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Market News 27 October 2014

‘Fletcher Building wins government contract to build 237 homes in Christchurch’

It is a shame these homes won’t have local insulation in them!

This was an unfortunate sequence of headlines for the government and Fletcher Building.



Market Volatility - I suspect the recent increase in share market volatility has a rather more direct relationship to the scale of ‘High Frequency Trading’ that we spoke of a while ago after reading Michael Lewis’s book Flash Boys, than market governors would like to admit.

You may recall that the US market’s largest traders, measured by volume of transactions, now use computers to make decisions and use speed to beat others to the target markets, with most transactions motivated by the use of insider information.  (They learn about buying or selling behaviour on one exchange and then become the first to execute the same type of trades on all other available exchanges).

Being first involves nano-second time splits and winning through the use of the best equipment and the shortest distances, but whatever they call it, I call it insider trading and it distorts and disrupts markets.

Over recent weeks we have witnessed some spectacular movements in share market indices, and thus individual stocks, with percentage movements that are not far from the disturbingly large movements in October 2008. Daily changes of 3-400 points on the Dow Jones represent 2.0-2.5% swings which, whilst not a repetition of the 500-point days of the Global Financial Crisis, are significant daily changes.

Of more significance to me were days like October 15 where the DJIA fell 450 points in the morning before rallying back up 350 points in the afternoon. Investment analysts don’t behave this way and seldom try to push markets this hard. In my view ‘thoughtless’ trading, sourced to computer algorithms, drives the days with this scale and speed of volatility.

 It is not hard to imagine a negative spiral where a large sell order sparks a computer to sell more, on all exchanges, which in turn sparks other computers or humans to sell more shares out of fear of a new downward trend. And so the spiral could continue, until checked by humans at a later point (check out the price movements for IBM shares and huge increase in turnover during October). Readers may recall how a Deutsche Bank error in 1998 with a computerised programme led to AMP’s share price being ramped up on AMP’s first day of trading.  Deutsche lost tens of millions.  A programmer lost his job.

The Japanese share market (Nikkei 225) fell from 15,700 to 14,500 during the week starting 12 October. It is now back up to 15,150.

The Volatility Index (VIX) rushed up from 15 to 30 and back again during the week of October 12-16, something that I do not consider to be a coincidence.

I hope I am wrong but until I learn about greater control of automated trading on markets I shall retain my concern that this form of trading will be responsible for a very large fall in share markets over a very short time frame at some point. Such a problem will compound upon itself for each new day that it lasts and remains unexplained.  It would prompt traders using borrowed money to sell shares to repay loan obligations and this additional downward pressure would increase the chances of ‘normal’ fund managers and investors fearing even lower markets, leading them to join the selling pressure.

The decline I am imagining, but hope doesn’t occur, will move too fast for most retail investors and their financial advisers to react.

The answer, looking forward, is to continually review your asset allocation ratios to ensure that your exposure to shares is within the bounds that you set yourself (investment policy) and that a dramatic change in market value of your shares would not disrupt your lifestyle.

Registries – We remind investors of the benefits of keeping a person’s (individual, joint, trust, company, partnership) investments efficiently administered especially with respect to minimising future expenses and inconveniences.

Registries in particular are progressively introducing more fees for actions requested by investors who are deemed to not be an obligation of the registered company. Fees exist for converting a registered holding into an estate and now fees have been introduced for name changes to holdings. Re-discovery of lost FIN numbers requires an indemnity process, which incurs a fee.

Where a trust has a retiring trustee (replaced or not), a change is required to the registration details, incurring a staff cost for the registrar; a fee is now to be payable by the investor.

These investor-motivated actions, which do not relate to securities transactions, are being viewed as an expense that the investment company should not have to bear. Issuing companies view their responsibility to pay for a registry as a mix of legal obligation to have such a register of owners, plus efficient support for market-inspired changes of ownership and capital raising. It is unsurprising that they feel they should not have to pay fees for personal administrative errors or changes to personal circumstances.

If the investment company is not going to pay the expenses of some aspects of registry maintenance then the only other party who can pay is the investor.

Another action that might soon attract a fee for investors is Off Market Transfers (OMT) for listed securities. Listed securities in NZ and Australia are now delivered electronically when on-market transactions are completed, involving very little staff time, but OMT are usually unrelated to market transactions (they usually involve movement between family, friends, estate beneficiaries etc) and the paper nature of these transfers is very time-consuming.

We expect NZ registries to introduce fees for OMT.

This progressive transfer of some registry expenses from the securities issuing entity to those on its register should encourage increased accuracy by investors with respect to name and address details and consistency of use of Common Shareholder Numbers (CSN) etc.

We see many holdings with administrative errors and these holdings are likely to incur fees to correct in future and may well slow potential sales.

Keeping one’s own investing simple and accurate will be the most efficient response to the arrival of these fees.


Second Mortgages – Syndicated farm investor ‘MyFarm’ has teamed up with German fund manager Aquila to offer a second mortgage financing facility to NZ dairy farmers and will offer wholesale investors the opportunity to be investors in the fund (lenders). If the scheme is wildly successful I guess it is possible that they might extend it to retail investors.

I am still contemplating the merits of this opportunity but look forward to reading more to understand its potential benefits to our rural sector and to the investors. Perhaps MyFarm and Aquila think the bank lending margins are too great, just like the Peer-to-Peer lending model, and want to break into the middle of these wide margins?

The fund intends to charge an interest rate that moves with the milk price; the base rate would be 2.50% and the interest rate would move 0.02% for each 1 cent move in the price of milk. This sentence leads to an oblique thought:

When we were kids we would often react harshly to a seemingly senseless statement from another person by asking ‘what’s that got to do with the price of milk’. Now I know, it may soon bear a direct relationship to investor returns!

The example given showed an interest payment of 8.80% based on last year’s very high milk pricing, but it did not offer the upper and lower bounds, if any. The fund also describes an ability to demand additional return from the farm borrower, based on the movement in the land value over the 10-year period of the loan, which is an interesting proposition and removes some of the volatility from the possible returns.

The mortgage as described certainly aligns well with the borrowers’ interests where the cost of the debt only increases when his/her farm is increasing in production and/or land value. The 10-year term commitment is also consistent with the rural industry’s calls for long term investors and not those seeking home runs recurring on a monthly basis.

Writing as I think (unlike when you were younger; speaking before you thought – Ed), if there really is a wide marginal return between equity ownership of a farm and the interest cost of a bank loan for the farm, then I can see these second mortgages suiting long term investors like Kiwisaver funds which have much longer time horizons.

Retired investors managing their own money predominantly need current returns, in full, now, so as to comfortably finance tomorrow’s consumption and travel plans. They would prefer that the young financed the next decade of rural growth with deferred income likely.

Fonterra is also looking for new funding sources with the announcement of an Equity Partners Fund, which hopes to source equity investment (non-voting of course) from pension funds with very long-term outlook for investment returns. This latter point highlights both the short-term focus of most investors and the volatile returns from the dairy sector; Fonterra wants more investors who will ignore the short term ‘noise’.

Fonterra didn’t help the ‘noise’ of course when it announced a likely 32 cents per unit dividend when floating its Fonterra Shareholder Fund and then promptly cutting this dividend to 10 cents!

Long term, volatility accepting investors already have the ability to invest in Fonterra through the FSF units so I am not yet clear where this new fund sits and why investors will be attracted to it.

By offering second mortgage loan funds and new equity schemes with a different colour, the dairy sector is also reminding us that they don’t want to release voting rights to others and that they need a lot more long term funding but won’t, or can’t, offer priority on such funding.  These circumstances may not be all that appealing to some investors.

