Market News 30 April 2018

Apparently in Sweden retailers are putting up signs stating ‘no cash accepted’ as they try to migrate to the efficiency of electronic payment only (our EFTPOS, mobile phone or online banking).

‘Anti money laundering’ regulators won’t stop this trend; they love the ability to ‘track and trace’.

The Swedish move seems logical in terms of ease (no manual banking, easy for Xero accounting services) and for security purposes but it might be happening a little too fast for the older generations who do not change methods as fast as technology enables change.

Sweden is described as the most cashless society in the world. NZ can’t be far behind.

I like the move toward cashless payments as a concept but just to make sure my perspective is sound I feel the need for a Research trip to the North of Europe. (before tax deduction is removed? – Ed)

Investment Opinion

Cluck, Cluck – On Thursday morning last week holders of Tegel Chicken (TGH) shares will have been temporarily pleased to learn that another business viewed their shares as being worth more than the then market price of $0.82 per share.

Bounty Foods Inc. is to make a full takeover offer for TGH at $1.23 plus allowance for the company to pay the same final dividend as it did in 2017 (4.1 cents per share, less any withholding tax).

However, if I was a TGH shareholder (I am not) that is where the pleasure would end.

The temporary pleasure stops once investors realise the TGH investment performance between the start point (May 2016) and today (May 2018) is a financial loss of 32 cents per share, or 20.6% of the original capital over two years (dividends paid were broadly comparable with many other NZX listed companies).

TGH was recently listed on the NZX via Initial Public Offer (IPO) in May 2016 at a price of $1.55, being at the bottom end of the price range that the private equity sellers tried to extract from the market when listing ($1.55 - $2.50).

The market wisely looked through the spin as the company thrust out its chicken breasts whilst promoting the offer, pressing back and demanding pricing at the lower end of the range.

It turns out that the IPO pricing wasn’t low enough.

Here are a few choice cuts from the offer document:

As the market leader in New Zealand, Tegel is well positioned to take advantage of market growth.

Tegel will seek to leverage its brand strength, marketing investment, and capabilities in new product development to maintain or grow its market share.

Tegel continues to leverage its established relationships with customers, driving growth through innovation and marketing programmes to deliver additional export sales growth.

Tegel continues to innovate in the value-added space to increase revenue in this segment.

Tegel seeks to be one of the lowest cost producers of poultry globally and continually implements initiatives to reduce costs and improve efficiency across its operations.

TGH then promptly missed performance targets and the share price has been declining since the listing on the NZX.

Since listing on the NZX the TGH share price briefly exceeded $1.70 (late August to mid-September 2016), but thereafter the share price followed a gradual decline to $0.82 cents.

For me there are two clear lessons from this example;

Be doubly careful when offered an investment opportunity from private equity sellers; and

Observe the recurring behaviour by markets to over-sell (and over-buy) relative to underlying value.

The arrival of Bounty Foods Inc. offer to buy 100% of TGH at $1.23 reinforces both points; $1.55 has proved to be too high a price for the business and $0.82 has proved to be too low, with respect to the real value of TGH.

The original seller of TGH shares in the IPO has already agreed to release its remaining 45% of the shares to Bounty Foods; they have no shame.

If the takeover offer is totally successful investors may lose (release? – Ed) yet another business from the NZ market (NZX). The offer is not conditional on 100% ownership so removal from the NZX is not a fait accompli. (maybe the NZX should step in and buy 11% of the shares! – Ed)

Actually, the NZX may not need to try and block the departure from the exchange, another regulator may step in to help; the increasingly protective Overseas Investment Office may block the ownership of the entity that controls 40-50% of the chicken supply to NZ.

This TGH scenario is beginning to look like the recent experience for investors in Fliway, the NZ truck transport firm; sold to the market by private interests, it then declined in price only to be subsequently taken over by a third party (without much loss to original shareholders in the Fliway case) and then removed from the NZX.

The Tegel example, also Metro Performance Glass and possibly Fliway, seem to validate an opinion that the wider market as an ‘investor’ pays too much for businesses when they are brought to market via IPO, relative to the value a trade sale (industry expert) would pay for the same business.

Forgive me for not celebrating the 10 minutes of excitement for TGH shareholders at 9:00am on 26 April because I don’t see the TGH investment performance as something to celebrate.

It is however, another useful lesson for investors.

Employment – I really don’t want to introduce a ‘Social Opinion’ section to this newsletter, but of an occasion things occur to me that are related to the economy, which as a derivative trickles through to your investments.

Today’s social policy is for the government to instigate a temporary job programme for the long term unemployed under 30 years of age who are past education and initial tertiary training but still find themselves unemployed.

By ‘temporary job’ I mean, if a young person has been receiving the unemployment benefit for six months, Work & Income become obliged to place that person into a working role (government or council supplied) on a higher income than the unemployment benefit for a further six months.

The jobs would be a little uninspiring, from the ‘nice to get done when able’ category, but importantly the youth would gain psychologically, financially and hopefully prospectively as such effort gets added to their CV.

These work opportunities would be rotated. After six months you would be expected to have found your own employment or you would return to the unemployment benefit.

It would be part of sharing the economy’s ‘spoils’ more widely.

If ‘we’ do not harness people’s efforts (for reward) during their most energetic years then rather than moving on to be a country’s most productive citizens many will become the opposite; witness some of the destructive behaviours of young adults around the globe.

‘We’ must integrate to avoid disintegration.

It isn’t grandparents that are reported causing mayhem around the world.

These thoughts were prompted by a report I stumbled upon by EUROFOUND.

I wish some unemployed youth had been involved in writing the report because it was enormous and no doubt occupied many working hours!

Education is often cited as the platform for future success, but without wanting to dilute this truth these unemployed youth have already been there; they don’t want to be told to absorb more information from another tutor.

Give these people opportunity, give them cash, give them confidence.

