5 Wealth-Building Resolutions For 2015

After five long years, the statistics show that average earnings are finally inching ahead of inflation. Which means that in real terms, we’re all starting to get that little bit richer, with a little more purchasing power in our pockets.
 
But here’s a question for you: how much of that added income do you anticipate being able to turn into wealth? Wealth to sustain you in retirement, for instance? Or wealth to achieve that longed-for transformation in your standard of living?
 
The fact is, most of us aren’t very good at this. Income gets frittered away, with precious little actually saved.
 
Worse, what we do manage to save often turns out to do little for us by way of wealth-building. Stick your money in a cash ISA, for instance, and the inflation-adjusted return is either zero or negative.

Make the break

So if this sounds like you, then what can you do about this sorry state of affairs?
 
Actually, the answer isn’t difficult to find. And it’s this: simply do things differently from how you do them at present.
 
In other words, if your present wealth-building plans aren’t delivering, then it’s time to ditch them and switch to something else.
 
Simply put, inertia just isn’t going to deliver on the wealth front. You have to act differently – or yet another year will go by, leaving you only marginally better off.

5 resolutions that could make a difference

So what – specifically – can you do differently? Here are five New Year’s resolutions designed to help make that vital difference.
 
The good news: you don’t have to join a gym, start jogging or go on a crash diet.
 
The not-so-good news: if you really want to make a difference to your wealth, you’re going to have to overcome a lifetime’s habits built up by living in our consumerist, instant-gratification society. Which isn’t easy.
 
It might not be comfortable, but at the end of the year, the figures should speak for themselves. Namely, you could be wealthier than you are now. And, even more importantly, you could be wealthier than you would have otherwise been.
 
So here we go

1) Spend less, save more

Fairly obviously, wealth-building starts with saving. So save more.
 
Now, I’m not going to trot out the familiar line about taking sandwiches to the office, and cutting back on indulgences such as take-out coffees. Yes, such things work – but the point is to find things that work for you.
 
And don’t kid yourself: it isn’t going to be easy. After five or so years of falling real living standards, most of us have cut out a lot of wasteful expenditure and become canny bargain-hunting shoppers.
 
So it’s a question of making real choices. Which, oddly enough, has the potential to deliver larger savings than the odd missed latte.
 
A new car this year – or in two years’ time? Holiday abroad, or in the UK? And is that kitchen refurbishment really, really necessary?

2) Harness the power of the stock market

So what to do with the resulting cash? Fairly obviously, cash savings accounts – especially with interest rates at their present level – are largely useless.
 
It has to be the stock market. Time and again, research shows the long-term wealth-building power of investing in solid businesses that are throwing off decent dividends.
 
And if those solid businesses happen to the temporarily under-valued, then there’s the prospect of market-beating capital growth, too.
 
You have to take a long-term view, of course, and accept that your capital is more at risk than if youd stuck the money in a savings account.  That’s what long-term wealth-building is all about. There will be good months, and bad months. And good years, and bad years.

But overall, you should be moving in the right direction.

3) Cut the costs of investing

You work hard for your money. Those savings have been painful. And you’re in it for the long term.
 
So don’t let fees and charges as act as a brake on that long-term wealth-building. Ditch those high-charging investment funds and fancy ‘wealth management’ brokerage platforms, and head to the no-frills cheaper end of the market.
 
I’m all for having a solid core of low-cost index trackers. But for active investment in individual businesses, I dont think you can beat managing your own investments.
 
Pay for advice, by all means – but consider getting out of high-priced funds, and holding your stock market investments via a low-cost execution-only brokerage platform.

4) Create some thinking time

You can’t operate in a vacuum.
 
Successful investment is about making judgments: judgments as to where the gains could be greatest, judgments as to where the income streams will be most sustainable, and judgments about where the risk will be lowest.
 
So put aside time to read, research and think. Browse the internet. Set up a different ‘investing-specific’ email address, and subscribe to blogs, newsletters and free opinion and research.

You won’t agree with all of it. You may not understand all of it. But you will learn from it.

5) Measure your progress

As with losing weight, getting fit or cutting back on smoking or drinking, motivation is everything.
 
Some people keep spreadsheets. Some maintain ‘tracking portfolios’ on services such as Google Finance. And others make a habit of regularly checking their brokerage account.
 
Frankly, it makes no odds. The important thing is to find something that works for you, and then do it.
 
What, specifically, are you looking for? Your first share that has ‘double-bagged’, or – even better – triple-bagged, for instance. The first time that a share has paid you more in dividends than you spent on the investment. And your ongoing progress towards that six-figure (or seven-figure) amount of wealth that you’ve been targeting.

Go for it

So there you have it: five wealth-building resolutions for 2015.
 
Give up in February, and you’ll probably be no richer in 2016 than you were in 2014. But stick with them, and you’ll have laid the foundations that could lead to future prosperity.
 
What’s not to like about that?

6 things you need to know before buying your first home

Buying a home for the first time is a big step. Realtors Jenny Gura, of Washington Square Realty, and Jeff Plesko, of Caldwell Banker Realty, share their tips on what to do when considering the big purchase.

1. Check your credit score.

2. The most important thing is to know your budget. Talk to a bank and get preapproved before you even talk to a realtor. The loan officer can give you a breakdown of what your payment would be and you can decide on your comfort level.

3. If you can, have a downpayment saved to help reduce the size of the loan.

4. Use a realtor. They are well-versed in the legalities and particulars of selling and buying a home and can save you headaches if you were to try a private sale.

5. Think about your future space needs, such as if you expect your family to grow. This can affect the homes realtors will show you so you wont run out of space within a few years.

6. Have a home inspection done. You need to know what you are buying.

Ginnie Mae securities rally, driving mortgage REITs

Ginnie Mae and the to-be-announced market

The Fannie Mae to-be-announced (or TBA) market represents the usual conforming loan, the plain Fannie Mae 30-year mortgage. Meanwhile, Ginnie Mae TBAs are where government loans go, such as the Federal Housing Administration (or FHA) and Veterans Affairs (or VA) loans.

The biggest difference between a Fannie Mae mortgage-backed security (or MBS) and a Ginnie Mae MBS is that Ginnies have an explicit guarantee from the federal government. Fannies don’t have a guarantee, just a wink-wink, nudge-nudge guarantee. As a result, Ginnie Mae MBS trade at a premium compared to Fannie Mae TBAs.

Military Family Receives Sub for Santa

LINDON, Utah, Dec. 23, 2014 (GLOBE NEWSWIRE) — Christmas will be a little better this year for a Wyoming military family that has endured its fair share of struggles.

The Atchley family was recently selected as the Low VA Rates Sub for Santa recipient and has received many Christmas gifts and an additional $1,500 check from Low VA Rates.

The Atchley family has recently passed through some tough times and needed the extra help during the holiday season to provide a nice Christmas for their family.

The father was recently discharged from the Air Force and has struggled to find employment since. The mother is taking care of their four children and has also not been able to find employment.

After receiving all the applications, Low VA Rates decided the Atchley family was the perfect Sub for Santa Candidate.

You really have no idea how much of a burden Low VA Rates has taken off my husband and I, A. Atchley said. We are so grateful for Low VA Rates making this Christmas a miracle for us.