Sir Peter Blake would have asked ‘will it make the boat go faster?’

If more diverse and better-aligned funding sources help New Zealand’s rural sector to grow in size and speed then I shall be a pleased observer, and perhaps an indirect investor via Kiwisaver.

Investment News

Europe – It is barely a story yet for this week’s Market News, but the sound of the ‘drums’ are getting louder with respect to the European Central Bank buying bonds from the market with money that didn’t previously exist within the banking system (aka printing money).

In buying bonds the ECB hopes to extend easier access to credit (loans) for European businesses, a different prospect to actually printing FIAT money to share with consumers. Mind you, a cynic might say that ridiculously low interest rates have directed higher levels of income to those who need it least (people with plenty of money invested in businesses with negligible debt costs).

The latest news item that caught my attention was a commentary from an interview with an Executive Board Member of the ECB (Benoît Coeuré) who was quoted as saying two things that are worthwhile repeating here:

The purchases ‘’will have the objective to steer the balance sheet of the ECB to higher levels and to improve transmission to the real economy’’; and

Interest rates will remain low and ‘’we intend to keep them rather low for a very long time’’.

The arrival of the former (forcefully buying bonds in the market) will help to ensure the latter. In fact, as I write I see that the ECB bond buying has now begun at the lower risk end of the asset profile with purchases of Covered Bonds ‘from Societe Generale SA and BNP Paribas SA as well as Spanish securities from other lenders’.

European Banking – Whilst we are in Europe, by the time we issue this newsletter the European Central Bank should have released its Asset Quality Review (stress test) of the European banks falling under its regulatory wing (releasing it on Sunday in Europe, deliberately outside market hours).

Early release information describes that 11 of the 130 banks have ‘failed’ the stress test; three of the banks are Greek, three are Italian, two are Austrian, one is in Cyprus, one is Belgian and one is Portuguese, according to the report.

We are very keen to learn that the ECB has not been flexible with its review and that the outcome of these reviews will stand the ruthless scrutiny of financial markets. ECB’s reputation so early on in its regulatory role (for banking) is too important to dilute with poor work on the first day ‘at school’.

The report will be a very interesting insight into the true strength of European banking and the impact this will have on European growth. Regular readers will recall us reciting comments from the Chief Financial Officer of Rabobank who said that increased lending in Europe, which regulators are encouraging so as to aid the economies, will only come with increased equity on bank balance sheets and not from 0.00% interest rates.

I hope to read that a large proportion of banks are in a strong financial position now, having minimised new lending and dividends for shareholders over the past 12-24 months such that greater equity was rebuilt in bank balance sheets. If this is the case, and it frees these same banks up to return to normal business, with an ‘AQR Tick’ from the ECB, then it is possible that economic conditions may well improve in Europe during 2015.

We look forward to reading the detail of the ECB report and then some commentary from global analysts.

NZ Inflation – Despite having one of the best performing economies in the world, even NZ is not experiencing high, or upward pressure on, inflation.

We often like to debate that the inflation most consumers feel via some their largest consumer items (rates, insurance, energy) are certainly increasing in price/cost at a far greater rate than reported inflation, however, the broad measure tracked by Statistics is reported at +1.00% for the year to September 2014. This is a remarkable result given the high levels of economic activity.

The weaker-than-expected inflation data, both in NZ and abroad, will contribute to delayed increases for NZ’s Official Cash Rate, which is up for review again this Thursday.

Graeme Wheeler explained during the week that he felt the Loan to Value (LVR) restrictions currently in place had the same influence as an interest rate increase of between 0.25% - 0.50% and I imagine he is pleased to have seen such an impact. The RBNZ needs to know what other influential tools it has available with the lever of interest rates a little muted by sitting at such low nominal levels (borrower perceptions versus the reality of high real interest rates) and the LVR policy changes are having a beneficial impact.

With a bias toward our investing clients I should be pleased if the next macro-prudential tool used was to increase the Core Funding Ratio thresholds and to demand that banks more closely match the duration risk (maturity dates) between loans and deposits at the bank.

This would force banks to attract more long-term retail investor deposits (recall that in excess of 90% of deposits are for 12 months or less!) Higher interest rates would be required on 2-5 year deposits to achieve this goal (set by some bloke watching seagulls at the beach in Paraparaumu – Ed), an outcome that would suit our clients just fine, in my humble opinion.

Don’t expect it to happen this week though, when Mr Wheeler is more likely to say ‘no change to OCR and perhaps not for an extended period of time’.

As an adjunct to this story I need to apologise for the ‘removal’ of Graeme Wheeler’s PhD. I have been assigning him an honorary Doctorate (from the Warrington University? – Ed) which according to the RBNZ website he doesn’t have.

Ever The Optimist – The Free Trade Agreement between NZ and South Korea is ‘very close’, which I shall interpret as pending a signing ceremony with Prime Ministers and Trade Ministers in attendance.

South Korea described a desire to sign an agreement before year’s end and NZ has always wanted an agreement ‘yesterday’. So, next time you see John Key at Auckland International Airport check the Departures board for a flight to Seoul.



NZ Post subordinated notes rollover continues to be a focus for markets.

Holders of the NZ Post bonds have received notices from the company inviting them to respond with respect to rollover, repayment, or a change to the amount invested. These are due back to the registry before 3 November. We strongly encourage all investors to send their response in prior to the end of October. (please handwrite CHRIS LEE & PARTNERS on the top of the form if you mail it directly back to the registry).

A minimum interest rate for the period 2014 – 2019 has been set at 6.35% p.a. The credit margin is 2.00% and the final interest rate will be set in November, but it cannot be lower than 6.35% (which is now looking likely, and attractive, given the declines in global interest rates).

Clients who authorise us to provide financial advice can find a research article about the NZ Post bonds by Kevin Gloag published on the Private Client page of our website.

Orion Health Group Ltd, a global provider of healthcare software solutions, has confirmed it is considering an initial public offer of ordinary shares ($120-$150m) and expects its offer document to be available in late October.

Recent placements of Orion shares at $4.00 imply that the IPO pricing should be at this level, or close to it.

Investors are welcome to join our mail list for this offer, if they wish to consider investing.

Auckland Airport has a bond maturing on 27 November but we expect this to be repaid, without the potential for reinvestment, as a result of the significant capital and debt restructure earlier this year.

Trustpower has a maturing bond on 15 December 2014 and we look forward to learning their intentions with respect to rollover, repayment, or additional invitation to new investors.

NZ Social Infrastructure FUND (NZSIF) – further to our reminder that the next payment is due soon (15 cents per unit) we have had an investor express a desire to buy a few more of these units. Given that it is not a liquid investment we felt it was appropriate to record this demand here, in case someone wished to sell some or all of their investment.

Venture Capital Investing – The venture capital sector of our capital markets is becoming a little more visible (as is Crowd Funding and Peer-to-Peer Funding) helped by various venture capital groups around the country. The Wellington group, AngelHQ, is having its annual showcase on November 5th where prospective companies present their business cases. I attended last year and found the process very interesting, even if it didn’t ultimately lead to investment.

If you are curious to know more, live in Wellington, have a significant excess of savings and a tolerance for high risk investment then you are welcome to contact me and I will tell you a little more about this group and the upcoming showcase event.


Chris will visit Hastings on November 11th, Auckland (Albany) on November 14th and Auckland (Waipuna) on November 17th.  He plans to be in Blenheim and Nelson in December on dates yet to be confirmed.

Kevin will be in Ashburton on November 5th and in Christchurch on November 21st.

Michael will visit Tauranga on Tuesday 25th November.

David Colman is planning a trip through the Manawatu and Taranaki areas on November 18th, 19th and 20th.