Using a quote from the report:

Related to the growing awareness that long-term unemployment might be harmful to physical and mental health, Waddell and Burton (2006) showed that the benefits of work are greater than the harmful effects of long-term unemployment, and participation in the labour market can reverse the adverse health effects of unemployment.

Highlights above are mine.

As a nation that is willing to push its minimum wage up to $20 per hour to share financial benefits more widely, it is entirely consistent for us to have what amounts to a subsidised work programme to also share economic benefits more widely.

I know I’ve cut a swathe through countless hours, and years, of brainstorming on the subject of long term unemployment but I think if we re-directed the money spent on mints, white boards and thinkers into actual employment programmes we might make a little more progress.

For those who would reject the carrot, it only leaves the stick.

Policy tutorial over.

Post Script: Finland has decided to end its trial of paying a Universal Basic Income to 2,000 of its unemployed. Clearly this did not enhance the employment and gross income potential of the group.

Investment News

US Treasuries - US 10-year bonds (Treasuries) breached (up) the 3.00% level last week and this has re-energised market commentary.

Some are very anxious about it reaching up and beyond 3.05% and are donning their hard hats and safety glasses.

The dual discussion thread behind the commentary is the impact of a rising cost of funds (US Fed Funds rate) and a lift in the belief that US inflation may indeed lift a little; these being related items.

The gradual flattening in the yield curve has some people predicting a US recession by 2020, which may imply that these commentators believe the US Fed Funds rate can lift to 2.50% but no further.

The opinion follows that if the Fed attempts to move Fed Funds on up to 3.00% they will likely trigger a US recession, which would be consistent with analyst opinions who don’t see US growth making it above 2.00% for long.

Rising long-term interest rates is important for the valuation (Present Value) of all other assets, so this subject (interest rate movement) has more leverage than most in your investment decisions.

However, we all have time to be patient, so let’s wait and see what actually happens, as our parents often recommended.

Oil – Immediately after the government announced its strategic move to less fossil fuel use (no more drilling) Statistics NZ reported our highest monthly importation of fossil fuels in a decade, knocking our March month trade balance into deficit (unusual for this month).

I know part of the financial problem from this situation was the recent increase in the price of oil but I shan’t let that ruin a good story.

It is however exactly what fuel users will do if NZ based supplies decline; they will import the difference, to the detriment of our country’s financial trading position.

Wouldn’t you just like to be a fly on the wall for a discussion between the Hon. Phil Twyford, Minister of Transport, and his Associate Ministers: Shane Jones (NZ First, Mr Regional, I need the roads) and Julie-Anne Genter (Greens, shut fossil fuels down).

You see, Phil Twyford has just announced greater tax collection from the use of fossil fuels to finance the increasing transport budget, and Julie-Anne Genter needs that fuel to flow to be able to pay for the Greens’ preference for cycle ways and electric public transport.

What a conundrum.

Conflicted Opinion – Here’s another conundrum:

Until the deal for HNA Group to buy UDC Finance fell over ANZ was very happy with HNA as a business relationship.

However, last week ANZ was reported as recommending that investors sell bonds issued by HNA Group to reduce redemption risk as HNA is coming up against very large debt refinancing obligations.

‘Loves me, loves me not’ (finance by daisy – Ed).

Property – A story last week reinforced the value offered by the various NZX listed property entities with the diversity and expert management that they offer.

Precinct Property (PCT) sold the old Deloitte House at 10 Brandon Street, Wellington after suffering damage during the 2016 earthquake.

PCT sold the building for $10.2 million, up a little on its most recent post-earthquake revaluation ($7 million) but down significantly from $45 million in late 2016.

Immediately after the earthquake PCT reported the following:

Precinct’s portfolio is insured for Material Damage and Loss of Rents arising from earthquakes, with Precinct’s total portfolio exposure for losses under the insurance policy limited to the Policy Deductible of $10 million for any one event.

By mid-2017 10 Brandon Street barely featured in the financial reporting. Losses had been acknowledged, insurance negotiated, and the balance of the PCT portfolio overwhelmed the modest influence of the damaged property.

PCT’s strategy resulted in the pursuit of a sale of the 10 Brandon St property (now complete), but also the sale of 50% of the ANZ Centre in Auckland where significant financial gains will likely be recorded.

As it happens, the earthquake’s ironic silver lining was that it has created price tension (upward) for rent payable on remaining A grade commercial property within the city.

The over-arching point here is that I (as a modest PCT shareholder) spent very little time worrying about the impact of the earthquake on PCT’s property portfolio because I knew it offered me the protections of diversity (within their chosen strategy) and of expert governance and management for handling the good and the bad.

I also enjoy the liquidity of the NZX listing, in case of change in my personal investment strategy (expertly governed by Mrs Warrington – Ed).

Post Script: If you are an Argosy shareholder you have been invited by them to attend presentations from the CEO, detailing current performance of your investment.

These personal presentations are excellent ways to be well informed about specific investments within a portfolio and are miles better value than anything the world of ‘robo-advice’ will ever offer you.

RSVP is required if you wish to attend.

AKL Transport – Drivers will continue to gnash their teeth about the additional fuel taxes being collected but businesses delivering in the roading and public transport contracts sector will be rubbing their hands together at confirmation of a $28 billion, decade long, spending programme in Auckland.

Fulton Hogan will have plenty of information to add to their book when it becomes a summary of the past 90 years (I just read the past 80 years edition).

The few F&H shareholders that I know will likely place these shares at the bottom layer of the bottom drawer.

I hope Fletcher Building is a successful participant also (bias on my part).

Fletcher– speaking of FBU, the company has mailed, and emailed, out the documentation for the Rights Offer (1 new share at $4.80 for every 4.46 FBU shares held) to retail shareholders.

If you are an FBU investor it is time to review the documents and respond to the registry prior to 11 May.

