Beware of Expert Opinion from Promoters.

Lately we have been witnessing a resurfacing of property promoters in the press after a long period of silence. We want to reassert our advice that people should do their own homework before embarking on a large asset purchase be it property or otherwise.

How can you tell if it makes sense to buy a property? Our suggestion, as a financial firm, is that you talk to a financial adviser, you determine your own circumstances, you look at your own unique situation, and that you don’t base your opinion on what you hear on the radio or TV from people in the property business. The people who are restarting to champion property now are doing so under the banner that ‘it is cheap to buy’, part of the ‘cheap’ is due to exceptionally low interest rates, which invariably will go up some day.

That is not to say ‘don’t buy property‘, far from it, what we are trying to tell people is ‘make prudent decisions’, don’t buy any asset you can’t afford …

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Homeloan carry trade, profit from your mortgage?

‘Carry trade’ is where you borrow and pay interest in order to buy something else that pays higher interest, the difference (when it is working as planned) is called ‘positive carry’. Usually this is done in bonds or currency, for instance, if you were to borrow money on short term rates to finance longer term bonds. The interest being paid on the long term bonds minus the interest on the short term borrowing would be the ‘carry return’. In currency the Yen was a very popular carry trade currency as their interest rate was 0%. So you could borrow in Yen, buy something else (unfortunately this money often ended up in CDO’s) such as US Tnotes and keep the difference, the main risk being that one that the Yen would strengthen significantly meaning you couldn’t pay back the original loan.

How does this affect mortgages though?

NOTE: THIS IS NOT A SUGGESTION THAT YOU DO WHAT IS DESCRIBED HERE! THIS IS MERELY MAKING A POINT!

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Deflation, the low paid, and expansion of the tax base

Here are some statistics (taken from the SBP) showing that contrary to assertions that the ‘rich don’t pay enough tax’ that in fact they pay more than anybody else. Half of all tax income is paid by the top 6.5% of workers. So about 1/15th contribute 50%. One third of all tax collected comes from the top 2.5% of workers, thus 1/40th are paying 33%. It means that things such as the new 2% levy are merely punishing those who already contribute the most! I wrote about this before when talking about the Laffer Curve and how Ireland may be driving high earners out of its jurisdiction.

Sources have said that the Irish tax base is too dependent on a small number of people, so what would happen if we were to drive them out? The implications are severe.

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Understanding Deposit & Lending Margin relationships

Part of the way you can get a view of a lenders margins is by looking at the deposit margins they offer because deposit margins usually reflect – at least to some degree – lending margins. This is because there are two sides to a balance sheet with any bank, on one hand you have deposits which you attract in order to fund lending so if you have low deposit margins that is probably indicative of having low lending margins (although not always!), however, if you have higher deposit margins it is almost certain that you have high lending margins.

NIB released their results today so we’ll take them as an example as well as Anglo Irish Bank to demonstrate the way that you can read into certain elements of how a bank is run from the outside and also on the type of business they engage in.

For a start you’ll need to know that average margin on a mortgage with many banks is less than 1% and that is from …

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Understanding Deposit & Lending Margin relationships

Part of the way you can get a view of a lenders margins is by looking at the deposit margins they offer because deposit margins usually reflect – at least to some degree – lending margins. This is because there are two sides to a balance sheet with any bank, on one hand you have deposits which you attract in order to fund lending so if you have low deposit margins that is probably indicative of having low lending margins (although not always!), however, if you have higher deposit margins it is almost certain that you have high lending margins.

NIB released their results today so we’ll take them as an example as well as Anglo Irish Bank to demonstrate the way that you can read into certain elements of how a bank is run from the outside and also on the type of business they engage in.

For a start you’ll need to know that average margin on a mortgage with many banks is less than 1% and that is from …

Read More

Short selling, what is it? What does short selling do?

Most of us are familiar with the idea of being able to buy and then sell a share, normally this is referred to as going ‘long’ in other words you feel it is a good share and you want to hold on to it. The opposite of this is where you sell and then buy which is going ‘short’, in other words you don’t think the stock is good and you don’t want to hold on to it so you borrow it and sell it today, buy it tomorrow (and dispose again to the original owner) and your position is set by the difference.

In a short sale a drop in the price makes you money because (for instance) if you sold today at $3.00 and bought back at $2.80 then you made 20c per share. If however, the price goes up to say $3.20 then you have to make up the difference. This is before we get into other areas like options or any derivatives. An easy …

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Will lenders become landlords?

In a recent article on Money Marketing News they said that ‘Lenders in the UK are likely to become landlords by buying up distressed properties in an attempt to halt repossessions and stop house prices falling’ this was according to leading valuations firm eSurv.

This raises some interesting ideas for the Irish market which is seeing bad news filter through constantly, only today NIB released their figures showing they had lost over half a billion in 2008. The losses seem to be concentrated in their commercial lending sector, however, with such small margins on lending being one of their hallmarks, it is fair to assume that a few impairments would have an amplified effect compared to other banks.

In the UK the plan is to set up company that would purchase distressed properties and then turn them into a manageable portfolio until the market allows for disposal at a better price while offering finance against repossessed stock in order to improve marketability.

would this work …

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Irish Government bonds, what is happening?

Governments often have to raise money to achieve their objectives over the short and medium term, in Ireland we do this by raising bonds which is basically where a buyer (private or institutional) acts as the ‘bank’ for the state. The creditworthiness of our nation is currently the lowest in the Eurozone, below that of countries like Greece and Portugal. This means that we have to pay more interest to attract a buyer.

Today Moody’s (a rating agency) has put Ireland on watch for a debt rating downgrade (it means our debt will be considered less secure), and that means that we will have to pay even more in order to attract new investors for bonds. How this trickles down to the person on the street is simple, we’ll have to foot the bill eventually because the ultimate guarantor of state borrowing are the people in that country. The tools to achieve this with are higher taxes and less public spending, both equally unpopular.

For now we …

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The secondary insurance market 'settlements'

Often you hear about a ‘secondary market‘ and often it is related to bonds, in particular the likes of TBills (Tbills are US Government bonds that run less than 12 months, TNotes on the other hand run longer than a year). What this means is that there is a market which operates outside of the primary market – where the transaction first takes place. In the treasury realm (the likes of Tbills) the primary market is from the Government to the buyer – either institutional or private – and the secondary market is between (for instance) one private individual and another. Why does it exist? Simply because the maturity date on the bond may not suit the holder, so private individual A will sell to B rather than wait until the time the bond matures.

A Secondary market exists in many other areas too, one example is that of Life Assurance. There are companies …

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The secondary insurance market ‘settlements’

Often you hear about a ‘secondary market‘ and often it is related to bonds, in particular the likes of TBills (Tbills are US Government bonds that run less than 12 months, TNotes on the other hand run longer than a year). What this means is that there is a market which operates outside of the primary market – where the transaction first takes place. In the treasury realm (the likes of Tbills) the primary market is from the Government to the buyer – either institutional or private – and the secondary market is between (for instance) one private individual and another. Why does it exist? Simply because the maturity date on the bond may not suit the holder, so private individual A will sell to B rather than wait until the time the bond matures.

A Secondary market exists in many other areas too, one example is that of Life Assurance. There are companies …

Read More