Anyone wishing to arrange an appointment is welcome to contact us.

Michael Warrington


Market News 20 October 2014

Here is a headline I didn’t expect to read and found hard to reconcile upon second reading:

‘Fletcher to close its Christchurch insulation plant, 29 jobs lost’.

Fletchers made all the usual statements to the media about costs and margins etc but I am sure it will just be about costs they have discovered can be removed from the process. I have no problem with that situation but it shows little respect to their umbrella contract from the government for the Canterbury rebuild to consolidate this business into Auckland.



Housing – Whenever I hear, or read, the media describing the Reserve Bank’s Loan to Value Ratio (LVR) restrictions as ‘shutting first home buyers out of the market’ I cringe at the misleading  impact it has on financial literacy in New Zealand, another subject that ‘we’ worry about in this country.

Improving financial literacy is very important and does deserve headlines, but it also needs content that serves to assist the public in improving their financial literacy and thus each person’s chances of successfully managing  their own financial situation. The more the public understand about finance the less in fees they will pay to others who might otherwise participate in the decision making process.

Encouraging regulators (RBNZ in this case) to make it easier for people with next to no savings to take enormous financial risks (buying houses with almost no savings) is inappropriate and frankly quite dangerous from a financial perspective; it is very poor financial advice and it hinders financial literacy.

A ‘first time home owner’ should not be led to believe that it is a low risk financial decision to buy a million dollar home with only $50,000 of savings regardless of what they earn from employment. 95% debt, especially on a nominal number that exceeds even a good salary by many multiples, is a high-risk proposition.

The young must not be encouraged to spend money they do not have, to invest with excessive leverage and thus rely heavily on future income. They are handing control of a large part of their life to the bank and the roof above them may only be temporary.

Where a young person has access to generous support from family I am completely relaxed about this being introduced to the ‘equity’ part of financing a home as long as the family member providing the funds is aware that any agreement to pay interest might stop if circumstances change; the banks mortgage always comes first.

The family member offering the financial support makes their own risk decision prior to offering their support.

The bank and the Reserve Bank are very relaxed about the presence of family equity (gift, 0% interest cost or market interest rate cost) because it reduces the risk to the bank and to the banking system, which is precisely what the RBNZ wants from its LVR policy!

House prices are affected by supply and demand and the government is trying to address delivery of more supply. An ability to pay for a house relates to ones willingness to earn and save money and that will only improve with behavioural change or higher incomes from a more successful economy. Behavioural change can happen quickly but economic change does not.

The fact that housing affordability is deteriorating, and that less and less people can afford a house, is not a reason to encourage those least able to afford an asset to take even more risks to do so.

Contrary to headline arguments about why LVR restrictions should be cut below 20%, I think they should be increased to 25%!

Investment News

NZSIF Call – The NZ Social Infrastructure Find is calling up payment of another 15 cents per share, bringing the ‘paid up’ amount to 57 cents in the dollar. It has been a slow amble toward full investment for this fund, sadly.

Hopefully the post election environment will release a few more local investment opportunities alongside the fund, which has been looking mostly in Australia recently. Perhaps HRL Morrison & Co can sit down with Bill English and establish a Public Private Partnership around a large block of the Housing NZ stock in Auckland?

If you are an NZSIF investor remember to send off your cheque to Computershare over the next week or so (due prior to 12 November).

Rabobank Credit Rating – Investors using Rabobank in NZ for term deposits and its call account facilities should have received a notice about a change to their credit strength last week.

Rabobank Nederland will be removing the guarantee from the deposit taking subsidiary (Rabobank New Zealand Ltd) by April 2015 (sooner for new deposits or changes to current deposits). The same decision has been made relating to Rabobank in Australia.

We do not view this change in credit (a slight weakening from AA- to A+) as reason for concern. We observe, as does Standard & Poor, that the parent displays meaningful support for its subsidiary and would be likely to do so in future if required.

The Reserve Bank of NZ regulates Rabobank NZ Ltd and importantly the bank currently has a total capital ratio of 13.4 per cent at June 30, well above the minimum 8 per cent required, and above most of its NZ Peers.

My speculative or deductive mind ponders the likely reasoning for this change as being two things:

1. Rabobank standalone credit in Australia and NZ is now ‘strong’ at A+ in their own right; and

2. The bank stress testing occurring in Europe will have forced all banks regulated by the European Central Bank (ECB) to review their capital structures and the impact (negative) of outstanding parent guarantees probably stood out as an unnecessary influence on the balance sheet of Rabobank Nederland.

Speaking of capital, the removal of the guarantee for the subsidiary has no impact for investors holding the perpetual capital securities (RBOHA and RCSHA) because these securites were issued by the parent entity Rabobank Nederland.

Similarly the change has no impact on senior bonds issued by Rabobank as they are issued by Rabobank Nederland, NZ branch (ie not Rabobank New Zealand Ltd).

Rabobank has offered more information to investors on this page of their website:

Tax – The Wild West tax behaviour of many of the worlds largest businesses may well be coming to an end and taxes should then be paid in the jurisdictions where revenue is earned.

Ireland has been one of the ‘doorways’ that allowed the likes of Apple and Google to pay very little tax and change is at hand.

Following pressure from the United States and EU, the Dublin government said on Tuesday it planned to change a rule underpinning this system which allows a company to be registered in Ireland but not resident there for tax purposes.

The only weakness in the proposed change is that it offers a five-year continuation clause to those already operating under this tax benefit scheme.

The shifting of income outside of the jurisdiction of the sales zone is pure smoke and mirrors and has played a significant role in the movement of wealth from the ‘have nots’ (tax payers broadly) to the ‘haves’ (limited group of shareholders).

If countries that respect property rights are serious about fairness (level playing fields) then they must continue this push to shut down tax loopholes. This tax pressure will logically place a downward force on share prices of these companies reducing capitalization (market value) by roughly the same amount of extra tax that would become due for payment in future!

If businesses like Apple and Google wish to move headquarters to countries with lower tax rates and less respect for private property, good luck to them, but I would rather not own many of their shares at all under the latter scenario.

Greater dividends – The electricity generators have all announced a near cessation of development spending on new generation and thus a significant reduction to capital spending for the immediate years ahead. There appears to be plenty of generation capacity (online and back up) for the NZ demand profile (stable, modest growth) and the regulatory threats have deferred any potential for potential lower priced development ideas (additional hydro on the Clutha etc).

This significant situational change will result in the electricity generators having a rising pile of excess cash to try and apply efficiently, which means greater dividends or share buybacks so as to avoid falling returns on a per dollar of capital basis. As we have often said, cash is important, much more important that asset revaluations, and businesses with excess cash flow display a meaningful indicator of strength.

We aren’t suggesting that investors hold excessive weightings in shares from this sector simply because of the cash situation but it does imply that shareholders of such companies can look forward to reasonably reliable dividend flows over the foreseeable years.

Rate Resets – There have been a few interest rates increased recently on the annual reset securities which holders will be pleased to receive. Specifically:

Sky TV senior bond (SKTFA) – 4.43% p.a. for the year to 16 October 2015. (It was 3.62%)

Rabobank capital securities (RBOHA) – 4.5875% p.a. for the year until 8 October 2015. (It was 3.7075%)

The Rabobank capital securities are unaffected by the story above about Rabobank credit strength in New Zealand because they are issued by Rabobank Nederland.

Origin Energy Contact Finance preference shares (OCFHA) – 5.28% p.a. for the year to 15 October 2015 (it was 4.50%).

Infratil (IFTHA) will be reset next month and should increase to about 5.25% p.a. (was 4.53%) when I estimate it based on today’s market conditions.

