Portfolio Construction - Part 8

Last year the Alt A category accounted for about 20 percent of the $3 trillion of U.S. mortgages, about the same as sub-prime loans, up from 5% in 2002 according to Credit Suisse Group, highlighting where much of the growth in US lending has occurred. Tighter lending standards may slash sub-prime mortgage sales in half this year and Alt A mortgages by a quarter, according to Ivy Zelman, a Credit Suisse analyst in New York who covers homebuilders.
The new requirements will force some prospective homebuyers to save more money for a down payment or risk being denied credit. The boom in the US property market has been fired by:
1) people and corporations being able to trade up properties and acquire properties more readily because these have been more affordable at such low interest rates
2) people who will be able to obtain credit at some point but should currently be saving up their deposits being offered deposit free terms now
3) people who by any logical commercial criteria shouldn’t really be able to currently obtain credit of such magnitude being offered it left, right and centre
All of this has compressed future demand - those without deposits and whose incomes aren’t yet sufficient to service the debts or whose circumstances aren’t sufficiently robust to ride through any short-term financial storms have been given credit that will in many cases lead to defaults, repos, damaged credit and instead of providing an economic boost, this will become a major economic drag.
Late payments of at least 60 days and defaults on Alt A mortgages have risen about as fast as on sub prime ones, to about 2.4 percent, according to bond analysts at UBS AG. Loans in the category made to borrowers with low credit scores, equity and documentation are doing about as badly as sub prime loans, according to Citigroup Inc. and Bear Stearns analysts.
Over the last couple of months rapid credit tightening that’s “been isolated to the sub prime world has really migrated” to Alt A offerings that involve borrowing nearly all of a home’s worth, said Brian Simon, senior vice president at Mount Laurel, New Jersey-based mortgage bank Freedom Mortgage Corp. Bear Stearns will finance 25 percent to 30 percent fewer non-prime mortgages this year as it tightens credit, Chief Financial Officer Sam Molinaro said on the company’s earnings call last week.
The impact here is 2-fold:
1) The market will continue to slow because the artificial stimulation of loans to people who can’t (or in the case of Alt A probably can’t) service them is going to be taken away. The market will weaken, asset values will continue to fall, better quality credit will start to suffer and defaults and repos will become more widespread. Credit will tighten in this slowing market, causing it to slow further, asset values will fall further, even better quality credit will start to suffer and defaults and repos will become even more widespread. The market will weaken even further, etc., etc. This is a difficult spiral to get out of until the market finds its floor and we don’t believe that Pimco’s Bill Gross is right in his assertions that aggressive rate cutting now can help to stem this spiral.
2) Lenders will be stuck with debt that they can’t sell profitably - many will suffer losses. Apart from the further contraction in credit that this will cause, the problems will filter through the financial system until the likes of Bear Stearns, Goldmans, etc., find their own books severely tested. We believe that there will be further corporate casualties in this market - we’re just not sure how many or how big. This could ultimately be an even greater problem than the S&L crisis and the impact on the general economy could be catastrophic.
The bottom line is that in the UK and the US too much money has been thrown (almost literally) at sectors where the growth has been too hot for too long with no regard to what will happen when the trend turns. This is also true in varying extents in economies like Ireland, Spain and Australia.
What can you do to protect/profit yourself from this problem with the property sector? Easy - get a Property Protector. This is an insurance product that protects the value of existing properties or an investment product that allows investors to gain from the falling price of properties. Which version you require depends on your circumstances but I can’t imagine that there’s anyone out there who shouldn’t be at least looking at this in some format.
To be continued…

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]@mbmg-international.com.com

Snap Shots: by Harry Flashman

Landscapes with the WOW factor

How many good shots do you expect from every 100 shots you take? 99? 100? 10? 1? I was thumbing through a photography magazine the other day and it had three pro photographers discussing how they go about bringing back great landscapes (and seascapes). Two chaps were happy with one great shot in 10 rolls of film (gasp!), while the other of the interviewed pros said he expected every shot to be perfect and he used 4x5 sheet film, but he didn’t pop the shutter until he was sure he had every element in the shot correct. Personally, I think he must hang about for a long time waiting.