At the time of writing the FBU share price delivers a financial win, post dilution, for those taking up their rights to new FBU shares.

Ever The Optimist–Tourist numbers set a new annual record at 3.82 million visitors for the year to March 2018 (+8% on 2017).

Investment Opportunities

Fletcher Notes – We continue to keep our FBI170 list open for those wishing to hear more about the possible supply of this fixed interest investment.

Possible deals for 2018:

One or two potential bond offers are being worked on, which we all hope will make it to market over coming weeks. More details if they are revealed as actual offers.

UDC Finance – IPO of ordinary shares (iterative speculation by us).

All investors are welcome to join these lists by contacting us.

The fastest way to hear about new investment offers is to join our ‘Investment Opportunities’ (New Issues) email group, which can be done via our website or by emailing a request to us to be added to this list.


Chris will be in Christchurch again on 15 May.

Kevin will be in Queenstown on 15 June.

Mike will be in Auckland on 8 May.

Our future travel dates can also be found on this page of our website:

Any person is welcome to contact our office to arrange a meeting.

Michael Warrington

Market News 23 April 2018

Beneficial use of technology needs to be a two-way street.

I disliked a recent example where our insurance company, who like most businesses now push for the ability to reach us by email, but then quite obviously avoid offering us the opportunity to reach them by email in response.

Issuing emails from ‘noreply@...’ is understandable, but then not offering a channel to reach out to is not.

We all have opinions about the effectiveness of call centres. As it happens I did try to call but it was a failed experiment.

Businesses will not please their clients if they make use of technology for shareholder (sales and cost cutting) purposes, but not to support client services.

The reality is that if you do not please your clients you are not pleasing your shareholders.

Don’t get me started on Artificial Intelligence; it will be a misnomer if technology is not clever enough to serve a customer well.

Investment Opinion

Lending – Are you a small to medium sized business owner?

How are the banks treating you?

Are they asking you to borrow more, or to repay?

We are picking up on a few anecdotal stories that the banks are pressuring some for repayment; the most recent story was from the dairy sector.

This information was validated by a second conversation that confirmed there were more dairy farms on the market (for sale) than in previous years, including many that don’t have a ‘for sale sign on the lawn’.

Pressure from the banks to repay some debt may well be targeted at those with the greatest debt ratios but it does display further evidence of strategic change about the way the banks wish to use their balance sheets (note also the sales of Direct Broking by ANZ, the intended sale of UDC and possible sale of fund management businesses etc).

With respect to dairy farming, even though the milk price is looking quite reasonable other risks are obvious with Mycoplasma Bovis, higher minimum wages, high occupational safety and health costs, higher fuel costs and a new push to get Emissions Trading (carbon tax) operating properly.

When you write it down like that it seems a bit daunting to the poor old farmer. It would certainly make one reflect on the price of a farm if you lost faith in capital gain as the only path to profit.

How about those of you in other sectors; are you being pressed by the banks to reduce or repay your business loans?

Flat Curve – There is a lot of change occurring on the US interest rate curve and it continues to warrant our close attention, such is its scale of influence over our economy and our investment decisions.

The US Federal Reserve is playing loudly, and with the coordination of an orchestra, the symphony of the rising interest rates.

They are doing this because they both believe it is necessary (the actual increases to the Fed Funds rate) and they want to test the market’s resilience to the rate of change (speaking in committed tones when at the public rostrum).

So far, so good. There has been no real fracturing of financial market pricing, nor economic outcomes, but to be fair it is probably a little early for meaningful economic data.

However, financial markets don’t wait for data to emerge, they are not ‘cash accountants’, markets are constantly trying to predict what happens next for as far as they dare see. Financial market pricing is, for the most part, still quite stable.

The most recent signal of concern was in late March when the US yield curve between its overnight rate (Fed Funds) and the 2-year Treasuries (government bonds) started to flatten (trend toward the same return for 1 day or 2 years).

The forward yield curve (mathematical calculation of yield curves of the future based on interest rates, and forecasts, of today) was beginning to alert people to the risk of a recession in the US by 2020. The 2-year interest rate was threatening to move below the overnight interest rate.

When you witness a negative yield curve (long term interest rates are lower than short term interest rates) the market is telling you that an economic recession is nigh and that central banks will be forced to cut interest rates to assist.

JP Morgan surveyed its ‘ultra-rich clients’ with three quarters of them responding that they were making decisions in the expectation of a recession in the US by 2020. JP Morgan disagrees, for the moment.

Interestingly the US Federal Reserve responded to this apparently tenuous market data by re-stating its case for lifting interest rates.

They are staring down the market.

As I stated a couple of weeks ago, perhaps the US Federal Reserve could respond to the market’s willingness to buy 2-year Treasuries at lower interest rates by selling some of the many billions of bonds that the central bank now owns (make sure supply meets demand).

At the time of writing the US market seems to have backed off from its concerns; 2-year Treasury yields have lifted again to 2.46% and 10-year Treasuries currently sit at 2.96%, its highest level since January 2014.

I hope the Fed did manage to sell some of its bonds, they sure have plenty to get rid of, but it is more likely that the broad confirmation of higher corporate profits and low unemployment data is behind the reduction of market concern about the timing of the next recession.

Let’s not be naïve though, there will be a next recession in the US and a recently shared article from a John Mauldin contact (Lacy Hunt) re-stated the certainty of that recession.

Lacy Hunt spelt out the ever-diminishing returns being created by the use of debt alongside the ever increasing scale of debt being used and thus he described the inescapable conclusion that slow growth and recessions were upon us.

He didn’t supply an exact date (smile) but reference was made to the year 2020 once we passed through the good reporting season and the sugar rush of the US tax cuts.

The US hikes to interest rates are leading them above the nominal interest rates for equivalent terms in NZ. This has only ever happened once before in my career (1994 I think) and is most unusual.