ASB Bank perpetual preference shares (ASBPA) will be reset next month and should increase to about 5.05% p.a. (was 4.31%) when I estimate it based on today’s market conditions.

Further increases next year look a little less likely while global economic concerns prevail and the RBNZ remains on hold with respect to Official Cash Rate change, but it is not too great a stretch for NZ interest rates to increase further if our currency weakens (less likely in my view) and our economy improves further (trying hard).

Longer term interest rates – During the past couple of months we have highlighted declines in long term interest rates of the major economies such as the US and Europe which typically runs counter to what our clients had been expecting, and we had been hoping for (increases). We have, however, always been anxious about the potential for all interest rates to remain at very low levels for extended period of time (years).

Global economic performance continues to be weaker than most hope for, Europe and Japan still look awful and China and the US are not looking as strong as required to make meaningful progress, let alone offset economic weakness elsewhere on the globe.

The following data can be looked up any time, and usually comes with pretty graphs, but to save you going off searching for it here is an update on the interest rates we displayed in August, updated late last week; the declines are significant:

16 October          25 August            11 August

2.13%                    2.38%                    (2.47%) – US (Market Leader)

1.94%                    2.08%                    (2.11%) - Canada

2.06%                    2.40%                    (2.53%) - Spain

3.05%                    3.20%                    (3.62%) - Portugal

1.20%                    1.38%                    (1.55%) - France

0.78%                    0.99%                    (1.15%) – Germany (ever closer to zero, for 10 year lending)

2.31%                    2.59%                    (2.71%) - Italy

0.99%                    1.17%                    (1.34%) - Netherlands

7.08% (rising!)   5.68%                    (5.82%) – Greece (This Canary looks a little unwell)

0.42%                    0.45%                    (0.49%) - Switzerland

1.67%                    1.88%                    (2.26%) - Ireland

1.85%                    2.36%                    (2.57%) - UK

0.48%                    0.51%                    (0.52%) - Japan

8.39%                    8.50%                    (8.50%) - India

1.81%                    1.88%                    (1.93%) - Hong Kong (China)

3.30%                    3.48%                    (3.44%) – Australia

3.99%                    4.22%                    (4.19%) - New Zealand

The declining trend for most does not spell optimism for global economic growth, the market moves is a statement that the opposite is expected, and the increasing interest rate for Greece within a ‘we shall not fail’ Europe is a reminder that the financial landscape ahead of is not trouble free, or default free, as some interest rates imply.

A recent political poll in Greece showed the anti-bailout Syriza party held a 6.5 percentage-point lead over center-right Prime Minister Antonis Samaras’s New Democracy party. This reminds us that politicians and politics change and I am incredulous that lenders would be happy to accept returns like 2.06% from Spain or 2.31% from Italy, nations that are hardly examples of long term political stability.

Deflation is a serious concern in Europe and this has driven interest rates down to the point of negligible real returns but as we are all taught it is the return ‘of’ your money that is more important than the return ‘on’ that money.

Six years ago we strongly encouraged fixed interest investors to consider Strong borrowers, Long terms and Liquid (saleable) assets. At that point we were increasingly concerned about some borrowers and falling interest rates and the need for flexibility to make changes, if required.

Strong, Long and Liquid seems just as appropriate today, but for different reasons, particularly the ‘Long’ part.

‘Strong’ - The returns offered on the ‘not so strong’ items have, until recent weeks, been declining and they had reached the point of not offering sufficient marginal reward for the risk involved, even though the default risk may have been tolerable. For example a five year Fletcher capital note (subordinated loan that has the potential for conversion into FBU shares) trading at a yield to maturity of 5.60%, incurring brokerage to purchase, yet, just around the corner most banks were receiving five year deposits at 5.75% return.

‘Long’ – The positive sloped yield curve in NZ (higher returns for longer terms) looks very likely to remain in place for the foreseeable years and thus investors will receive greater rewards from longer term investment. We don’t think the threat of rising interest rates is sufficient, or likely to happen fast enough, to disrupt this investment strategy.

‘Liquid’ – having flexibility to make changes across the majority of your portfolio is always important, regardless of the circumstances.

Sadly, in 2008, Strong, Long and Liquid offered returns well above 8%, today it is 5.50% - 6.00%.

Part of the victory claimed by investors in 2008 was pre-empting the decline in inflation that occurred but today we are asked to believe that inflation will remain stable around 2% leaving fixed interest investors with real returns of 3-4%.

If true, (anchored inflation) then these real returns would indeed be quite good.

Chorus (CNU) – I shall start with a disclosure of bias – I own a few CNU shares, holding on to them post the company’s drama – so optimistic stories relating to the company capture my attention, albeit that given my bias such stories also make sense.

Statistics NZ has completed an Internet Service Provider (ISP) survey about usage over the past year.

Use of copper line services have increased by 11% to 1.3 million users while adoption of fibre-optic cable services, the fastest internet provider, more than trebled to 46,000 in 2014. Fibre optic uptake has a long way to go yet but its growth rate is unsurprising and the tipping point toward fibre will stand out when growth in copper line use stalls; decline would be the logical change in that sequence.

One commentator offered a view that fibre use will surpass copper five years from now.

Data use has increased 53% to 53,000 terabytes, the equivalent of 12 gigabytes per kiwi, and it is this growth rate that will ultimately frustrate the copper line internet users and direct their attention to the capacity of fibre. It is a bit like trying to double the water flow rate in your garden hose with the consumer expecting more than the hose is capable of, so the consumer will demand a bigger hose.

Because the Commerce Commission has limited CNU’s ability to charge ‘enough’ for the use of the ‘garden hose’ consumers can expect minimal maintenance of this utility and thus some of its capacity may gradually be lost to unrepaired ‘leaks’. We certainly shouldn’t expect new ‘copper garden hoses’ to be installed as the old ones wear out. 

At some point the choice of upgrading from copper to fibre will be obvious to all consumers.

Ever The Optimist – Our export trading has become more diverse to the point that it has forced the Reserve Bank to alter the constituents of our Trade Weighted Index (currency basket).

Historically the TWI Measured five currencies whereas now it will measure seventeen different trading partners proportionate to the export/import activities.

ETO II - The annual value of New Zealand meat exports rose 9.60% to a record of $5.3 billion in the year to September as global demand for kiwi meat boosted prices and offset the impact of a strong kiwi dollar.

The falling NZ dollar value and the stated intention of US consumers to buy more product from us should be seen as very good news for this sector of NZ farming.


NZ Post subordinated bond offer remains the current focus for investors.

Holders of the NZ Post bonds have received notices from the company inviting them to respond with respect to rollover, repayment, or a change to the amount invested. We strongly encourage all investors to send their response in prior to the end of October. (please handwrite CHRIS LEE & PARTNERS on the top of the form if you mail it directly back to the registry).

Any investors wishing to buy some NZ Post bonds are welcome to contact us and we will try to help them with a firm allocation.

A minimum interest rate for the period 2014 – 2019 has been set at 6.35% p.a. The credit margin is 2.00% and the final interest rate will be set in November, but it cannot be lower than 6.35% (which is now looking likely, and attractive, given the declines in global interest rates).

Clients which authorize us to provide financial advice can find a research article about the NZ Post bonds by Kevin Gloag published on the Private Client page of our website.

Following NZ Post we expect Orion Healthcare (shares) to be brought to market and perhaps one or two of the others.


Chris will visit Christchurch on October 21st and 22nd, in Hastings on November 11th, in Auckland (Albany) on November 14th and Auckland (Waipuna) on November 17th. He plans to be in Blenheim and Nelson in December on dates yet to be confirmed.

Kevin will be in Ashburton on November 5th and in Christchurch on November 21sth

Michael will visit Tauranga in the last week of November.