Low VA Rates has assisted families across the nation with various charitable events and donations, and has provided a Christmas donation to a family in need for the past four years.

President of Low VA Rates, Eric Kandell, loves the holiday season to give back to military families in need.

We have always made it a point to give back during the holiday season to military families in need, Kandell said. This year the Atchley family really stood out as being a wonderful military family that needed some assistance and we were very pleased that we could help out.

The father has strong ties to the military and has been serving our country for the past 5 years until his recent discharge. He joined the military in 2009 and later became a services apprentice after technical school. The family has been stationed across the nation and he also served a tour in Iraq with the 332 Expeditionary FSS during Operation New Dawn.

The Atchley family is everything good we see in military families and we are honored to be able to help them out this Christmas, Kandell said.

The four children of the Atchleys received many gifts from Low VA Rates including: clothes, action figures, speakers, bedding and even a Huffy green machine. The additional $1,500 donated will be used to help make Christmas a wonderful time for the Atchley family this year.

It has been a hard year for us, but we are still keeping our holiday spirit alive! A. Atchley said. We are so grateful to Low VA Rates and it will be nice to give my children the Christmas they deserve.

Low VA Rates has donated over $12,000 in charitable donations in 2014 and plans to continue to give back to the community and military families.

Since Low VA Rates has opened its doors for business we have always made it a point to give back to military families. Kandell said. We love all that have served in the military and give our heartfelt gratitude for sacrificing their lives to preserve our freedoms.

ABOUT LOWVARATES.COM

Low VA Rates, NMLS #1109426 is dedicated to serving veteran homeowners. We specialize in providing VA loans to qualified veterans for home purchases and refinances. These loans provide lower interest rates and monthly payments than other traditional loans.

Low VA Rates is one of the nations Leading websites for VA Loan Information and is dedicated to assisting all the men and women of the United States Military, both active and retired. We have built a reputation of serving those that have served us, and doing everything we can to ensure home ownership for all.

VA loans are one of the only programs left that allows no-money-down loans providing a secure mortgage option guaranteed by the Federal Government. Our professional staff and loan officers will assist you to lock in low interest rates and take advantage of the unique opportunity provided through VA loans.

CONTACT:
Craig Walton
Director of Public Relations
pr@lowvarates.com
Office: 801-341-7048

Craig Walton
Director of Public Relations

Office: 801-341-7048

Mortgage Rates Drop To 3.80%; Experts Forecast More Falling Rates

Mortgage Rates Drop To 3.80%; Experts Forecast More Falling Rates

  • Mortgage Rates

Current Mortgage Rates Resume Downward Trend

Mortgage rates have moved to their lowest levels of 2014. Will they start the New Year even lower?

For the fifth time in six weeks, the average 30-year mortgage rates dropped last week, reaching 3.80% nationwide. Low interest rates are giving a boost to home affordability and are boosting the purchasing power of US home buyers.

Also, millions of US households are now eligible to refinance to todays low rates.

Many lenders now quote rates in the mid-3s with equally low APRs. Even zero-closing cost mortgages can be dirt-cheap in todays mortgage rate environment.

Its an excellent time to consider a refinance of your existing home; or to check payments on a new one.

Click to get a rate quote.

Todays Mortgage Rates Average 3.80%

According to Freddie Mac, the average 30-year fixed-rate mortgage interest rate fell 13 basis points (0.13%) last week, to reach 3.80% nationwide. The rate is available to mortgage borrowers willing to pay an accompanying 0.6 discount points due at closing.

The cost of 0.6 discount points is 0.6 percent of your loan size, or $600 per $100,000 borrowed.

This 3.80% mortgage rate is available to prime borrowers, which is defined as borrowers with a high credit score, verifiable income, and twenty percent down for a purchase. Other conventional mortgage borrowers can expect to get slightly higher rates.

As compared to the start of the year, rates are down nearly three-quarters of one percent. According to Freddie Mac research, the typical refinancing household now saves more than 30% per month via refinance.

A $1,000 payment can be lowered to $700.

There are huge numbers of homeowners who can realize savings, too. For example, homeowners with less than one year in their home are eligible to refinance and save money; as are homeowners wanting to refinance an FHA loan to get rid of FHA MIP.

Meanwhile, as mortgage rates drop, its getting easier to get a zero-closing cost mortgage.

A zero-closing cost mortgage is a mortgage transaction for which the lender pays all closing costs normally paid by the borrower. In exchange for paying all closing costs, the lender raises the borrowers mortgage interest rate by a small amount — typically 0.125% for a loan of $250,000 or more.

In states in which closing costs are high, zero-closing cost mortgages can be a terrific way to lower your monthly payment without the risk of recouping your costs over time.

Click to get a rate quote now.

HARP, FHA Streamline Refinance amp; VA Streamline Refinance Options

Mortgage rates are at their lowest levels of the year and their best in more than 82 weeks. Strangely, though, and perhaps because rates have dropped so gradually since January, large numbers of homeowners appear unaware that refinance opportunities exist.

The government is trying to fix that.

In a series a town hall-style meetings, FHFA Director Mel Watt has been meeting with homeowners and imploring them to explore their eligibility for the Home Affordable Refinance Program (HARP); and has introduced a program for homeowners which allows 97% LTV.

On average, HARP homeowners save several thousand dollars per year and the newest HARP loan rules make qualification easier. Even if youve been turned down for HARP in the past, it may be wise to re-apply at todays low rates with todays new rules.

Another homeowner set now eligible for refinance is those with an existing FHA loans or VA loan. Both programs offer a streamlined refinance to homeowners who can demonstrate that the refinance is worthwhile and the most common way to prove a refinance is worthwhile is by showing that it lowers your payments.

With mortgage rates dropping, FHA Streamline Refinance opportunities are opening up for todays FHA-backed homeowners; as are VA Streamline Refinance opportunities for todays VA-backed homeowners.

Click to get an instant mortgage rate quote.

Buyers: Loans Requiring Little Or No Money Down

Current mortgage rates are also helping todays buyers to purchase homes more affordably.

Since January 1, fading mortgage rates have boosted purchasing power close to eight percent. Today, a homeowner can purchase $8,000 more home for every $100,000 approved as compared to the start of the year. This extra eight percent may afford you an extra bedroom; an extra bathroom; or a home in a different school district, if thats whats important to you.

Mortgage rates are improving your purchasing power faster than rising home prices can erase it.

Additionally, low- and no-downpayment mortgage programs remain readily available nationwide.

Among the most popular programs of such programs is the FHA 3.5% downpayment mortgage and the conventional 97% LTV mortgage.

Available to buyers in all 50 states and the District of Columbia, the FHA 3.5% downpayment mortgage is the Federal Housing Administrations flagship mortgage program. Loan sizes of up to $625,500 are permitted, and the FHA gift funds for downpayment from parents, family, and others.

Furthermore, because the FHA loan is insured by the government, FHA loans are often aggressively priced and not subject to adjustments for less-than-perfect credit scores; or, for 2-unit, 3-unit, or 4-unit homes.

The Conventional 97 loan is similarly flexible. Allowing for downpayment gifts and even average credit scores, the 3% downpayment program from Fannie Mae and Freddie Mac helps homeowners with ample annual income but who may lack the asset reserves for a large downpayment.