I’m not brave enough to offer a prediction on how long the situation will hold (NZ rates lower than the US) but it is beginning to have an impact on the price of borrowing money in NZ.

Confusingly you’ll say; the cost of borrowing is going up in NZ!

NZ banks historically borrowed a lot of money from the US placement markets and swapped that money back to NZ, often times achieving funding costs below NZ market equivalents.

However, that situation is changing. The margin (or fee I’ll call it for ease of understanding) that a bank pays to borrow the money in USD and bring it back to NZ has increased along with the higher nominal interest rates in the US. This combination has had a direct, upward, impact on the NZD interest that the bank pays to borrow money from the US market.

I expect you’ve all jumped to the correct conclusion of recognising that this will drive up the interest rate charged to NZ borrowers.

The eagle eyed owners of NZ’s various annual reset securities may have noticed that the 1-year interest rate swap benchmark in NZ lifted from its 1.99% slumber in February to be 2.20% by the end of March, all while the governor of the Reserve Bank of NZ was describing no plans to lift our Official Cash Rate prior to 2019.

We’re not alone with this development, the Australian 1-year swap rate has made the exact same upward move.

It is unlikely to move much further without the OCR lifting because borrowing via the RBNZ comes into play, but the signal is worth noting; the increased marginal cost of debt in the US very quickly reaches the NZ market and thus economy.

Ironically, if this increased debt cost imposed by our banks slows activity a little our central bank may have yet another reason to defer an increase to our OCR!

Side story: The market price of our annual reset securities (Infratil – IFTHA, ASB’s - ASBPB and ASBPA, Downer – WKSHA) have all increased over the past 10 days.

They are right to be tracking the lift in the 1-year swap rate, but the behaviour seems even more robust so maybe investment advisers sense higher inflation risks that aren’t being seen in the current statistics.

Investment News

Inflation – I was surprised last week to read economists describing the government’s new ‘fee free tertiary education’ as placing a downward pressure on inflation.

If inflation management was that simple, then government should offer to pay more private expenses (starting with our insurance – Ed).

The fact that little Johnny, or Jane, weren’t required to pay their own university fees doesn’t mean that the costs went away. The professors, tutors and property expenses still had to be paid.

Payment came from you and me (via the tax lady).

In fact, I think I could mount a cogent argument from watching my children that their spending went up (more inflationary) after discovering they wouldn’t be required to pay this year’s fees!

Student rent has been forced up (scarcity influence), the cost of a ‘Flat White’ has gone up (new minimum wage influence) so I see inflation where the statisticians do not. (I doubt brewers will have trouble making enough beer to avoid the inflationary impacts of student spending on this product).

I am not predicting a spike in inflation, but I am equally not impressed by reports of disinflation based on reallocation of who pays.

Closed For business – No sooner has the current NZ government started passing legislation to restrict foreign investment in NZ than I read that one bastion of exclusion, China, says they will remove ownership caps on the auto industry, reversing a two-decade old policy that will pave the way for foreign control of more than 50 percent of its manufacturers.

I know this comparison is a bit shallow, but it is also stark, especially when NZ savings rates are so poor and thus we are the nation that definitely requires international capital to keep our economy humming.

Bank Profits – I’ll bet the under review and pressure Australian banks hate reading the ‘record profit’ announcements from US banking (JP Morgan, Bank of America, Goldman Sachs).

They are an integral part of an economy and can always find a way to generate profits, regardless of the politicians that come and go.

For the People – Government of the people, by the people, for the people.

According to the most recent IMF report ‘we’ (globally) are getting the last bit wrong.

If ‘we’ do not focus more on long-term outcomes for the wider population the reaction will be more of the current disruptive actions against governments and their policy settings.

You can have as many robots and artificial intelligence algorithms as you like but they won’t do much good if real people ‘storm the Bastille’ with spanners.

Turkey – the Central bank of Turkey (220 tons) and two commercial Turkish banks (95 tons) are reported to be moving their physical gold out of US custody.

There has been quite a lot of ‘gold shifting’ talk lately, generally against the US as the prior custodian.

These loss of trust moves must be driven by changing political motivations and warrant monitoring a little more closely than in the past.

Ever The Optimist–Having criticised Fonterra when they moved to delayed payments, it is now time to compliment them for their announcement that they will again pay contractors on the 20th day of the following month.

Accelerating cash flow is good for the economy and good for small to medium business enterprises.

This move should be evidence of good administrative control of invoicing and payment at Fonterra, another good sign.

Once Ross Taylor gets on top of the business risks at Fletcher Building, which will take most of 2018, he too should display the same business integrity and shorten FBU’s payment cycles.

ETO II – NZ sheep farmers are being paid record prices for their lambs as supplies tighten (AgriHQ's Monthly Sheep & Beef report for April).

In the North Island, processors were last week offering $7.20 per kilogram for lamb, up from $5.75/kg at the same time last year and above the five-year average of $5.16/kg.

ETO III – A global start-up ecosystems report describes NZ as punching above its weight for venture capital investment in start-up businesses.

Regular readers will recall that I joined one of the venture capital clubs (AngelHQ) to try and discover how our economy moved good ideas into good businesses.

It is heartening for our economy to read that venture capital participation has increased with 3x as many angel networks, supporting about 500 start-ups with $120-150 million.

Usefully, the report also noted that the local weakness was with helping founders to exit an investment or share it more widely.

I know that the NZX is supportive of the angel associations and is no doubt willing to help prospective companies to publicly list once they reach a reasonable scale (say $50 million or larger).

ETO IV – I see Rocket Lab has had to defer its first commercial launch. So, be it, it doesn’t dent my respect one iota for this fantastic company.

Have I already suggested that they (Wairoa, Mahia) should coordinate tourism to watch launches?

I’d attend one, buy the T-Shirt and support the area (again).

ETO V – Whilst I am in the regions, I was pleased to read within Seeka and Turners & Growers recent announcement (a sale from the latter to the former of Kiwifruit business assets) that both businesses see ongoing expansion in the Northland area (Kerikeri centre).