David Colman will visit Manawatu, Whangamata and Taranaki regions on November 18th to 20th 

Anyone wishing to arrange an appointment is welcome to contact us.

Michael Warrington

Market News 13 October 2014

If the majority of the world’s citizens were genuinely concerned about spying, and the influence of spy agencies like our GCSB, surely postal services would experience increases in the volume of mail by envelope, rather than the opposite.



Slow to pay – I thought the reason the Commerce Commission was so interested in monopolies was because it does pay to be one! But, clearly when one is a monopoly, or close, they do not pay, at least they do not for a long period of time.

A recent report by Dun & Bradstreet (D&B) confirms that utility businesses in NZ, such as the electricity sector, are the worst at paying their bills, meaning that they do so very late, simply because they can.

We experienced this impact when Mighty River Power decided to pay brokerage on its bond issue three months after the deal was completed.

D&B reports that while economic conditions have improved and payment times on average have fallen to the fastest on record at 41.4 days (0.4 of a day presumably means the bill was paid at midday – Ed) payments by utilities have widened to 48.2 days. Clearly this behaviour is strategic.

In contrast to the monopolists’, our agriculture, forestry and small businesses all pay invoices in well under 40 days which is tangible proof of which sectors keep our economy moving and growing.

Utility businesses, especially those who provide an essential service, receive very large volumes of cash flow every month and can present the threat that if the consumer doesn’t pay the utility can shut off the service. By receiving payments inside 30 days but paying out in, say, 90 days these businesses are placing an unnecessary tax, and a drag, on our economy and most likely the weakest parts within that economy.

The ‘tax’ applied is the enforced retention of up to two months interest (earned or cost saved) on the money held between receipt and payment time frames.

The drag is the financial management pressure it places on the businesses waiting to be paid by the utility.

This behaviour might be good for shareholders but it is rubbish behaviour by the offending businesses that should displaying better leadership but instead are displaying questionable moral integrity.

Queenstown - my recent visit to Queenstown provided another snapshot of this important tourist region and what I saw provided good reason for continued optimism and the weaker NZ dollar only adds to the potential.

I did strike NZ school holiday timing and the snow was gone for most a fading fast from the higher altitudes yet the airport was stretched at the seams and town was busy. Not peak season queue busy (unless you stand outside Ferg Burger which has a perpetual queue) but quite obviously still busy. Night flights, when they start, will add to the volume (unless they meet with low cloud and snow as we witnessed one day).

The Five Mile project in Frankton (readers may recall Hendos Hole) has been predominantly filled back in, which presumably makes local contractors laugh as they visit the bank, and a new supermarket (Countdown) and retail complex is being built. Queenstown's confined space forces growth out toward Frankton, near the airport, and on out toward Lake Hayes where there is plenty of development happening.

The scar behind the Hilton Hotel (Hanover Finance), on the old Christian campground at the source of the Kawarau River, is now trying to sell private sections to fill some of the undeveloped gap. It is a great site, but at $500,000 each it will take a while to sell; any sale here would represent good economic indicators.

Jacks Point will take many years to fill, given its size, but there is a lot more activity down there now and thank goodness people are designing their own homes rather than using the original ‘cookie cutter’ designs.

I only saw Bendemeer (of Strategic Finance infamy) from the air but it is safe to say that little or nothing has been built there yet. Those with sharp memories might remember SFL describing the ease with which the sites should sell for $1m each but the new owners aren’t making much headway at $650,000 either. I think they bought the ‘bag lot’ for more like $250,000 for each section.

The wine industry was very busy but this is unsurprising given the growth in exported volumes for NZ and the prices that Central Otago easily achieves for its Pinot Noir.

The economic winter did not last long in Queenstown (neither did the seasonal one – Ed) and the region has confirmed its ‘most desirable’ status for tourists, in my view, and thus has a predictably rosy future ahead.

Vodafone – I do hope that the IRD will not fall for the sob story that Vodafone is building publicly about the difficulty it is having making a profit and ipso facto might be unable to pay much tax to the NZ government.

What nonsense.

My guess is they are doing what so many other multi jurisdictional businesses have done and reported minimal net profits in countries with average or high tax rates and enormous financial success in low tax jurisdictions like Bermuda or Jersey.

Globally governments are trying to block this behaviour and the sooner they succeed and the more forceful the corporate taxman is on these entities the better.

Vodafone may be pleading poverty but they aren't finding it so hard that it stops them digging lines to deliver a signal into Waikaia, Southland, population 110.  This is not something a struggling business would do; expand into a marginal profit region.

I don't see them making a profit in Waikaia because the locals aren't looking forward to the arrival of the service, they prefer to talk to people face to face. If you drop into Waikaia John, from the General Store, or Wendy-Jane & Biggles at the Hotel will happily talk to you all day about the local gold mine, tourism rising, town progress (including dreaded mobile phone services!) and the kids who try to hack into the pubs WIFI signal.

If it is OK for the Commerce Commission to describe acceptable returns for monopolies  (Vector, Airports, Chorus etc) then I imagine they could also define the likely equity returns sought by an entity like Vodafone and they could ask our Government to empower them to collect tax on that deemed return.

A customer volume measure and a constrained deductible debt measure could work because analysts are always measuring Average Revenue Per User (ARPU) as part of a test of investment return and the IRD could limit the ratio of debt they would tolerate.

So, to the person in IRD who covers the Vodafone account; if they can make a profit in Waikaia they are certainly making one in New Zealand.

Government- Between now and Christmas investors and business people should get a reasonably clear steer from the Cabinet ministers revealing their big ticket strategy items, clearly housing and the Resource Management Act are two areas of focus.

Several senior cabinet ministers have been commenting about reforming the Housing NZ stock and how it is managed, plus applying new pressure to the councils to accelerate the business of resource consents.

More commercial minded ministers like Bill English and Steven Joyce probably have a thinly veiled dislike for HNZ, from a value for money perspective, and may view it is a gross waste of taxpayer capital with a large percentage of its tenants taking unreasonable advantage of the properties and the pricing of rent. I suspect some of their commercial concerns are valid but they will need the tempering view of the Prime Minister to remind all concerned about the social nature of this asset.

All views, and hyperactive media assessment, will be aired over the coming year as government strategy is revealed and changes are made, but it is clearly a big ticket item this term.

HNZ has about 65,000 of its own houses and rents a further 4,000 privately owned properties to complete its portfolio. At any one time approximately 3-4% of the HNZ stock is untenanted for various logical reasons, not the 25,000 houses that I heard referred to on the radio once.

Whichever prism you view this asset through it is enormous; 65,000 houses at the NZ average valuation of $420,000 equals $27.3 Billon. It should be no surprise that the government want this asset well managed from more than just a social perspective.

The 4% untenanted housing stock will include a mix of classifications such as ‘awaiting sale’, ‘development’ and ‘ready to let’. This is all very logical, especially the ‘sell in Remuera to buy in Meadowbank or Onehunga’ concept, which will provide better use of the taxpayers money and not lead to too much social engineering. I would not be in favour of selling all houses in high socio economic areas and buying only in lower socio economic areas but perhaps the best performing tenants would gain best access to the most desirable houses?

I am not clear about whether the government feels the 69,000 houses are not being well managed or that they find it hard to believe that the government should need to provide such a high proportion of housing for New Zealanders (3.8% of all houses but more importantly 12% of rented houses in NZ) but this asset pool is clearly in greater focus for this term of government.

If the government is to successfully move people out, who no longer need subsidised accommodation, they will need more privately owned housing to be created. This is good for the building industry and should also be good for those in genuine need of housing support from HNZ as house use changes.