Seascape by Joe Cornish

Again, when the three were asked what the principal elements were to get a “WOW” landscape, two of them went straight to the light factor, citing the quality of light. Perhaps one of the greatest reasons your landscapes fail is because you are not prepared to get up early enough to get the cold morning light, or are prepared to hang around long enough to get the warm sun just before it dips behind the horizon.
When asked about their extra gear they consider necessary to be professional landscape photographers, two said a tripod and the third wanted Blu-tack to keep his filters in place and a notebook and pen!
Looking at representative works from all three – and all were excellent shots, by the way, the use of the tripod was obvious to the trained eye. Soft ‘milky’ or frothy seas showing a long time exposure, or ‘filmy’ tree foliage were the giveaways, along with the incredible depth of field which results from the aperture settings of around f22, minimum, allowing depth of field sharpness all the way through the shot.
Another commonality was the film they used, with all of them going for Fuji Velvia slide film. This is nominally rated at 50 ASA, but when I have used it in the past I got the best results rating it at 37.5 ASA. Being slide film, you should also remember to bracket the exposures about half a stop either side of that indicated by the exposure meter.
One feature that was also evident, looking at their shots was attention to foreground detail, as well as the important features further back in the frame. All of them spent much time positioning the camera so that they had something of interest. For example, a shot of sea with an island in the background had beach rocks in the foreground. And all were in focus. That’s the tiny aperture again. They will even use a Neutral Density filter as well as the time exposure to keep that small aperture open longer. (A tip when using ND filters - focus without the filter in place, lock the focus and then put the filter on, otherwise it is too hard to see the individual items in the shot in the darkened viewfinder.)
As far as the best piece of advice they were given, they went for an alarm clock to get them out of bed early, so they did not miss the magic light of early morning. (Being a night person, who has difficulties with early mornings, is why I do not consider myself a good landscape photographer!)
To look at the final situation, from the words of the three pro shooters, if you want to get good landscapes then you need a camera with sharp lenses, get yourself a tripod - and use it to be able to have very slow shutter speeds, and practice with slide film. Wait for the light to be right (the more horizontal the sun’s rays, the better) and don’t bother if it is all wrong. One guy waited six days to get the light right for one lakeside shot! Make sure you have some interest in the foreground and get the deepest depth of field that you can.
Do all of that and you will be bringing in those WOW landscapes too! And for a change do try and use slide film. It’s harder to use but the results are better.

Modern Medicine: by Dr. Iain Corness, Consultant

Have I got Blood Pressure, Doctor?

Well, I certainly do hope you have blood pressure (usually known as BP), because if you don’t you are definitely dead! However, if your BP is too high, it can mean you could be claiming early on your life insurance policy – or your relatives will, on your behalf.
High BP (hypertension) is otherwise known as the “silent killer” as there are very few symptoms of the increase in blood pressure, until a vessel bursts somewhere, generally catastrophically! The good thing is you are dead within minutes, so you won’t linger.
Blood Pressure is needed to keep all the organs of the body supplied with oxygen. This is done by the red blood cells which carry the oxygen, with the pump to drive the system being the heart. The tubes from the heart heading outbound are the arteries, and those returning the blood to the heart are the veins.
This heart-arteries-veins-heart system is a “closed” circuit. In other words, no leaks, otherwise you would be continually losing the life-preserving blood, but to make it go around, there has to be a pumping pressure (just like the oil pump in your car).
The heart squeezes the blood inside itself and pumps it out into the arteries. This squeezing pressure is called the Systolic, and is the upper number quoted when we measure your blood pressure.
After the squeeze, the heart relaxes to allow the blood to fill the chamber, ready for the next squeeze. The pressure does not return to zero, because there has to be some pressure to refill the chamber. This resting or ambient pressure is the lower number quoted and is called the Diastolic. BP is then typically quoted as 120/70, being 120 (systolic) / 70 (diastolic). The actual pressure number is measured in a millimeters of mercury scale.
So what is your correct BP? Well, many years ago it used to be thought that your systolic BP should be your own age plus 100, and the diastolic did not matter that much. That was not correct! While many 60 year olds had a systolic BP of 160, research showed that this was not a ‘healthy’ pressure. To lower the risk, the BP had to be significantly lower.
The following table shows the categories of BP measurements.
Optimal: less than 120/80
Normal: less than 130/80
High-normal: 130–139/85–89
High blood pressure (hypertension):
Stage 1: 140–159/90–99
Stage 2: 160–179/100–109
Stage 3: 180 or higher/110 or higher
The problem with running at high pressure is that the heart is having to work harder, and therefore may be subject to heart failure. The arteries are also subjected to higher pressures than they were designed to cope with and can burst, making the risk of stroke so much higher. Other organs don’t like working at the high pressures either, and kidneys, in particular, can go into failure mode.
So how do you find out (before it is too late) if your BP is too high? Quite simply by repeated measurements. Note that I wrote “repeated”. Just as one swallow doesn’t make a summer, one elevated reading does not necessarily mean Hypertension.
Blood Pressure is a dynamic situation. Lying down you can have one BP. Get almost run over by a baht bus and you have another much higher BP. Blood pressure tends to be higher in the morning and lower at night. Stress, smoking, eating, exercise, cold, pain, noise, medications, and even talking can affect it. The single elevated reading does not immediately mean you have high blood pressure. Conversely, a single normal reading does not necessarily mean you do not have high blood pressure. In fact, the average of several repeated measurements throughout the day would be a more accurate picture of what is going on than a single reading, but quite frankly, you do not have to go to that extreme.
As part of the routine in most good hospitals and clinics is the measurement of your blood pressure. You should get this done at least twice a year, in my opinion. Rising or elevated readings do mean you should get medical advice. Have it checked today.