I hope this helps with employment growth and supports expansion of transport options and use.

Hon. Shane Jones, are you helping them too?

Investment Opportunities

Fletcher Notes – The announced rights issue from FBU (1 for 4.46 shares at $4.80) to raise $750 million equity prompts a few thoughts from me:

Well done to the CEO for getting on with the job taking back control of the FBU balance sheet, reducing the risk profile and simplifying the business model (exit America);

It is right that the FBU shareholders should be asked to support the moves with additional equity (after Adamson’s era burnt a larger sum! – Ed);

The price discount may represent a little wariness on the part of the underwriters to the rights issue but equally it represents a price that will result in a very large participation rate from FBU shareholders;

After I wrote the previous paragraph the market displayed some new confidence in FBU by paying a 20-cent premium for any unwanted new shares from the institutional part of this capital raise (paid $6.20 for a share with a theoretical diluted price of $6.00). This is good to see;

Whilst the FBU CEO has had much larger fish to fry I’d be very surprised if he didn’t now task his Treasurer with the sale of Fletcher Capital Notes held in Treasury stock (on balance sheet).

In the past (28 years!) FBU has helpfully acted as a buffer for the movement of Capital Notes (such as the FBI170) between the market and FBU’s balance sheet by purchasing unwanted Notes at rollover time. However, now isn’t the time for FBU to be loaning its balance sheet to the market; the opposite should be happening.

Accordingly, we continue to keep our FBI170 list open for those wishing to hear more about the possible supply of this fixed interest investment.

Possible deals for 2018:

One or two potential bond offers are being worked on, which we all hope will make it to market over coming weeks. More details once they are revealed.

Sky City Casino – bond (no news yet, but an issue remains logical for the company to do);

UDC Finance – IPO of ordinary shares (iterative speculation by us).

All investors are welcome to join these lists by contacting us.

The fastest way to hear about new investment offers is to join our ‘Investment Opportunities’ (New Issues) email group, which can be done via our website or by emailing a request to us to be added to this list.


Chris will be in Christchurch again on 15 May.

Kevin will be in Queenstown on 15 June.

Mike will be in Auckland on 8 May.

Edward will be in Remuera, Auckland on 28 May.

Our future travel dates can also be found on this page of our website:

Any person is welcome to contact our office to arrange a meeting.

Michael Warrington

Market News 16 April 2018

President Xi has tried to claim the high ground by criticising the US for its ‘cold war’ tactics.

Where I thought it was trade hostility, or trade negotiating tactics, but President XI has confirmed my speculative comments last week about the manoeuvring actually being political and not about trade, which confirms that he too is playing ‘cold war’ games.

Putin will jump on the bandwagon next.

Investment Opinion

NZ Politics – I have, for the most part, had my political lens on international changes but progressively NZ politics is trying to take centre stage.

NZ Politics will never be as important for capital market pricing as the US, China, Europe etc, but we do need to factor in the local scenario because it will impact a collection of micro outcomes, which collectively can result in a visible difference for investors.

Last week’s decision to stop all future oil exploration permits in New Zealand is undoubtedly negative from an economic perspective.

There will be a very wide range of opinions about this decision, but it will have a negative impact on employment.

The policy is couched in terms of leadership with climate change, but leadership is only effective if it gains a following, which I doubt this move will achieve.

In my personal view there are other ways the government could have accelerated this country’s climate change performance without thinking they needed a light bulb moment.

Again, in my personal view, good incremental change, tested along the way, is more effective than seeking dramatic light bulb moments with a high failure rate.

I know the sharp increase to the minimum wage has the potential to threaten total employment, but I support this change based on the view that more money from production needs to be spread more widely for the efforts being made.

If a business’s profits were dependent on paying someone only $15.75 per hour then they weren’t really managing a productive business, they were arbitraging a low cost of labour and not achieving satisfactory returns for the risk involved with their product or service.

Well performing businesses will not lay off staff that are required based on the new higher minimum wages. They might, and probably should, explain to those staff what must be achieved to ensure those higher wages can be paid, but this in turn should buy more loyalty from those staff as they feel more involved in that business and its success.

This new oil decision though, will have a negative effect on employment.

Oil consumption in NZ will not change quickly following the government decision; fuels will be imported and our vehicle exhaust volumes won’t change as hoped.

Declaring a rising fossil fuel tax programme, expansion of the country’s renewable electricity generation and delayed tax collection from electric vehicles would have been more beneficial to climate change.

Norway benefits hugely from the oil industry, but this hasn’t stopped them being a respected nation in the moves toward tackling climate change without cutting their nose off:

This decision about exploration permits will not stop the sun coming up tomorrow (nice solar pun – Ed) and the wider NZ economy will continue, but this decision is a small knock backward and I’m hoping it’s not the grain of sand that unveils other weaknesses in our economic optimism.

Infratil (IFT)– Kindly invited us to their annual investor day where they continue to outperform other businesses with their communication efforts to the market (investors, analysts and politicians).

With real people on site, speaking and listening, technology was kept simple with microphones and a video camera, no live Facebook streaming!; the effort they make is better than most others and it is a credit to them.

I had a little laugh as I witnessed one of the world’s tech gurus, Mark Zuckerberg of Facebook, a master of the online communication world, being called into the Senate building to communicate with its ‘members’ the old fashioned way.

IFT has recorded all of the presentations from the Investor Day and loaded them on their website for wider access, making you a virtual attendee, if you wish to be.

I would encourage all Infratil investors to go to the website and view the presentations, especially the one by the CEO of Canberra Data Centre.

Greg Boorer is one of the most passionate CEO’s I have met since travelling with Jim Delegat in the era of successfully floating his (and his sister’s) wine company on the NZX.