Councils should have plenty of incentive, beyond government pressure, to encourage development, and thus increase housing supply, because it increases the population of properties to levy rates against and anything to share the load more widely would be much better that a vertical increase to a persons’ rates bill, usually at well above inflation rates of the day.

Given the enormous expenditure plans in Auckland and Christchurch cities it is surprising that they are not developing property themselves to accelerate the housing supply side of the market!

Lastly, the huge angst surrounding HNZ’s housing stock, it use, management and returns on the $27.3 billion of value should remind investors of the pleasure of managing residential real estate for the retired community with accumulated savings (Ryman, Metlifecare, Summerset etc). How jealous must HNZ feel as the watch these businesses manage an asset with a desirable tenant population, mandatory refresh on departure and a monopoly real estate fee at each change of tenant!

If you are a residential property investor I am not predicting a fall in property values for you, clearly this rarely happens in NZ’s most populated areas and with our population rising quickly (4.5 million now) demand is increasing, but I am highlighting the intent of cabinet to undermine your asset value and any tax advantages that you have enjoyed in the past.

Investment News

Cyber Theft Problem – The US are concerned enough about cyber hacking from China to state publicly that residents of China are the worst behaved when it comes to theft of information via the internet.

Hacking is not new, as soon as one clever technology developer designs something secure another equally clever developer finds a way to tear down the walls. Those with the technical skills to ‘break in’ to other peoples private electronic spaces to steal valuable information is little different to entering a home to steal money or a television; it is inappropriate and undermines confidence.

The protection of private property rights is very important for a well functioning society, regardless of governance philosophy.

Increasingly I find it hard to view technology and intellectual property as easy ‘assets’ to protect (investment moat) and thus their valuation as an investment should be lower, or we should expect that valuation to be much more volatile, than a tangible asset like a farm with irrigation and cows that a smarty-pants computer hacker cannot reach or steal from a desk in a dark corner of the world.

A hacker cannot use a keyboard to stop tourists arriving in NZ to spend money, ‘he’ cannot block our pea exports to South America, cannot stop our renewable electricity generation nor block our irrigation schemes to farms and horticulture.


Technology delivers dynamic leverage to productivity and service for many businesses but investment portfolios must include some, perhaps many, good old-fashioned businesses with tangible assets and markets that aren’t easily disrupted by a person with a keyboard and nothing better to do with their life.

I don’t see the US rhetoric changing the behaviour of the cyber thieves.

NZ Post vs Alibaba – Last month Chinese online retailer Alibaba listed its shares in the US in the biggest Initial Public Offer ever at US $25 billion. Alibaba looks likely to be a threat to many of the world’s retailers by providing buyers with a near direct channel to product from Chinese manufacturers.

However, good news is at hand; NZ Post, from little old New Zealand is setting out in competition having established a branch of YouShop in China!

YouShop is NZ Post’s service to NZ consumers allowing them to shop like a local in the US, Europe and now China and having their purchases delivered to a local address then on delivered to NZ.

NZ Post has been experiencing falling mail (envelope) volumes but parcel mail is rising (as is its finance business through Kiwibank and payments facilities) and the dynamic thinking that leads to YouShop should provide optimism that NZ Post intends to remain a dominant feature on the NZ delivery services landscape.

NZ Post is highly unlikely to threaten Alibaba’s market valuation though (but Housing NZ might! – Ed)

Junk Bond Indicator – the credit margins (incremental return for risk) on ‘junk’ bonds in the US are widening and like a canary in the mineshaft investors are watching closely.

Widening credit margins represent a possible increase in risk of default by the highest risk borrowers, which are often reliant on good economic performance and tail winds regardless of the point of sail.

Markets are always volatile and the current credit margins on US junk bonds remain within the recent bounds but the widening session has captured the attention of many. The anxiety will be settled if US employment improves and if company profits report stability or growth in the next reporting period, but until there is a turn (decline) in credit margins share markets will be uncomfortable, as will the holders of many junk bonds.

I don’t like, or use, the term ‘junk’ for fixed interest investment in NZ. Often our weaker credit ratings are a result of small size (lack of diversity in the eyes of a credit rating agency) and not an enormous debt ratio on the balance sheet. So, in offering this anecdote I am not raising concern about any NZ fixed interest investment products, just the possible global lead indicator for investors to be aware of.

Judgment Day – Justice Heath tomorrow (Tuesday) announces his decision on the case of alleged fraud brought against two South Canterbury Finance directors and its one time Chief Executive. This case may be followed by another case against other SCF directors, a shadow director and the 2010 Chief Executive over errors made in 2010.

Ever The Optimist – Employment, probably our single most important focus, continues to improve.

Employment confidence rose (seventh consecutive increase) to a six-year high with the index at 111.5 in the September quarter from 109.9 in the June quarter, in a measure were a number above 100 indicates optimists outweigh pessimists.

New Zealand's unemployment rate fell to a five-year low of 5.6 percent in the June quarter and the above confidence implies it will continue to fall. Anything below 5% is a very good result, where 4.00% receiving a benefit is considered to be ‘near full’ employment. (sadly – Ed)

ETO II – Massive US retailer COSTCO is visiting NZ to communicate its intentions to beef farmers which, given the actual visit and handshake rather than phone call or email, imply a need to buy more volume from NZ farmers.

Presumably this increased demand will mean higher prices but it certainly means higher volumes, which can only be seen as very good news for beef farmers in NZ.

ETO III – Proving that we are not a one trick pony (dairy), nor two (forestry) or three (beef) our pea growers are also increasing volumes and quality!

International demand for processed peas is increasing at 12 percent every five years. Plant & Food Research’s vining pea breeding programme has commercialised 10 new cultivars in the last five years alone, with seeds now exported to Australia, Europe, South Africa and Chile.

New Zealand receives a significant premium for peas which is great news, even if the younger consumers hide them under their knife and fork at the dinner table.

ETO IV – and then there is our log trade, prices are rising again, the exchange rate is falling and shipping costs are reducing; ‘all good’.



NZ Post subordinated bond offer remains the current focus for investors.

A minimum interest rate for the period 2014 – 2019 has been set at 6.35% p.a. The credit margin is 2.00% and the final interest rate will be set in November, but it cannot be lower than 6.35%.

NZ Post has issued documents to current bondholders (NZP010) asking if they wish to reinvest (remain in vested), add/decrease their investment, or be repaid. (We think people can ignore Option D on the election forms as no other terms/interest rates will be accepted by NZ Post).

New investors have the opportunity to buy NZ Post bonds released by those bondholders who wish to be repaid.

The ‘Remarketing Process’ will only be successful if bondholder responses exceed 25% of investors. Brokerage will only be paid if responses reflect the involvement of a broker and portfolios can then easily be updated with such information.

For clarity we strongly encourage NZ Post bondholders to return their election to us for processing regardless of their preferred action.

New investors wishing to invest in the NZ Post bonds are now invited to express firm demand to us to arrange that investment. We will confirm such requests, as able, and will subsequently issue a contract note (no brokerage charged) with a payment date in November.

We anticipate being able to satisfy most, if not all, client investment demand in this bond offer.

Clients which authorize us to provide financial advice can find a research article about the NZ Post bonds by Kevin Gloag published on the Private Client page of our website.

Following NZ Post we expect Orion Healthcare (shares) to be brought to market and perhaps one or two of the others.


Chris will visit Christchurch on October 21st and 22nd and Hastings in November.

Kevin will be in Ashburton on November 5th.

Michael will visit Tauranga during late November.

David Colman will plan a trip through Manawatu and Taranaki areas.

Anyone wishing to arrange an appointment is welcome to contact us.

