Australian taxes. I'll have to reconstruct it from scratch. All the sources are intact at least, just a question of bringing everything together.

Macquarie Capital Alliance Group to be Privatised

Another Macquarie private equity listed fund to be delisted. This bodes well for my various Australian listed funds that are trading at huge discounts to book value: EBI, AEP, IPE, CAM, and PMC. Though CAM and PMC are more traditional share funds. EBI continues to attract new hedge fund investors. The manager of the fund referenced in the EBI announcement, Andrew Weiss, was a professor of economics at my Alma Mater, Boston University. I remember once I went to look for him for some reason, but never did meet him. Some grad student was sitting in his office. EBI are going to introduce a buyback facility that will come into play whenever the fund trades 10% below book value. The problem with AEP is of course that it was an Allco sponsored fund, so no privatization likely there, though I expect another more serious takeover effort if it continues to trade so cheaply.

Another similarity with 1990-91

Record levels of bearishness. As I write, oil just spiked to a new all time high. Seems to me this was a reaction to a bad Empire State Report (NY Fed report on NYS economy) which caused US bonds to rise and therefore the USD to fall. This started a rise in the oil price that then set off a cascade of stop losses at $137, $138, and $139. At least that's what the charts look like... Dow Jones commented on the price spike but didn't report any news except the Saudi decision to raise output which was already known and bearish for the oil price.

Mid-Month Update

The numbers in the right column look really awful. The only goal where we're making progress at this point in the month is on realized gains with a net $487 gain so far this month. Investment performance is -7.81% so far against a 4.59% loss for the MSCI and 2.88% loss for the SPX. Numbers were worse before the start of Friday's trading by around $4000 and at the end of Friday were in fact better than this - but there is always a delay in getting the prices for Australian managed funds (mutual funds). The numbers are also better in Australian Dollar terms (-6.34%) as the Australian Dollar is down on the month. I think this is the worst point of the month and hopefully, month ending numbers will be better. The main reason for the poor performance is our much higher level of leverage since April - estimated beta is 1.06 (time series estimate) to 1.34 (naive estimate).

Immigration

Another goal completed, Friday, when we visited the Department of Immigration in Canberra to turn in Snork Maiden's immigration application and pay the $A2,060 fee. When processed they should award her temporary residence status in Australia. As a temporary resident you can work and receive government healthcare (Medicare). You can't receive other government benefits. After two years, our savings in health insurance should pay for the fee. Also after two years, they should grant her permanent residence in Australia and all rights apart from the ability to vote. Another two years on she should be able to obtain Australian citizenship with the obligation to vote and an Australian passport that allows visa free travel to most countries in the world. Still, today we were discussing maybe stopping off in another Asian country on our way back from China later this year. With an Australian work visa, getting a visa for Thailand, Singapore, or Hong Kong should be easy and the embassies are here in Canberra. I've been to both Thailand and Singapore as well as Malaysia. I'd like to visit Hong Kong some time, but no rush. Snork Maiden is most interested in visiting Thailand, I guess because that is the most exotic for someone from China.

The stockmarket finally has turned for the upside on Friday. This week, my trading was not at all good and by Thursday I was running three positions at close to $1,000 losses in each case. It was a rather anxious week. Friday night I got rid of a US futures position at a profit and my Australian futures (via a CFD) and US short options positions significantly improved. I'm not even calculating our current net worth or investment performance at this point in the month as I know they are so bad. I think Wednesday (Thursday in Aus) will be the low point for a while in the market. Wednesday was "Weird Wollie Wed" - the Wednesday of the week before US options expiry week. It seems the market often rises from there into options expiration and my model is now unequivocally pointing up.

Australian Stock Market Update

The chart shows progress so far since all time highs in the Australian stock market at the end of October. A suggested Elliott Wave count consisting of a triple zig-zag W-X-Y-X-Z is shown. In US markets I believe the top was in July. The move out of the August low in Australia has five waves though and plausible counts from the 2003 low place it as the top of the market. Of course, other counts from the high to the March low are possible, but I think this is the most plausible. All E-Wave analysis can tell us, is that the decline, could be complete. The correction might simply be the first wave of a much larger correction if the more bearish scenarios play out. I've also sketched a five wave rise from the March low to the May high. Wave 4, in this sequence doesn't look much like a correction, but this count again is the most plausible. The move down from the May high also looks "impulsive". We've now hit the lower Bollinger Band (34 day moving average minus 2 standard deviations, which is a natural point to attempt a bounce, especially when the moving average is not declining. At the January and March lows the BB didn't arrest the decline immediately, as you can see the moving average and bands were declining steeply. So I expect a bounce of some duration here, and the model is forecasting a rise too in coming days. We are also just above the August low.

This point in the market does seem similar to the January Societé General and March Bear Stearns lows. This is the Lehman low, where Lehman did not blow up but was rescued with a private capital injection. I've also marked a possible inverted head and shoulders bottom. We need to rise above the 6000 level and break through the blue resistance line before this comes into play. If it does, expect a move to the old highs as a minimum target. That's the bullish scenario. Any move down from here would be very bearish. I'm betting on the bullish outcome.

Overnight, the US market seemed to stabilize, Japanese futures are up pre-open as I write. Let's see what happens.

New Investment: Legend International

Legend International is a company run by Joseph Gutnick that is developing a major phosphate mine in northwest Queensland. The stock is an OTC-BB stock in the US, but following a successful private placement the company plans to list on the American stock exchange. The company also plans a secondary listing on the ASX. I bought some shares a few days ago. I compute that based on:

• The company's worst case scenario of a phosphate price less than half current prices
• Assuming that they still need to raise another $700 million to finance the development of the mine by issuing shares at the current share price.
• Applying a P/E of 10. Most fertilizer companies are currently trading at much higher P/Es. BHP has a P/E of 15. Rio Tinto 17. The Australian materials sector has a P/E of 14.

The stock should be worth $5 a share. It's currently trading for about $3.30. The nice thing about this project is that they don't have to find the resources, though proving the size of the reserve is needed. They mainly just need to build a mine, a pipeline to the port at Karumba in parallel with an existing pipeline used by the Century Zinc mine and extra port facilities at the port. They hope to be in production in 2010. I have some confidence in Gutnick, a previously successful miner - I don't think this is a scam - more a Fortescue Metals type story. The Atticus Capital hedge fund is also a major existing shareholder.

We'll see how this works out.