Learn to Live to Learn: with Andrew Watson

The Esther Benjamins Trust

Regular readers of “Learn to Live to Learn” will have noticed that at the end of every column, there has been a reference to something called, “The Esther Benjamins Trust” which I have had the privilege of supporting for almost a year. The charity was brought to my attention by my neighbour and colleague, Dave McCracken, a six-foot-six former British Soldier, whose size belied my assumption that everybody who has run with the Ghurkhas is tiny. It has been suggested that it was in interests of self-preservation that Dave has become a great friend. Actually, he’s the embodiment of a ‘gentle giant’ as anybody who has spent time working with him will testify. I heard him described as ‘intimidating’ once, which is utterly preposterous, although it is true that Dave doesn’t suffer fools gladly, so I suppose that fools, impostors and professional vagabonds have much to fear from him. Oh, and Mr. George Bush.

Steven Gailloud - the boy with the beaming smile.
Much of Dave’s work in recent years has been devoted to the welfare of the children who are supported by Esther Benjamins Trust, for whom he has been coordinator in Thailand. I thought it was the right time to tell you a little bit about it. Oh, and I should also make one very important point. Dave is definitely Irish and not British.
The Esther Benjamins Trust was established in 1999 by Lt Col Philip Holmes in memory of his first wife Esther Benjamins. Esther took her own life in January that year because of childlessness. Philip’s response was to resign from a successful career as an Army officer and establish a children’s charity in Esther’s name. This was not just as a memorial, for at the time of Esther’s death she was a Judge whose admirable qualities combined a sense of justice for the neglected and oppressed with a deep love for children. It is these values that are perpetuated through the work of the Trust that bears her name.

Dave McCracken -
he really looks like this.
Since its inception, the Esther Benjamins Trust (EBT) has grown rapidly to become the leading registered charity that works exclusively for disadvantaged and stigmatised Nepalese children and young people. Terrible stories about their captivity are common. One young girl said this upon being rescued, “I was overheard crying in my sleep and one of the circus staff beat me and my sister as punishment, until the stick broke.” EBT hopes that through the Circus Children project that the use of child performers in Indian circuses will become illegal, which in turn will close down a longstanding child trafficking route.
Dave has been to Nepal many times and he knows that all the money raised by the charity goes where it needs to go. No money is wasted. Nobody is driving around in Mercedes; everybody works flat out because there is so much to do.
One of the things the charity does is rescuing enslaved, trafficked and abused children and creating safe havens, after care and education for them in Nepal. Dave has taken international school students there and it has made a real difference to both the kids in Nepal and their rather more privileged guests. But the rich kids don’t go there for a holiday, they go there to work and just maybe they learn more about the world in one week than they have in quite a few expensive years of education.
Dave wanted to take a group from a school in Thailand but was told he would have to ‘prove’ himself by organising a trip locally first. This might sound reasonable until you recall that he spent twenty-five years in the British Army organising rather more difficult trips than student trips to Nepal! As somebody who has already concluded one highly successful career, Dave has not always been very impressed by what he has witnessed in private education.
What he has enjoyed doing is bringing students aged 3-18 a bit closer to understanding that they too can make a positive contribution to the EBT. For the last 18 months, every Saturday morning, at the occasionally difficult hour of 8am, he and another volunteer (me) have been running a ‘School of Football’ at Garden International School. For a small fee, students are coached towards awards authorised by the English FA and their fees are transferred directly to the EBT.
When you engage in a project like this, you suddenly become aware of how ripples of goodwill can become waves of change. One day, an IB student in Garden, Steven Gailloud, came up to me and asked if it would be all right for him to come and help coach the kids. All right? Steven is not only a boy with a beaming smile, he’s also an absolutely ‘dynamite’ footballer, an Artist indeed.
Then, a couple of his friends, Raymond and Simon, came down as well, similarly blessed with a remarkably positive mental attitude and a tremendous sense of footballing fun. They put some of their less enthusiastic and occasionally obstructive teachers to shame. These boys were ‘big’ people, with big hearts, ready to give not only of their ‘free’ time but also to a cause, happy and willing to share their divine talents with others. No petit politics were allowed to pollute their worlds. They led by example. If proof were needed (which it isn’t) of the altruistic nature of their efforts, then witness the victory of a Year 5 team in a recent Fobissea tournament. The members of that team were coached every Saturday morning at the Garden International School of Football and won the tournament at a canter for a neighbouring school. Now that’s outstanding work for you.
This year alone, the School of Football has raised well over a thousand dollars and real lives are being changed in real ways as a result. Dave McCracken, all six-foot-six of him, has asked me to say a massive ‘thank-you’ to all the students and parents for all their support during his last two years in Thailand. With his wife Stella (the world’s best Maths teacher) he’s just moved to Hong Kong and a thoroughly appropriate place for two such richly talented and ethical individuals; the United World College at Li Po Chun, one of the very best schools in the world.
Andrew Watson is a Management Consultant for Garden International Schools in Thailand. andreww@ gardenrayong.com
All proceeds from this column are donated to the Esther Benjamins Trust. www.ebtrust .org.uk email: [email protected]
Next week: La Dolce Vita

Little people play a part in a bigger future.