Another low-downpayment program which is popular is the VA loan program, which is backed by the Department of Veterans Affairs.

Available to military borrowers, the VA loan requires no downpayment whatsoever and annual mortgage insurance premiums are not required. Similar to FHA loans, VA loans offer flexible underwriting standards and, among all mortgage rates, VA mortgage rates are currently lowest.

Lastly, there is the USDA loan, which is guaranteed by the US Department of Agriculture.

Also known as a Rural Housing Loan, USDA loans arent just limited to properties in farming communities and rural towns. Homes in suburban neighborhoods are often eligible as well.

USDA loans allow for 100% financing and mortgage insurance requirements are inexpensive as compared to FHA and conventional mortgages.

USDA loans are available from most major lenders.

What Will Mortgage Rates Do Next?

This week, mortgage rates will rise, fall, or remain unchanged. Its impossible to know. However, that doesnt stop experts from making a prediction.

The Mortgage Reports hosts a weekly mortgage rate prediction game called The Mortgage Rate Game in which loan officers, real estate agents, and other industry experts; as well as consumers and others compete for the title of Best Mortgage Rate Predictor.

The game is free to play and winners are awarded prizes for their accuracy. To play, go to The Mortgage Rate Game and click Sign Up.

Here are some predictions from this weeks players.

https://twitter.com/mortgagereports/status/545644913082134528

https://twitter.com/mmi_tim/status/545616079989391362

https://twitter.com/jmazmortgagepro/status/546014025213964288

https://twitter.com/skinnerrealty/status/546699375288651776

https://twitter.com/1seanyoung/status/545409094907985920

https://twitter.com/jglynn/status/545677582952177664

Get Todays Mortgage Rates Now

Mortgage rates today are low and pricing continues to improve. Its an excellent time to consider a refinance or to buy a home affordably.

Compare todays mortgage rates now. Rates are available for free online, with no obligation to proceed, and with no social security number required to get started.

Click to get todays live rates.

Nonprofit gets grant to focus on Larimer

A local nonprofit with a strategy to help low-income people build wealth by owning and living in buildings with tenants now can hire staff using a $60,000 grant from Neighborhood Allies.

Neighborhood Allies, a grant-making nonprofit focusing on low-income areas to make what it calls catalytic grants, dispensed $478,000 to seven groups in the latest round of giving.

CARE Ownership was established in 2007 as an all-volunteer organization. Its goal is to buy blighted multi-unit buildings, renovate them with help from volunteers and train qualified buyers to become owner-occupying landlords.

The grant responded to the agencys decision to focus its program in Larimer so that neighborhood residents can get a jump on buy-ins ahead of a wave of hundreds of units of mixed-income housing.

KBK Enterprises is building 40 scattered-site, multifamily units in the neighborhood. Another 350 units are slated for a multiple-use development paid for through a $30 million federal Choice Neighborhoods grant, $12 million in city money over five years and $16.5 million from the citys Housing Authority.

CARE Ownerships first and only property so far is a duplex it bought for $11,000 out of foreclosure in Marshall-Shadeland. It has been gutted and refurbished as the organizations prototype for the inaugural client, a man who is renting one unit while renovations are completed, said Linda Schultz, who founded the agency.

We have put more into it than I want to say, she said. But it is a 100-year-old house that had not been maintained. It has all new systems and insulation and was gutted with help from organizations including Pittsburgh Job Corps, she said.

Ms. Schultz said the prototype embodies early lessons learned.

We need to partner with experts in acquisition and renovation, she said. We spent last year digging deep into business and strategic planning.

CARE Ownership won a $4,000 grant from a fast-pitch presentation to Social Venture Partnerships in February.

That led to connections, networks and coaching, she said. The next step was a partnership with East Liberty Development Inc., a nonprofit that has built expertise in real estate over many years.

East Liberty Development will be helping CARE obtain six properties and help six people become owner trainees in Larimer, Ms. Schultz said.

There are a lot of opportunities coming up to revitalize there, she said, and we want to make sure the residents there now will benefit from neighborhood improvements by entering early with a strong support program.

We will consult with neighborhood groups in the acquisition process to make sure it agrees with neighborhood plans.

The $60,000 grant will pay a program manager, she said.

CARE Ownership commits three years of support, training and mentorship to the prospective property owner, who must have at least a 40-hour-a-week job. Through fundraising and grants, it expects to buy foreclosed, blighted multifamily properties and select applicants to get the free training in renovation, personal and communication skills, tenant management, and entrepreneurial business development.

During training, candidates for CARE Ownership get subsidized rent and help in buying the renovated property, at 25 to 30 percent below market value, with five years of follow-up mentorship.

Talia Piazza, a program manager for Neighborhood Allies, said CARE Ownerships model is truly catalytic because it brings a wealth-building method to people of modest means and removes blight.

Maine bank tests innovation on 15-year wealth-building home loan

Tue Dec 16, 2014 15:25 PST

Maine bank tests innovation on 15-year wealth-building home loan

A small bank in southern Maine is giving a new 15-year wealth-building home loan concept its first real-world test.

Androscoggin Bank is one of the first lenders in the US to offer the 15-year, wealth-building product, and the first private bank to offer the product with no subsidy. The bank has made a significant change to the product, but has retained the spirit, which is to help borrowers build equity
quickly.

American Enterprise Institute (AEI) economists Stephen Oliner and Edward Pinto
designed the Wealth Building Home Loan to allow borrowers to pay little interest, allowing them to build up equity to protect their home in case of an economic crisis like a job loss or even a housing crash.

To bring down the monthly cost of a 15-year loan, the wealth builder allows borrowers to use their downpayment money to buy down the interest rate. With that, borrowers get a lower monthly payment while building equity by paying more toward the principal.

The Boston-based nonprofit Neighborhood Assistance Corp. of America (NACA) was the first lender to offer the loan. NACA allows borrowers to buy half percentage points for $1,000. Based on a 3 percent interest rate, a borrower could achieve a zero percent interest rate on a $100,000 home for just
$6,000.

The NACA model is heavily subsidized, and not designed to turn a profit. Bank of America and Citigroup have supplied NACA with billions of dollars to subsidize its wealth-builder loan, as well as a slew of other low-cost mortgages aimed at low-income borrowers.

A non-subsidized
model

Joseph Ferris, vice president of mortgage lending at Androscoggin Bank, read about Pinto and Oliner’s wealth builder in a blog post. The bank was already using many techniques unique to the wealth builder, particularly a residual income underwriting guideline.

Ferris wanted to bring the product to his bank, but lacked a pricing model to keep the 15-year term affordable and make it profitable. The bank could not afford to subsidize the loan like NACA.

“In order for it to be sustainable, you have to be profitable,” Ferris says. “I had to figure out how to price this to have traction in the real world — to have it benefit the consumer, which it clearly does, and be profitable and sustainable to the bank and the community.”

The solution: Ferris split the loan into two chunks. In the beginning, borrowers buy three points to get the interest rate down to 1.75 percent, where it stays for seven years. In year eight, the rate increases to 5 percent.

Regardless of the payment increase, a borrower has about 45 percent equity by year eight, Ferris said, far more than the equity a borrower would build with a 30-year mortgage.

“By [year eight] you’re a seasoned homeowner, hopefully you’ve got some advancement in your career — at that point it shouldn’t be a payment shock,” Ferris said.