Amongst the videos I’d also encourage you to view the one by Paul Newfield, the Chief Investment Officer at HRL Morrison & Co, the managers of IFT.

Paul explains why IFT made strategic changes to its investing a few years ago. The market pricing for buying the lowest risk infrastructure assets became too high, ‘forcing’ IFT to increase its risk profile a little as it pursued new opportunities.

Paul would argue that quality people and quality research will reduce some of that risk, and he’s correct. He is positive that imminent (reportable) financial performance (next three years) will prove his confidence.

During the investor day IFT executives addressed the disappointing recent share price performance. They acknowledged that whilst long term annual returns from IFT shares are high, the same cannot be said about the same measure over the past three years.

The next statement was ‘please be patient’.

There is building evidence of exciting financial performance from some of the new investment platforms (a title for the themes being pursued such as renewable energy and demographic change) even though our cash hungry market isn’t yet paying them the respect of a higher share price.

As an aside, one of the ‘platforms’ liked by IFT is Renewables for the energy market. They will thus be pleased to see some enormous companies, including Apple, declare that they are moving to renewable energy supplies only for the business.

The current IFT share price, and the IFT investment committee’s tough return standards for making new investments, resulted in them buying back some of their own shares recently. This action may seem conveniently timed in the weeks prior to the investor day, but the reality is they would not have made the purchase at all unless the financial scenario was compelling.

I need to avoid reaching the point of providing financial advice in this open forum but will close by saying that as usual there is a lot going on inside IFT and they are generous with their time in ensuring that ‘we’ are made aware of the investment information.

Please be sure to take advantage of the efforts made by them.


NZX Trade Reporting – A client kindly prompted me out of neutral today, as I was wondering what subjects to cover here, by asking what the NZX meant with its proposal to change the market rules relating to ‘Off Market Trading’.

Initially the person confused ‘Off Market Trading’ with ‘Off Market Transfers’.

‘Off Market Transfers’ are the domain of registries, such as Computershare and Link Market Services, and not the NZX. The ability to legally transfer ownership of an asset will not change.

A holder of an investment (a transferable security) can still complete an ‘Off Market Transfer’ to shift an investment from party ‘A’ to party ‘B’; such as from Mum or Dad’s Common Shareholder Number into a family trust Common Shareholder Number.

Functionally this is a little like writing a cheque to transfer money from one person to another, an Off Market Transfer form is used to move an asset.

Transferring an asset (such as a bond, or share) can be done without a transaction occurring. Imagine you gifting 10,000 of a bond from your portfolio to a grandchild, just as you can pass money to a grandchild without buying an item from them.

Now to explain Off Market Trading.

The market being described here is the NZX (stock exchange), upon which only NZX Participants (Broking Firm) may load transactions. Participation on this market is regulated by the NZX; they set the rules.

The NZX is considering a rule to limit the size of transactions that a broking firm can arrange away from the sight of the market (Off Market) before ultimately reporting such transactions to the market, which they are obliged to do.

Some of you may have seen us talk about ‘dark pools’, especially in the US, where transactions are arranged between buyers and sellers within the walls of a single broking firm.

I am not keen to describe the NZ scenario as ‘dark pools’ because in NZ all these transactions are reported on the NZX, so some light is shed.

However, the criticism has been that if broking firms try to arrange all of their buying and selling in house, before reporting it to the NZX, then the market becomes rather shallow and information flow (disclosure) is late and this compromises the overall liquidity of the market.

Good liquidity in capital markets is a very important part of the depth and efficiency of those capital markets and their necessary role in economic development; helping to finance new and expanding businesses and to shift investment risk from those who do not want ‘it’ to those who do want ‘it’.

The major broking firms have some preference to arrange buying and selling in house to try and earn revenue from both sides of the transactions and to convince other customers to approach them for business, because they are the most effective at getting business done.

I have sympathy for their commercial position, albeit a little shorter sighted than that of the regulatory body (NZX), which needs wider financial success for the broking community and thus broader participation.

I also have some sympathy for broking firms wishing to retain much of their trading knowledge prior to reporting it on a public exchange because the advent of computer based trading has enabled rapid interrogation of available information to take advantage of it quicker than clients and brokers can manually respond.

Having been a trader, I can confirm that risk takers do not wish to disclose their entire plan to the wider market for others to take advantage of. This fact will not change regardless of NZX regulatory change.

Large risk takers are useful to the market; they are the counterparties that brokers call when they are trying to achieve a transfer of risk in greater volume than the markets average trading would support.

These risk takers are the price makers for a transaction, the other person who asked for a price on a very large transaction is the price taker, i.e. the person that must concede some value to the price maker for the risk involved.

The price maker deserves protection (briefly) from the disclosure of the transaction information.

The two italicised wording items above are the key to the new NZX regulations on this subject and the NZX touched on this when they sought feedback on minimum transaction size that can be traded ‘Off Market’.

When is a trade large enough that the NZX, and its participants, must concede that the price making, deal confirmation and reporting of risk transfer can enjoy delayed disclosure?

The NZX has proposed that trades must be greater than $50,000 in value to be approved for off market execution. I think this is too small; many of you would be sufficiently large investors to ‘make a price’ for purchasing $50,000 of a single company’s shares.

Having said that, I don’t have a precise answer for you about a minimum amount; I am too far removed from what constitutes a difficult transaction to execute, but you know what I mean, it is easy to execute a $100,000 transaction in Spark shares but not in Veritas (Mad Butcher) shares.

Frustratingly for the regulator for a qualitative response this means the ‘minimum’ answer for an Off Market Trade should be different for each stock, but the only way the NZX could have a moving minimum amount for off market trading would be if they publish daily numbers on the NZX (based on trailing market activity).

I guess modern technology should make this easier than I make it sound. The NZX knows the evolving volumes traded relative to the free float of shares and it knows the volume weighted average price of each stock; it should be an achievable task.