Michael Warrington

Market News 6 October 2014

I DON’T intend this to be a political column, more a look forward in strategy for investors wondering if a third term might be the last for the current National-led government.  At present I think a fourth term is a probability and thus investors can currently assume stable government.

Imagine if the National party moved strategically to the ‘left’ a little, ie to become dead ‘centre’ in political terms, claiming more of the vacuum left by Labour as it moved further ‘left’.  National could try to cement this position into the population’s perceptions while Labour spent a few months navel gazing (or arguing over where its navel is – Ed).

Such a strategy would theoretically reinforce the support of a wider range of people, consistent with the volume of party vote gained by National in this election, and it would make it doubly hard for Labour and the Greens to achieve a governing majority in 2017.

Disaffected voters on the ‘right’ who felt the National party was being ‘too social’ would, I guess, vote Act or Conservative if they felt upset with National; surely this only brings a smile to John Key and his party.

The icing on the cake from National’s perspective might be if they can help the Maori party to continue delivering real benefits to their constituents and thus increase this party’s voter support again in 2017.

Time and again the NZ public confirms that it seeks stable, centrist government with evolutionary change to strategy and not radical change.

For now, as we try to identify probabilities for investors, I expect a continued period of stable, evolutionary government in NZ which should be a good platform for those making decisions about where to invest capital and how many people to employ.


Monetary Policy – The Reserve Bank of NZ has made a concerted effort through use of speech, and now the central bank’s cheque book, to manipulate the NZ dollar lower, especially as measured against the US dollar.  (Manipulate? – Ed).

Sure, why not?  That is what happens when the central bank enters into the foreign exchange market.  I imagine the RBNZ, as a regulator, along the road from the Commerce Commission, won’t be keen to see the ‘what’ (manipulate) in the same sentence as the ‘who’ (regulator), especially when their peer regulators, the Commerce Commission and the Financial Markets Authority, spend every waking hour trying to stop manipulation of markets and anything that might be misleading or deceptive.  To Graeme Wheeler’s credit he is certainly not being misleading or deceptive after making it very clear, loudly, what he believed and what he would do about it if he felt it were necessary.  There is no escaping that it is market manipulation, though.

Mr Wheeler has shrewdly picked a moment of strength in the USD, and thus weakness in the NZD, to launch an attack on the over-valued NZD.  It is probably an old war tactic learnt at West Point (New York); strike when the opposition tries to retreat.  I have no idea how Mr Wheeler found the time to learn warcraft whilst holding down a senior role at the World Bank (Washington), but his actions are proving to be very effective in the short term. (Perhaps a trip to NY is in order to learn his technique? – Ed)

Exporters’ emotions will undoubtedly be moving rapidly from satisfied, to excited. With another 10% decline they would be deliriously happy, which is why such a subsequent move is most unlikely to happen in my view.  With an ounce of luck, a surge of activity by exporters will be matched by a slump in consumers buying gadgets and NZ will enjoy an unexpected trade surplus.

If the RBNZ can convince financial markets to retain the recent 5-10% decline in the value of the NZD they should be very pleased.

Not only that, but the interest rate analysts would be forced to revisit their claims that the OCR increases are on hold for a long time.  You see, a currency decline is measured as a monetary policy easing (like an interest rate fall) and the RBNZ is focused on monetary tightening until conditions reach a mystical point described as ‘neutral’.  Last year ‘neutral’ was estimated to be a 4.5% Official Cash Rate and NZ/USD a little below 80 cents.

If the NZD/USD can hold below 80 cents then OCR reviews will be brought back to the table a little sooner.

Speaking of lead indicators, you may recall that NZ’s long-term interest rates take their lead from US interest rate movements.  Well, US interest rates have always been very interested in the opinion of Bill Gross, bond trading legend.

Forty years ago, Bill established Pacific Investment Management Company (PIMCO) and progressively became the biggest fund manager in the world, with a specialist skill with interest rate management.  For the age-old reason of ‘time to move on’, Bill has been forced out of the firm he established but rather than retire he has accepted a role at fund manager Janus Capital.

Maybe it was time to retire, but I have no doubt that financial markets will remain very interested in the views of Gross and his strategic investment decisions over the next 12-24 months.  Gross is no shrinking violet so I am sure that he will share his views with the world and given his new circumstances those views will be well broadcast across financial markets.

Back to NZ.

Financial markets in NZ have been quick to price in assumptions that rate hikes here may well be off the table but I would be a little careful of this view if our currency manages to hold at these weakened levels, especially as it relates to short term interest rates; times may be improving again for investors and worsening for borrowers, more than has been assumed recently.

As for travellers, including my newly proposed trip to New York, the foreign money will cost more than you wished.

Investment News

SCAM Alert – An elderly client, clearly still sharp enough mentally, called us today to warn us of a scam call he had received.

A person with English as a second language near-on threatened our client that if he did not release his CSN and FIN number to the caller his computer would be hacked and records ruined, including any banking information.

After our client saying he would ‘think about it’ and hanging up, the person called back 10 minutes later.  The wise gentleman asked the caller for his name and where he was calling from so he could check (and report) his credentials.

Unsurprisingly the line went dead.

It may seem obvious, but NEVER hand over financial information, or usernames and passwords, to callers or any person you do not know extremely well and have extensive trust in.

If you receive such calls and can glean any useful contact information please pass it on to the Financial Markets Authority.

On a related, but different, matter the FMA has issued an ‘extreme caution’ warning about interaction with a business called General Equity.  In my language that means avoid them at all cost; hang up, throw out any marketing material and do not do business!

Property – It was only two or three weeks ago that I commented positively about a German investor buying into one of Auckland’s best commercial properties, noting my perception that such investors were being attracted to our relatively neutral governance, growing economy and attractive returns (capitalisation rates on property between 7-8%).

Last week there was more evidence of international investors buying into commercial property in NZ, this time with an Australian fund (Quattro Asset Management) trying to buy properties from both Precinct (PCT) and Goodman Property Trust (GMT).

Quattro may well be bulging with cash from Australia’s compulsory superannuation rules and feeling the heat from the Australian regulators about investors holding too much money in Australian shares; whatever the reason I am happy to see them here injecting fresh capital into our economy and fresh liquidity into the commercial property market.

I would also back Precinct and Goodman to be well informed, rolling out a winning strategy and to thus have the stronger hand here.  They will be quietly pleased to sell these properties to recycle this capital into developments that they believe have greater potential for tenant demand and thus higher rental.

In Precinct’s case this will mean developing its Bowen Campus beside Parliament and its Lower Queen St /Quay Street precinct alongside Britomart and Auckland’s waterfront.  For Goodman,  it means accelerating the developments at Highbrook near Manukau.

If the managers of Precinct and Goodman are successful they will help to justify their high fees, which are greater than the costs of a board of directors and employees running companies.  I cannot afford one commercial building, let alone many for diversity, and I do not have the time or inclination to manage such risk, but I do want a few dollars invested in the sector (personal circumstances) and I do want it managed by experts.  Precinct and Goodman are displaying the type of expertise that I like to see.

Unsurprising disclosure: I own a few shares (units) in Precinct and Goodman.

Aussie IPOs – The Australian government has returned to the asset sales market, like NZ, and is offering for sale its 100% shareholding in Medibank Private, a health insurance business.  Quite why the government is involved in this well-regulated competitive sector is hard to explain, which is no doubt why the current Australian government has put the business up for sale.

The government has stated that it will use the proceeds for more logical, and much needed, infrastructure investment.  Medibank is expected to sell for about AUD$4 billion.

Where there is a proponent there is usually an opponent and in this case I read comments from one in the Sydney Morning Herald:

‘Victorian president of the Australian Medical Association Tony Bartone said he was concerned the sale of Medibank Private would push the company to focus more on profitability than healthcare.