Androscoggin has not officially marketed its
version of the wealth builder yet, but it is offering it to customers. The bank has originated two mortgages — one for $356,000, the other for $187,000 — and has four more in the works.

On average, the monthly payment goes up about 13 percent in year eight, Ferris has calculated. There is no mortgage insurance requirement.

Testing it out

Many in the mortgage industry praised Pinto and Oliner’s wealth-builder concept when it debuted this fall. A headline in Bloomberg Businessweek called the product “A better mortgage for lower income borrowers.”

Ellen Seidman, a senior fellow at the Urban Institute, challenged that assertion. She calculated whether a 15-year product could be as affordable for low-income borrowers as a typical 30-year Federal Housing Administration (FHA) loan.

Seidman determined that it would be
impossible for a for-profit lender to keep monthly payments on 15-year mortgage as low as a 30-year FHA loan. Even at zero percent interest, a monthly payment on a $200,000 home would be $23 per month more than on a 30-year loan.

Assessing the Androscoggin Bank wealth-builder model, Seidman found that the monthly payment on a $175,000 loan would be $1,106 for the first seven years (excluding taxes), and would jump to $1,253 in year eight, well above a monthly payment on a 30-year FHA mortgage.

Still, Seidman had praise for the innovation, and underscored that building equity so quickly is a big benefit. Ferris said that the bank’s wealth builder is not necessarily for low- to moderate-income borrowers, but did allow that it could have some Community Reinvestment Act (CRA) applications.   

Seidman suggested that a debt-to-income ratio target of 30 percent is best to allow room for the year-eight payment increase.

“In short, this looks like a very useful product if underwritten in a way that minimizes the potential for serious payment shock in year eight,” Seidman wrote in an email to Scotsman Guide News. “I’m glad to see a community bank trying this. It will be helpful to the industry, advocates and
policy makers to know how many loans they ultimately make, the demographics of who gets them and how they perform.”

Ferris said the bank has set aside about $4 million to test its version of the wealth builder, and the bank has about $1.5 million in the pipeline already. From there, the bank will assess the program to see if it is worth expanding.

“The guy who invented the Edsel probably thought he had a great vehicle,” said Ferris, referring to the ultimately unsuccessful Ford spinoff from the 1950s. “But my gut instinct tells me that, at least for us, this product is going to stick around. I think everybody wins on it.”

Eyeing a presidential run, Jeb Bush cuts some of his financial ties

When Jeb Bush completed two terms as governor of the US state of Florida in 2007, he reported his net worth at US$1.3 million, about US$700,000 less than when he took office.

Today, nearly eight years later, he is a wealthier man. He has plunged into business and entrepreneurial ventures involving consulting, the paid lecture circuit and energy development. He has developed real estate, advised international investment banks and joined high-paying corporate boards.

But as he considers a run for president in 2016, Bush has begun to unwind some of his financial affairs, apparently to avoid the kind of criticism that hobbled fellow Republican Mitt Romney in his unsuccessful bid for the White House in 2012.

Bush is quitting Tenet Healthcare Corporation, a company that has profited from Obamacare – and is ending a consulting contract with Barclays Bank to focus on his political future.

Aides say he also has stopped giving highly paid speeches to focus on travelling around the United States, meeting with potential donors and testing what a friend calls a visionary brand of campaigning.

But Bushs business record, enmeshed in international finance and some troubled former ventures in south Florida, could end up complicating his return to politics and his hopes to follow his father, George HW Bush, and his older brother, George W. Bush, into the Oval Office. Last year, he took a step into the rarefied world of private equity and offshore investments, joining with former banking executives and a Chinese airline company to make bets on natural gas exploration and shipping. One of the funds was set up in the United Kingdom, a structure that allows the company to shield overseas investors from US taxes.

During the 2012 race, Romney drew ceaseless attacks from Democrats for his lucrative work at Bain Capital, a pioneering venture capital company that bought scores of troubled companies, took over their management and sometimes laid off employees while garnering huge fees and payouts.

But Bush and his aides argue that his investments and entrepreneurial ventures are different because he isnt taking control of companies and restructuring them.

These are all growth investments that the governor has worked on, said Bushs spokeswoman, Kristy Campbell.

Bushs latest undertaking is as a partner in three privately held funds that have raised a total of US$127 million for investments in domestic and foreign companies. Bill Parish, an investment adviser, says the funds are fairly small in the private equity world.

But in the heat of a political campaign, Parish said, opaque investment vehicles, especially involving overseas accounts, inevitably would raise questions about their investors and nature of business. If hes smart, hes going to take care of it and shut them down, Parish said.

Campbell said the former governor was reviewing all his engagements and his business commitments now that he had begun to focus on a potential race for president.

Born and raised in Texas, 61-year-old Bush became Floridas governor in 1999 and served until 2007, the first Republican to hold two-terms in Florida. After leaving office, he set up Jeb Bush and Associates, a management consulting firm. Bush has said the firms clients range from Fortune 500 companies to small tech startups, but Campbell declined to discuss the companys business or identify its clients.

He was grabbing at a lot of things to make money quickly, said Susan MacManus, a political science professor at the University of South Florida.

Now Bush has begun to pull back, including resigning from Barclays and Tenet Health, both by December 31.

Among his private equity forays which began last year, with three banking partners and amounting to US$127 million, is BH Global Aviation. Based in the United Kingdom, it raised US$60.8 million and is invested in Hawker Pacific, an aviation sales and services firm based in Hong Kong that mainly does business in Asia and Australia.

 

Why Buy-And-Hold Doesn’t Work For Investor Wealth Builders

Bamp;H is just dandy if youre capital-rich

But not if you are time-pressure poor. Were not talking about meeting the rent-money needs here. What is at issue is the lurking problem for those that think they are time-rich. Or for those that used to think so, then listened to the Bamp;H platitudes, and now find themselves time-paupers, when they look at their todays inadequately increased capital in comparison to the calendar of offspring college expense needs, retirement continuing expense requirements, or medical emergency expense needs.

As we have spelled out in SA articles here, here, and here, the power of financial compounding resides in the passage of time. We all only have from now on. We cant go back and get a re-fill. And time is, for many, far easier to squander than money. All we have to do is just not pay attention.

And the Bamp;H seduction is so appealing

You dont have to work continually at Buy amp; Hold. Just do a little superficial scouting around now for stocks or ETFs that cant fail and have steady growth records, buy em – some now and some more every month, quarter, or year – if you remember to – or whenever you have extra cash. Dont worry about timing, because nobody can time investments or the markets. So just take what everybody gets – the average, including some dividends. And never sell, because uncertainty will likely keep you from getting back in when you should have. (That point in time will be obvious after the fact, and who wants to wear that Was I dumb? Kick me sign.)

This is the Bamp;H sales pitch.

But what is the reality?

How much do the averages grow, including reinvested dividends? Over 30 years the major stock price indexes have grown in price at a compound annual rate of +8.7% for the Dow Jones 30 (NYSEARCA:DIA), +8.1% for the Samp;P 500 (NYSEARCA:SPY), +12.5% for the Nasdaq 100 (NASDAQ:QQQ), and +7.2% for the Russell 2000 (NYSEARCA:IWM) (small cap stocks, 28 years). To add in dividends on the Samp;P500, in the ETF form of SPY during its 21-year history, dividends have added +1 frac34;% to its growth rate, so figure nearly +10% a year, total.