Beyond the holistic market and economic goals of the NZX, they actually do have a commercial (selfish? - Ed) imperative too; they sell data and to some extent off market trading robs the NZX of some live pricing data for that service offering (in return for a fee).

New Zealand’s broking community has become very small and a huge majority of the transactions are concentrated with three or four firms.

Those firms are to be applauded for their success with gaining such large market share, but their dominance is beginning to compromise wider market activity.

Thus, those major broking firms should not be surprised that the NZX is considering amended regulations to insist that more trading be presented to the market for all to compete for execution of transactions.

According to one article on the subject trading volumes on the NZX have been increasing recently and this may reflect NZX Participants acknowledging that change is coming and that they are willing to work with the NZX on sensible minimum amounts for executing off market trades.

If the NZX and its Participants work together on this new setting it can benefit both the market and the market’s investor community.

For our clients, this situation, including any regulatory changes, has no impact on your ability to get deals done through us, large or small, because we have a very good knowledge of the options for completing your transactions.

Those of you who occasionally arrange Off Market Transfers (with our help) will be unaffected by the debate and possibly conclusions addressed above.

Powerhouse – young investment bankers are gaining visibility to a wide selection of businesses to learn from with respect to ‘how not to manage a cash flow negative business’.

Wynyard is one that is already dead.

Powerhouse is one that is struggling to breath.

Orion Health has a lot of explaining to do.

Ever The Optimist–The records continue, with a ‘new’ annual record for guest nights around NZ at 39.6 million (44% is international guests).

Occupancy rates are up for most, but I was surprised by the differences across sectors – Hotels were a huge 81.8%, Motels 76.8%, whilst Backpackers was 59.1% and holiday parks 30%.

Maybe we are all spending more money on premium options, but I hope it is disproportionately the tourists spending the bigger numbers.

Investment Opportunities

Bank of China – Thank you to all who participated in this bond offer last week. The interest rate was set at 4.02%.

Fletcher Notes – we will keep our FBI170 list open for those wishing to hear more about this possible supply, but for those who wish to act now the notes are trading on the secondary market.

Possible deals for 2018:

Sky City Casino – bond (no news yet, but an issue remains logical for the company to do);

UDC Finance – IPO of ordinary shares (iterative speculation by us).

All investors are welcome to join these lists by contacting us.

The fastest way to hear about new investment offers is to join our ‘Investment Opportunities’ (New Issues) email group, which can be done via our website or by emailing a request to us to be added to this list.


Chris will be in Christchurch on 23 and 24 April and again on 15 May.

Kevin will be in Christchurch on 3 May.

Mike will be in Auckland on 8 May.

Edward will be in Remuera, Auckland on 28 May.

Our future travel dates can also be found on this page of our website:

Any person is welcome to contact our office to arrange a meeting.

Michael Warrington

Market News 9 April 2018

US share market volatility is increasing.

Now (last Thursday) it is experiencing dual direction swings of 2.50% in a single day, from -1.50% to +1.00%.

The ‘lack of confidence’ message from market participants is clear. (David Lange referred to them as Reef Fish – Ed).

The market closed last week with a -2.50% day and traders will be getting dizzy.

Investment Opinion

e-Krona– The Swedes appear to be breaking ranks early and plan to introduce their own electronic currency. (If we discount the Venezuelan attempt to defeat US dollar limitations placed on them).

The Swedes are reluctant to call it a crypto currency, presumably not wanting to get tangled up (excuse this pun, explained later) in the unstable stories around the likes of Bitcoin etc. Further, and very interestingly, they have decided against using BlockChain as the technology underlying settlement of their new electronic currency.

‘Tangle’ is a newly developed form of technology communication, associated with peer-to-peer settlement at its core, which within the Internet of Things (convenient acronym for Greek letter IOTA), will enable rapid and cheap processing of payments.

I don’t think Tangle is a killer blow for BlockChain but having central banks develop regional electronic currencies is definitely a blow to the crypto currencies that were developed in dark corporate offices around the globe.

They of the dark rooms may well have been correct about the use of technology for advancing payments but the central banks are going to steal their thunder with respect to market dominance.

Crypto currencies that are not aligned with any particular country or geographic region must quickly find their place, and any competitive advantage, if they wish to be commoditised (like gold) and remain relevant long term.

I doubt that using anonymity and its competitive advantage for criminals has a robust future.

The ‘new payments’ space is quickly becoming ever more interesting and I would quite like it if new RBNZ governor Adrian Orr introduced e-Kiwi into the NZ economic lexicon.

BoE Block Chain – Meanwhile, across the English Channel the Bank of England reports that it is undertaking a Proof of Concept to understand how Real Time Gross Settlement (live) between banks could interact with Distributed Ledger Technology (BlockChain).

I recall early RTGS conversations in 1995 so its emergence in banking was hardly rapid, and although technology is forcing institutions to move at faster speeds central banks will not be allowing rapid change in the payments networks.

Indeed, on this point, the BoE has already rejected migration of payments to BlockChain at this stage due to its immaturity.

Good things take time.

In the interim then, the BoE is acknowledging that private industry (and now the Riksbank in Sweden – Ed) is rushing at an anaerobic pace to make use of new technology platforms for payments with its agreement to consider how RTGS might interact with BlockChain (or Tangle) systems.

Rapid development of something usually discloses a profit opportunity and for it not to it needs to be for the common good, which peer-to-peer ambitions have for lowering intermediation costs.

The logic of peer-to-peer is sound, but it is much the same as the days of open source computer programme development as the clever minority tried to avoid dominance by Microsoft, Apple and Oracle.

You do not need to be a technology sector disciple to know how that story played out.

Actually, as I pondered who the ‘Apple’ of the currency world would be I struck on a thought; the Bank for International Settlement could become the market operator for the exchange of central bank managed e-currencies.

Such a market place would gain enormous trust, massively reduce foreign exchange expenses and importantly for governments retain data ownership and monitoring rights.