‘’We have concerns of the effects that it might have on premiums going forward. Significant cost pressures might be reflected in bottom line need to drive profit and that might certainly spell increased premiums for policy holders,’’ Dr Bartone said.’

Perhaps Dr Bartone didn’t think this through before raising his criticism.  A business must make a profit to survive and serve its customers and the presence of health insurance and the setting of the necessary premiums reflect the costs of service from the good doctor’s industry.

Something tells me Dr Bartone is more likely to invest more in his own practice than in shares in Medibank!

Ever The Optimist – Water science is continuing to be refined as agriculture recognises the rising cost of water provision and the need to avoid overuse and excessive drainage from the land.

A new app that tells farmers whether they should irrigate and how much water to put on their pastures has been launched by ReGen and NEC New Zealand.  It is used in conjunction with the soil knowledge already held by land users.

Every little idea, like this one, will help improve NZ efficiency and productivity.

I happen to know that venture capital funds have been supporting another business in this field (excuse the pun) known as Varigate.

Whichever service provider rises to the top, in terms of sales to land users, improves outcomes for the country of more efficient water use which is the appropriate focus for all.

Kevin Writes:

The political shenanigans of recent months have once again highlighted the power of the media and the influence, often distorted and unhealthy, that they can have over people’s views and opinions.

TV obviously has the greatest reach and its ‘game plan’ often seems to be based around sensationalising new events or people from a negative perspective - trying to ‘catch the big wave’.

I believe that in its attempt to gain mileage and add spice to the election, the publicity and increased profile TV1 and TV3, in particular, handed to Kim Dotcom was one of the biggest time, energy and money wasting exercises in NZ media history.

The media’s fascination with the convicted fraudster was not shared by 99.9% of New Zealanders but it just kept dishing him up day after day and the amount of primetime wasted on Dotcom, who has not and will never make any meaningful contribution to this country in my opinion, annoyed me immensely.

Of course as I’m changing channels at the mere sight of him you must remember that the majority of New Zealanders live modestly, pay their bills, obey the law, treat their family well, help their neighbour and do some volunteer work for charity and I suppose this behaviour doesn’t make pulsating news stories, so don’t expect the media’s game plan to change any time soon.

Thank goodness it’s finally over.  Where is Dotcom now?  You suddenly don’t hear of him.  Maybe his little partnership with the media is finished because they have no further use for each other.  Who cares!

What I do hope is that if or when they march Dotcom across the tarmac at Auckland International Airport to catch a flight bound for the US, to face his accusers, the media are there with all the cameras and reporters they can muster on the day.

I will excuse them on this occasion if they run Dotcom as their lead story.

Also in the news again is Harmoney, NZ’s only licensed peer-to-peer lender.

Harmoney officially launched its online platform on September 10.  As outlined in our August 14 Taking Stock article, Harmoney’s platform matches investors with borrowers, with loans up to $35,000 for terms of 3 or 5 years and interest rates ranging from 9.99% to 39.99% depending on the assessed risk profile of the borrower.

After nearly a month in operation, Harmoney chief executive and 70% shareholder Neil Roberts reports that it has already lent about $2 million, even though it is rejecting between 70-80% of all loan applications.

The average loan size is about $14,000 and, as expected, debt consolidation represents about half of current demand.  Other categories include motor vehicle purchases, holidays and home improvements.

After an impressive start Roberts believes Harmoney can lend up to $100 million in its first year of operation.  To fund this growth, Harmoney has commitments for $100 million of institutional money, including a funding line from its new 10% shareholder Heartland Bank, which will use the platform to lend to Harmony’s borrowers.

We see Heartland’s involvement as both a shareholder and funder as very positive, as we suspect its support would have been subject to having input into the credit checking and approval processes that Harmoney has designed and adopted.

Heartland is a market leader in consumer and motor vehicle finance and its knowledge and experience will be invaluable for Harmoney which has the role of flag bearer for this new lending and investment product.

Roberts has a lot of skin in the game and plenty of reasons to succeed but he is basically lending at the bottom end of the consumer market which can be very high risk, especially if strict disciplines around systems, processes and lending criteria are not maintained at all times.

Interestingly, Roberts’ background included a role as general manager at Pacific Retail Finance (PRF) which was part of Eric Watson’s Pacific Retail Group before being sold off to GE in 2006.

PRF was an aggressive ‘factory style’ consumer lender whose rapid growth was matched by a high default rate.  As a condition of the sale GE withheld around $30 million as retention against future bad debts and from memory the full $30 million was used up.

I am not suggesting these losses were in any way the fault of Harmoney’s Roberts, but it does highlight the dangers of employing a growth strategy in a high risk area.

It was encouraging to read that many of the ‘hundreds’ of retail investors who have invested in Harmoney to date have come from London and New York, where P2P lending is already quite established.  It seems that these investors were well informed about the P2P model and many had already enjoyed a good experience in this sector.

New investment opportunities are always welcome but in terms of P2P lending I think I’ll join Chris and be a spectator for the time being.

 Early Redemption of GFZ010


Goodman Fielder has announced that it will redeem for cash all of its 2016 fixed rate bonds after arranging a new 3-year bank debt facility of $250 million.

The bonds will cease trading on 14 October and be redeemed on 24 October 2014 at $1.01 each, which is a volume weighted average price trading price in accordance with the Trust deed for the NZ bonds.

The early repayment of the Goodman Fielder bonds follows the early redemption of the APN News & Media 2016 bond on 22 September.

Goodman Fielder and APN have both been in ‘strugglers gully’ in recent years.  Some investors believed they would fail and sold their bonds at a loss.  Others were concerned but hung in, not quite so keen to realise a loss, although I’m sure that if you had offered them their money back they would have grabbed it.

It now seems a little ironic that just as investors finally get comfortable with the outlook for both companies they get their money back and lose the quarterly income.

Just goes to show how eager the banks are to get a deal done and how favourable the terms must be.


NZ Post bond offer is the current focus for investors.

A minimum interest rate for the period 2014 – 2019 has been set at 6.35% pa. The credit margin is 2.00% and the final interest rate will be set in November, but it cannot be lower than 6.35%.

NZ Post has issued documents to current bondholders (NZP010) asking if they wish to reinvest (remain invested), add/decrease their investment, or be repaid. (We think people can ignore Option D on the election forms as no other terms/interest rates will be accepted by NZ Post).

New investors have the opportunity to buy NZ Post bonds released by those bondholders who wish to be repaid.

The ‘Remarketing Process’ will only be successful if bondholder responses exceed 25% of investors.  Brokerage will only be paid if responses reflect the involvement of a broker and portfolios can then easily be updated with such information.

For clarity we strongly encourage NZ Post bondholders to return their forms to us for processing, regardless of their preferred action.

New investors wishing to invest in the NZ Post bonds are now invited to express firm demand to us. We will confirm such requests, as able, and will subsequently issue a contract note (no brokerage charged) with a payment date in November.

We anticipate being able to satisfy most, if not all, client investment demand in this bond offer.

Clients who authorise us to provide financial advice can find a research article about the NZ Post bonds by Kevin Gloag published on the Private Client page of our website.

Following NZ Post we expect Orion Healthcare (shares) to be brought to market and perhaps one or two of the others being alluded to.





Kevin will be in Christchurch on Friday October 17th but is now fully booked.

Chris will visit Christchurch on October 21 and 22 and Hastings on November 11.

Michael will visit Tauranga during November.

David will visit the Manawatu, Wanganui and Taranaki areas in early November.

Anyone wishing to arrange an appointment is welcome to contact us.

Michael Warrington


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