Savings bankers, insurance salesmen, mutual fund peddlers, and financial planners all love to talk about how those numbers can turn a $10,000 investment into variously $100,000 to $340,000 if simply held for 30 years. Simple, if you have the 30 years before you need the money, and of course, the $10,000 available in your early years.

Somehow, turning $1,000 proportionately into $34,000 over 30 years doesnt sound so impressive. If you saved up the $1,000 then by riding the bus, so that you could buy a car now — well, you get the idea.

The exigencies of life constantly seem to get in the way for many of us, attacking the good intentions and wise parental counseling of thrift, restraint, sensibility, and self-discipline we know are right – usually; but right now we need to… That is what makes time so valuable.

How to buy time (?)

We cant. But we can seek to grow our financial resources faster than average; the 8% to 12% a year that markets seem to offer without any real continuing effort.

In a place as avaricious and competitive as the investment markets, everything has a cost. The most inclusive description of investment cost is risk. Usually the bigger the return (the more that is won on a given investment in a shorter time period) the higher the risk cost is likely to be. But we need to be careful about what risk really means.

Investment risk really means a realized (not potential) loss of capital. Much of the investment literature seriously confuses uncertainty with risk. Uncertainty can contain the setting for risk, but it also contains the setting for opportunity. Statistical measurement of historical price uncertainty uses a measure (standard deviation) that equates the price deviations – from the mean price – to the upside as well as to the downside.

What the measure is saying is that there is as much upside price change opportunity as there is of downside risk exposure. But what if thats not so? Some 50 years ago two Stanford University professors, Amos Tversky and Daniel Kahnemann performed Nobel Prize-winning experimental analyses which showed that investors feared loss more than they were attracted by gain. Interesting, but they never determined that investors were repelled by gains.

Other academics of the era sought to concoct an elegant and elaborate means of measuring risk that could be incorporated into risk~return tradeoff analyses. The standard deviation of returns suited their purposes if one simply ignored the positive side of the distribution and instead focused on the negative. Unfortunately, the intellectual dishonesty of that approach, while commercially successful for consultants, turned the Capital Asset Pricing Model from CAPM into CrAPM.

Real life investment risk~reward tradeoff situations are rarely symmetrical in their arrays of opportunity vs. danger. In the investment world the commercial liability of revealing the true extent of negative exposures of equity investment propositions is that the revealer becomes a despised person among the community of proposers.

Please re-read that last sentence, because it explains the behavior of otherwise intelligent persons. So consultants, academics, and investment bankers do as much as is possible to obfuscate risk realities.

Unfortunately, even professional investment societies have been taken in by such community social pressures. Only after several decades of the demonstrated failure of widely accepted practices (like CAPM) are the true problems being recognized, and the focus is starting to shift toward alternative means.

One such avenue is the recognition of the game aspects of investment transactions and market-making. The role of game-players and their behaviors is becoming labeled by the general description of Behavioral Finance. Much of it so far has focused on human behavior that is in error, with hopes of investors making money at the expense of the misguided. So far that has produced only trivial results in terms of useful investment practice.

An alternative branch instead focuses on what skilled investment players do that is right, and is becoming regarded as Intelligent Behavior Analysis. It forms the basis for logical price range forecasts being made by essential market-making professionals. These forecasts are powerful wealth-building tools when used in a disciplined portfolio management process.

Instead of producing the average single- to low-double-digit annual rates of gain, they regularly offer net realized rates of gain of +40% to +60% or more. That happens because instances of triple-digit and even quadruple-digit annual rates are interspersed with many strong double-digit gains and infrequent experiences of unavoidable low double digit realized losses.

The Win-Loss ratio and what odds are about

If timing investments means never taking a loss, then the naysayers are right, nobody can time the markets – except for frauds like Madoff.

Loss experiences in making equity investments are inevitable, if you care about the high cost of time erosion. If you dont, and follow the NEVER SELL maxim, it will be your heirs that realize the losses as they take over the remains of your accounts. With far less to relieve their then financial needs than could have been provided.

Think Eastman Kodak and other Dow Jones Index departees.

The key to handling losses is to have a sensible understanding of how likely and how large a capital loss exposure may be, and to have a disciplined plan for either recovery or acceptance of loss. Without such a plan and discipline, human emotions take over and losses become destructive.

Here is where the price range forecasts of experienced market professionals that are derived through Intelligent-Behavior analysis make another significant contribution. Those forecasts are being made by a systematic examination of contemporaneous forward-looking judgments, a system that is consistent across time. The system is consistent because it produces anticipations that are constantly changing.

So, what good is a consistent system that produces varying results? Answer: The results can be observed and recorded across time, the same way that life insurance actuaries build morbidity tables, and sports fans build player batting averages or yardage gains. Those results have forecasting value, as long as the scorekeeping system does not change.

Actuaries have it made; when youre dead, youre dead, and its absolute. Then, over time they can observe how long the average person lives, or how that is changing thru time. Or how it may differ from the average among people pursuing high-risk occupations, like flight-deck crews on naval aircraft carriers.

By keeping the Intelligent-Behavior analysis consistent across decades, as has been done, we can observe important things about specific securities, like how far their prices might decline before they recover to forecasted heights, or to new record heights. Consistent analysis provides records of how frequently the balance between upside and downside price change potentials occur at various levels through time. And then, what the price decline and recovery experiences have been subsequently for the security at any given level of that prospective upside to downside balance. Like todays balance.

That lets us build tables of odds for price recoveries during specified position holding time-limit periods. If price declines are inevitable in virtually all equity securities, does that sound like useful information to have? It is. When such information is at hand, the decision to either accept a loss or hold off for a recovery becomes a reasoned process, rather than an emotional one. Now investment risk has a chance to be understood, and investment management has a better chance to be fit to the investors preferences.

It has a much better chance than by investors getting risk-pacified by some managers vague, obscure, dimensionless fuzzy notions, accompanied by a lot of hand-waving. (Hands later waving bye-bye to gonzo investment capital?)

Buy amp; Hold is literally a waste of time

It is, because it operates from the presumption that all equity investments, especially the one(s) you own, will always rise (sometime before you become actuary-bait), no matter how far they may have fallen, or how long it may take. Where recoveries do occur, those price round-trips consume precious time, while providing no additions to return amounts. This is the high cost of undisciplined time erosion.

Any portfolio management philosophy that does not ration investment holding period time is not a discipline, it is an excuse. When done by a hired manager, the chances are he is more concerned about losing a customer through acts of commission (making active investment decisions that dont work out) than by acts of omission (passive investing decisions that may work out). The apparent attitude is: Let sleeping (fee-paying) dogs lie and let their rates of return erode. If you are your own manager, you need not let this happen.

Risk and recovery understanding typifies active investment management

As discussed earlier, the avoidance of equity investments with high price volatility because they are risky really means the avoidance of equity investments with the largest opportunities for wealth building because the information to manage them effectively is not present.

What is needed is an adequate history of win-odds of recoveries from interim unrealized loss exposures, due to a discipline of limited holding-times. This needs to be coupled with a knowledge of worst-case interim price decline exposure during said holding period. When that is available, there then is basis for informed and rational choices to be made among desired portfolio candidates. Investment candidates can be selected based on their historical credentials earned under similar contemporary forecast experiences.

How often such alternative choice contests come about is a product of holding-period time limits, price gain target expectations, and by market circumstances that may be otherwise unpredictable. But two of those three conditions can be defined and/or adjusted.

Since at every day-end we find several investment candidates with very competitive credible prospects, we believe it pays for the wealth-builder to stay fully invested by using them when the time management or profit management discipline frees up available capital.

How to make it work

We have found that using the top of the forecast price range as a sell target works quite well as a signal to move on to a currently-chosen alternative capital commitment. That goal needs to be bounded by a holding time patience limit of 3 to 4 months to avoid spending that scarce time resource unproductively. Some opportunities will get cut short. But it usually turns out that the alternatives become more productive, from a rate of return point of view, than hanging on longer to a tired or late-blooming position.

Further, constraining holdings to a known price objective or time limit helps to make rational decisions about investments that, in transition, are not working out. With prior experience history there is a sense of the odds of recovery within the bounded time, and a sense of certainty of length of capital commitment while waiting for that recovery. Both help the investor to act rationally during periods of stress, not emotionally — where mistakes usually get made.

What evidence is there that Intelligent Behavior analysis works?

This is an analysis that has been conducted for decades in an intentionally unpublished environment because it works by converting the wasteful activities of some investors into profit benefits of others. That opportunity, while large, is not endless. On the other hand, the capital-gathering skills of the professional investment management community are such that market-price-moving quantities of money can be quickly directed to any approach that appears to work. So doing usually destroys the viability of the approach. Publishing explanations in professional literature invites this inevitability.

We hope that modest exposures in circles more visited by individual investors with smaller amounts of capital to apply will be both beneficial to a larger number of investors and encourage more effective market-making than by enhancing the present advantage imbalance held by investment establishment giants. So we are starting to talk about what we do in Seeking Alpha.

We now have some two years of live, published recommendations involving 1400+ equities on Seeking Alpha in 2013 and 2014, along with daily buy list recommendations in 2014. Profits have been made in 77% of those positions, at the average simple percent price change of 6.2%, taking 49 calendar days to reach. The typical annual rate of net gains on 205 buys in 2013 was +58% while the rate of gain for the Samp;P500 index was +36%. In 2014, over 880 recommendations, closed out and currently marked to market where still open, averaged 39% annually, while the Samp;P 500 struggled to show 17%.

These add to several years of live investment forecasts maintained and used by selectively limited numbers of institutional and private investors. Since the markets are full of oblique references of fish tales about the ones that could have been caught, we prefer to back up our story by results from ex-ante published forecasts even when we know more appealing unpublished examples abound.

Conclusion

Investors have a wide range of objectives that they seek. The one set of purposes where we can be helpful is the accumulation of capital under time constraints, often referred to as wealth building. The principal differentiation from this activity and just plain greed has to do with the pressure of time.

Conventional investment wisdom, for many reasons, has had the effect of abusing time, to the point where prevailing practice provides significant opportunity for investors who are intent on using it more intelligently, and have the resources (including information and discipline) to do so. What is involved is active management instead of passive, index-average investing.

There are investment professionals, who rarely have contact with individual investors. They have specialized skills and information flow resources that make possible, for them, an odds-on sense of how specific future equity prices are likely to behave. Their own self-protective actions in pursuing their daily work allow an insight into their future price expectations.

Those insights are key to active investment management pursuits, with better-than-average success in achieving better-than-average price gains. Such information will be illustrated in a next part of this portfolio strategy series, utilizing two well-known stocks to illustrate how alternative choice decisions may be quickly reached, flexibly, within the individual preferences of the investor.

A following article is intended to illustrate how sequential decisions made this way can compound to build wealth more rapidly and more assuredly than buy and hold or other portfolio management practices.

The Forgotten Chokepoint: The Mozambique Channel’s Rich Past and Bright but …

As a Christmas gift from our friends at Risk Intelligence, we’re sharing two free articles from the publication Strategic Insights by CIMSECians. This second (also available in Pdf form), originally appeared in the November 2014 issue and provides a background and maritime risk analysis on the Mozambique Channel.

When considering maritime chokepoints worldwide the Mozambique Channel should come to mind; however, because of greater instability and vulnerability in other geographic bottlenecks it is often overlooked. Yet, for the past millennium, the Mozambique Channel has served as a key transit and trade hub linking the Indian Ocean to the world. Today is no different. This article will examine the history of the channel, its growing importance as a source for fossil fuels, the lack of adequate maritime security from regional governments, and the international efforts to mitigate security deficiency.

Pre-Suez Canal History

The Mozambique Channel is approximately 1000 nm long and 250 nm wide at its narrowest point. Madagascar, the world’s fourth largest island, forms the eastern boundary, with Mozambique to the west. The volcanic Comoros Islands and the French island of Mayotte lie in the centre of the northern mouth of the channel. The first settlers here were Austronesian seafarers from South-east Asia; next, the great Bantu migration brought Bantu peoples to the Mozambique coast and islands around 1000 CE. In the 11th and 12th centuries, Omani Arab and Persian traders sailed down the East African coast in dhows, establishing trading posts, starting a slave trade from East Africa to the Middle East, and bringing the Islamic faith to what became known as the ‘Swahili Coast.’ The Arab traders were the first, but not the last, to incorporate the Mozambique Channel into the larger Indian Ocean trading sphere.

Europeans arrived in 1498 when Portuguese explorer Vasco De Gama navigated through the Mozambique Channel on his way to India. In the following centuries the Portuguese established colonies throughout the Indian Ocean basin and East Asia, largely displacing the Arab traders, and used slave labour from Mozambique to supply plantations in Portuguese Brazil and other Indian Ocean destinations. The channel became an international thoroughfare and a critical transit hub for trade linking the Middle East, India, and East Asia with Europe and Brazil.

As the power of France and Britain ascended, ship resupply points in and safe transit through the Mozambique Channel were vital to trade routes with India and the Middle East for both countries. Predictably, pirate havens soon emerged in Madagascar and the Comoros Islands due to their strategic location and the value of passing trade, creating a need for warships to act as protection. Despite prohibition by most countries by 1820, and curtailment of slaving in West Africa, slavers shifted their operations to East Africa and in the 1850s the British Royal Navy and the US Navy regularly patrolled the channel on counter-slave trade deployments.

Whaling was also common. In 1851, an American whaling brig, Maria, was taken hostage in Anjouan, one of the Comoros Islands. The US Navy sloop-of-war, USS DALE, in the area conducting counter-slave trade patrol, responded by bombarding the Island’s defences to release the Maria. By the 1860s, the Mozambique Channel had for centuries played a dominant role in trade within the Indian Ocean and to East Asia and the Western world. Yet to safeguard channel trade and prevent illicit traffic required an international naval response – the same scenario one sees today.

The Most Significant Day in Mozambique Channel History

The Suez Canal, opened on 17 November 1869, drastically reduced shipping times and costs for trade between Asia, Europe, and the Americas. This ended the Mozambique Channel’s longstanding and central function as the indispensable link between Asia and the West, relegating it to a supporting role. However, because of the growing threat of terrorism and regional instability, reliance on the Suez Canal causes concern. The September 2013 rocket-propelled grenade (RPG) attack against a merchant vessel transiting the Suez highlighted this. If the Canal closed, the subsequent disruption to trade and immediate increase in shipping costs of re-routing through the Mozambique Channel would significantly increase the price of global consumer goods and oil.

Of course, before the 1869 opening of the Suez Canal, no one questioned the Mozambique Channel’s significance to global commerce – it was understood to be essential. One can see the Mozambique Channel’s role in international trade and traffic from pictured map of British trade.

Post-Suez Canal History

In the 1890s France’s territorial ambitions in the Mozambique Channel set off few alarm bells in Britain, as the French brought Comoros (including Mayotte) and Madagascar into their Empire – Britain’s primary focus had shifted to securing the route to India and the Middle East through the Mediterranean, Suez and Gulf of Aden. However, during World War II, Axis forces in the Mediterranean and North Africa threatened the British supply route to the Indian Ocean, forcing them to use the Mozambique Channel extensively. In fact, the British became so concerned that Vichy France’s Madagascar territory might be used by the Japanese Imperial Navy to harass their vital sea line of communication (SLOC), that they successfully invaded Madagascar in 1942 to ensure Allied control of the Mozambique Channel.

Post-war independence movements reached the Mozambique Channel in 1960 when Madagascar separated from France. Mozambique gained independence in 1975, after fighting a brutal, decades-long guerrilla war against Portugal. The Comoros Islands eventually broke away from France in 1978, with the notable exception of Mayotte, which remains French. After independence, instability continued to plague Mozambique as a violent civil war ensued until the 1990s. Comoros fared only marginally better, experiencing a series of 20 coups from 1978 to 2008 when the African Union intervened militarily to restore order. Madagascar only emerged from its 2009 coup in late 2013. Most of the world viewed these up heavals as internal security struggles that required little attention from the international community, since global maritime transit had shifted to the Suez Canal. Yet today the Mozambique Channel is regaining its status as an important chokepoint, and the resulting maritime security challenges demand international attention.

From Afterthought to Global Hydrocarbon Hub

In the past few years, East Africa has rapidly emerged as one of the hottest natural gas plays in the world – and the international interest and investment show no signs of letting up. The offshore region straddling north-east Mozambique and south-east Tanzania, known as the Rovuma Basin, contains, on estimation, over 100 trillion cubic feet of recoverable natural gas, making it one of the largest gas finds in the world. Multinational energy firms have rushed to take advantage of the opportunity. In particular, the US-based energy firm Anadarko and the Italian energy firm Eni hold the two largest offshore investments in north-east Mozambique. Due to the remoteness of the region, the two energy firms have agreed to convert the gas to liquefied natural gas (LNG) onshore in a joint facility for eventual transport via tanker to worldwide markets. The LNG facility is scheduled for operation by 2018 according to company press releases.

The Indian ‘Gulf of Guinea’

The Gulf of Guinea (GoG) in West Africa provides the US and northern Europe with obvious advantages as a source for hydrocarbons: 1) several countries offering favourable terms to private investment 2) short distance to the US and northern Europe compared to Middle East oil; 3) no geographic chokepoints en route. In contrast, Middle East oil has to go through four critical maritime chokepoints (Hormuz, Bab el Mandeb, Suez, and Gibraltar) before reaching the Atlantic. Currently, most of India’s LNG comes from Qatar; thus Mozambique and East Africa could represent India’s equivalent ‘Gulf of Guinea’ – a large natural gas source close to India with no geographic chokepoints, no Middle East political calculus, and with countries open to international investment. Without a doubt, LNG imports will play an increasingly important role in India’s electrical generation mix as India’s growing population and economy demand and expect access to energy. Not surprisingly, Indian oil and gas firms bought significant stakes in Anadarko’s Mozambique holdings. According to ArcticGas.gov (27 May 2014), India’s Oil and Natural Gas Corp (ONGC), India Oil Limited (staterun), and Bharat Petroleum Corp have purchased a combined 30 per cent stake in the Anadarko’s Rovuma fields at a cost of well over $5bn USD.

Not to be outdone, the China National Petroleum Company (CNPC) bought into Eni’s Mozambique lease to the tune of $4.2bn USD for a 28 per cent stake, making the Mozambique play “China’s biggest ever investment in overseas natural gas fields” according to the Financial Times (14 March 2013). Japan and South Korea, both looking globally for alternative sources of LNG, have also invested with both Anadarko and Eni’s holdings; the Japanese energy company Mitsui now holds a 25 per cent stake in Anadarko’s concession and Korean Gas Corp (Kogas) holds a 10% stake in Eni’s concession. Additionally, European Union (EU) tensions with Russia make gas from Mozambique and Tanzania more attractive to the EU members as they attempt to diversify sources away from Putin’s Russia.

To add to the equation, western Madagascar potentially holds billions of barrels of heavy oil onshore and natural gas offshore. As reported by Reuters (07 Nov 2013), ExxonMobil, Total, BG International, and a host of international oil and gas majors have returned to Madagascar to pick up where exploration efforts (both onshore and offshore) left off before the 2009 coup. If exploration yields commercially viable oil and gas, Madagascar might become a hydrocarbon production powerhouse in its own right.

Undoubtedly, critical energy maritime traffic in and around the Mozambique Channel will increase significantly as East Africa transforms itself into a hydrocarbon hub over the next decade. However, the logistics, infrastructure, port facilities, lodging, and support vessels must be created from scratch to support the development. For instance, Anadarko and Eni currently operate two large drill ships in the Mozambique Channel, but security has to be provided by private security companies using their own platform supply vessels (PSV), due to inadequate maritime security capability from area navies, especially in the remote Rovuma offshore region.

Furthermore, the local populace will have to be incorporated into the picture. Populations in the areas around the Rovuma Basin in Mozambique and Tanzania are largely marginalised Muslim communities. Protests and civil unrest in Mtwara in southern Tanzania erupted in 2013 when the country announced a multi-billion USD deal with a Chinese firm to build a gas pipeline from the south to the northern port of Dar es Salaam. As Robert Ahearne states in Think Africa Press (31 May 2013), the chronic grievances in these marginalised areas could become acute as foreign investment pours in and locals see no improvement their lot. The emergence in the mid-2000s of the infamous Movement for the Emancipation of the Niger Delta (MEND) in Nigeria, which posed a serious threat to Nigeria’s oil revenues because of MEND’s sabotage, piracy, and kidnapping of oil workers, serves as a stark warning. While the Mozambique Channel might not descend into a MEND-style armed insurgency, one cannot rule out an increase in piracy, kidnapping, and harassment as energy production related vessels, workers, and infrastructure flood into an area with a disaffected, impoverished population.

The Comoros Islands pose a similar challenge, with an impoverished Sunni Muslim population of over 700,000 inhabiting a strategic location at the northern mouth of the Mozambique Channel. A prudent course of action would be to engage with moderate Islamic groups and leaders to prevent radical voices from influencing Comorans. Appropriate levels of international and regional engagement with Comoros to enhance maritime security and co-operation should be considered.

Maritime Security

In 2010, during the height of the Somali piracy scourge, the Mozambique Channel experienced several piratical events including the hijacking of an Indian merchant vessel. Despite this, Mozambique can still only occasionally field one vessel capable of patrolling the channel. Madagascar’s navy, emerging from years of government neglect (and virtual isolation from security co-operation with international navies) after the 2009 coup, has even less capability with a few older patrol vessels of questionable value. Comoros has an advanced US-donated patrol vessel, but the high cost of operations and maintenance severely restricts its use. Additionally, these navies and coastguards do not have the fuel and operations and maintenance budgets required to conduct regular patrols of their economic exclusion zones (EEZs).

Djibouti Code of Conduct Members

Typically the channel’s navies stay in port unless there is a distress call or search and rescue (SAR) emergency. The basic calculus is, if the vessels are not underway, then they are not burning fuel or incurring damage. This is a budget-driven decision, not a strategic assessment of the multitude of threats to maritime security and economy in the channel including illegal, unreported, and unregulated (IUU) fishing and illicit trafficking of drugs, people, etc. Last year, however, Mozambique offered a bond for a tuna fishing venture that garnered $80m USD investment due to the high returns, and a French shipyard has been contracted to deliver $300m USD-worth of patrol vessels to be run by private companies to protect this tuna fleet – whether this tuna fleet and associated security vessels materialise remains to be seen (The Economist, 23 November 2013).

Equally limited in the Mozambique Channel is maritime domain awareness (MDA). No Mozambique Channel country uses maritime patrol aircraft (MPA) to monitor the channel regularly. The region also has few automated identification system (AIS) monitoring locations and/or coastal radars. While AIS antennas and systems have recently been installed in Mozambique by the US, the ability to keep them operational (electricity, internet connectivity, maintenance, manning) remains a challenge. French Mayotte offers some MDA capabilities, but the lack of incentive and mechanisms to share the information creates impediments to developing a common, channel-wide MDA picture, leaving MDA severely limited outside of satellite AIS reporting, with patrolling capabilities of regional naval forces sporadic at best. As in the past, regional and international partners have had to step in to ensure the security of the Mozambique Channel.

The Regional Response

While the Somali piracy threat has diminished, the structures put in place during the crisis remain. One of the most important maritime security initiatives is the International Maritime Organization’s (IMO) 2009 Djibouti Code of Conduct (DCoC). The DCoC links countries from Egypt to South Africa in an attempt to build regional support structures to improve maritime security through training, information sharing, formalised collaboration, and MDA initiatives (material, exercises, and operations). Despite DCoC’s efforts to build capability, the reality is that the member states’ capabilities to meet its goals remains questionable, especially in the Mozambique Channel, as discussed above.

In 2012, South Africa stepped into the maritime security void with Operation Copper. It signed an agreement with Mozambique and Tanzania for the South African Navy to conduct permanent counter-piracy patrols in the Mozambique Channel and in Tanzanian waters. South Africa also stationed MPA in northern Mozambique to assist with airborne reconnaissance and targeting for the SA Navy frigates and offshore patrol vessels (OPV). In 2013 Tanzania withdrew from the agreement, but the SA Navy deployments continue on a bilateral basis with Mozambique (DefenceWeb, 20 March 2014). Without question, the SA Navy is the most capable force in southern Africa, and its presence in the Mozambique Channel offers a modicum of stability and security. However, South African politicians and observers have begun to question the necessity of continuing Operation Copper in the absence of a clear Somali piracy threat, because of the cost and the need for Mozambique to contribute a legitimate force of their own, (DefenceWeb, 05 March 2014). Should the SA Navy decide to stop Operation Copper, the Mozambique Channel would face serious maritime security and MDA issues – just as the region looks likely to become an offshore energy production and exporting hub.

International Maritime Security Efforts

US and European navies have played a minor role compared with South Africa. The US sponsors the Africa Partnership Station (APS) programme that features ship visits, training, and annual exercises for Mozambique in particular. APS increased US engagement with the region, and the US has used its foreign military financing budget to buy limited equipment (patrol boats, AIS, etc) and training for regional navies. European Union navies also pass through the channel to conduct training, ship visits, and exercises. Most notably, considering Italy’s energy company Eni’s investments in Mozambique, Italy deployed an entire aircraft carrier naval group to Mozambique for two months in early 2014, and signed an agreement with Mozambique to train and operate with the small Mozambique Navy (DefenceWeb 10 February 2014). These arrangements may well continue as Eni’s offshore natural gas field and LNG export facilities come online over the next five years. Meanwhile, through its Indian Ocean Commission (IOC) efforts, France is looking to strengthen co-operation with Comoros, Madagascar, Seychelles, Mayotte, Reunion, and Mauritius on maritime issues included illegal fishing, environmental degradation, etc. Finally, the EU has also recently agreed to restart engagement with Madagascar following the successful election.

However, one must not forget that the future of the Mozambique Channel will be influenced by Asian countries’ need for resources. The Indian Navy signed a maritime security co-operation agreement with Mozambique in 2012 and opened a ‘listening post’ in Madagascar in 2007 (Asia Times Online, 02 August 2007. See also David Brewster in The Interpreter, 12 July 2012 for India’s broader strategic interests). The Chinese People’s Liberation Army Navy (PLA-N) has conducted a few port calls in Mozambique, but one can expect greater involvement of the PLA-N in years to come as CNPC’s investments in Mozambique and resources deals with Madagascar move forward. Whether Indian and Chinese security and economic interests can co-exist here will be an interesting ongoing measure of their relative power and influence in the Indian Ocean.

International security co-operation in the Mozambique Channel should also focus on humanitarian assistance/ disaster response (HA/DR). The channel receives regular tropical cyclones, inflicting massive damage and flooding. These pose several maritime issues: 1) environmental response (especially when, as the offshore oil and gas industries increase, so too does the channel’s exposure to damage and spills caused by weather or man-made disasters); 2) SAR – without capabilities to conduct SAR channel-wide, ships in distress will have to hope for merchant vessel or foreign navy aid in extremis; 3) disaster response – should a disaster occur, international navies might be called upon to bring relief.

The historical precedent for international involvement in the Mozambique Channel is clear, and the issues that first confounded the Portuguese, British, and French still largely remain. A proactive international approach to building regional capacity seems warranted in light of the channel’s growth in offshore energy trade, traffic, and infrastructure in the coming years.

Final Thoughts

As long as the Suez Canal remains open and operational, the Mozambique Channel will remain a relative afterthought in global maritime security conversations. Yet the channel looks certain to regain some of its historical significance as a key trade link as the hydrocarbon boom increases maritime traffic volume and value in the channel. Indian, East Asian, and European countries will all come to depend on a steady flow of LNG from and through this chokepoint. Issues ranging from piracy, HA/DR, and illegal fishing will challenge maritime security in the channel for the foreseeable future. Security will have to be underwritten by regional and international partners until the governments in Mozambique, Madagascar, and Comoros make funding viable and operational navies and coastguards a budgetary priority. In the meantime, a better understanding of the maritime history of the region, its importance to future energy markets, and its current security challenges merits focused attention from the international maritime community. Attention, and a few prayers that the Suez stays open.

Louis P. Bergeron serves in the US Navy Reserve and works in his civilian career as a strategy consultant in the national security sector.  He obtained a MA in Security Studies from Georgetown University in 2011.