Free market pricing could be retained for CASH to E-CURRENCY and then also for E-KIWI to E-KRONA, removing any need for the central banks to play a role in pricing, only to ensure the ultimate in settlement efficiency was gained across the system.

If the BoE and others validate a reliable connection between RTGS (interbank settlement) and third part technology (BlockChain, Tangle) then perhaps this ‘wild blue sky thinking’ isn’t as radical as it seemed 500 words ago.

At this stage I have no idea what this means for yours, or my, investment portfolio.

US Federal Reserve – If the US share market continues its retreat in price and investors react by purchasing more bonds, holding yields back down, the Fed should jump on the opportunity to sell more of its billions of bonds to the market (in my humble opinion).

Financial markets had become very nervous about the Fed both lifting the overnight cash rate and selling many billions of additional bonds to the market (supply on top of new borrowing by the government).

Initially I shared the view about over-supply pressuring interest rates higher, but then I recalled a study by Dr Bryce Wilkinson during his days at Jarden & Co where he concluded that it was inflation plus marginal return for risk that drove interest rates and not the volume of bond supply.

The threat disrupted the markets for a while, probably shaking out those investors with uncomfortable portfolios who couldn’t tolerate just a modest change to the supply/demand dynamic of the market.

However, the recent pause for the 10-year US Treasuries at 2.90%, and then descent in yield when trade wars began to threaten economics, should validate Bryce’s thesis again that markets need inflation changes to drive long term interest rate changes.

Hence my opening point; if markets get scared of weaker economics and try to buy larger volumes of bonds the US Federal Reserve would be very wise to sell some of the massive portfolio of bonds back to that market. This would both satisfy the demands of the nervous investor and slowly begin to restore the firepower of the central bank, for the next drama that they need to become involved in.

Many do not think the Fed (or Japanese, or Europeans) will ever be able to exit their current large bond positions, established through artificial market interference, but surely, they should strategise to make a start?

Two subjects in and it looks like I want to be a central bank governor (not!).

We are watching the movement of 10-year US Treasuries more closely than usual at present. If this bond yield settles into a new range between say 2.50% - 3.15% for a while, unable to break any higher, it would reinforce my comments last week about interest rates being held at structurally lower levels and thus being beneficial to other long-term investment options.

The many and varied tectonic plates of investment are in perpetual motion, but that is the current reading.


PPP – Maybe the Minister of Finance is dizzy too, judging by his changing decisions.

Two weeks ago he offered encouragement to private investors to join with him and discuss ways to finance the government’s enormous development programme.

Last week he cancelled all future (unapproved) funding that Crown Irrigation was using for shared investment in our greatest natural advantage, water catchment and distribution.

That’s not a great platform of decisions to encourage participation by private investment, including the governors of your Kiwisaver accounts.

Trade War – Keep a wary eye on the tariff laden spears that the US and China are throwing around.

The developing reality is that the actions are becoming standard political wars, at the expense of trade.

The industries that are being targeted are:

US Voter support when launched by the US; and

US voter undermining when launched by the Chinese.

If they can limit their disagreements to trade changes that would be a nice outcome.

A2 Milk – Sadly, I do not, and have not, enjoyed ownership of A2 Milk shares, so this little thought is for those of you who do.

Last week’s announcements from Nestle about competing in the A2 milk supply market prompted reasonably sharp falls in the price of ATM on the NZX.

Without wanting to make a comment about fair pricing for ATM shares, I viewed the announcement differently from the initial market reaction.

I think the actions of Nestle and Fonterra in entering further into the A2 milk market category validate ATM’s business by acknowledging that customer demand for this product is real and growing in volume. The behemoths would have been foolish to ignore such data.

However, regardless of one’s company view the jumpy volatility for the ATM share price discloses to me that manyATM investors have, unsurprisingly, huge overweight investment holdings in the company but have not yet taken some of their profits off the table.

A $2 fall in the share price created a flurry of fear linked to lost value (from the perfect high point – Ed).

Investors will avoid this surge of adrenalin through their veins if they follow a more disciplined approach to their investment risks.

Something isn’t quite right with an investment exposure if one swings from the excitement of financial gain to the fear of financial loss without any change in heart rate.

Property – The new government is continuing along the path, established by the prior government, of reducing unnecessary or inappropriate incentives that have been enjoyed by property investors.

We’ve touched on this new financial risk a few times, and this note is just stating the obvious; that the proposed financial threats to the residential property investment space are underway.

Factor them into your calculations if you are an investor in this sector.

Heartland Bank – Kevin Gloag has written a research piece on HBL immediately after their interim results.

It is useful to all HBL investors (shares, bonds, term deposits).

Clients who make use of a financial advice service can access the report under the Private Client Page (login) of our website.

Ever The Optimist– Fulton Hogan has admirably used its scientists to deliver a method for combining rubbish (shredded plastic oil containers) into to a form of asphalt for the roads.

I expect that FH has discovered a lower pricing for asphalt production, and the opportunity for greater profits; a clear win:win scenario.

ETO II – Rocket Lab is T minus 11-31 days from launching its first commercial rocket; remarkably this is only its third launch.

Spire Global and GeoOptics Inc are paying to have satellites delivered to orbit.

This first commercial launch is part of a planned sequence of monthly launches for this remarkable little NZ company.

I hope a few entrepreneurial folks in Wairoa, and the landholders on the Mahia Peninsula, are putting together tourist activities around each launch (and selling T-Shirts – Ed) to bring some additional economics to the region.

I am undoubtedly getting ahead of myself, but I hope the government and our education sector are already planning for the ‘Sir Peter Beck Engineering Scholarship’, even though he famously decided against attending university!

Rocket Lab really is a remarkable NZ export story, involving brains, time, a sales effort and a few hectares of land. (and 3D printing – Ed).

ETO III – The government’s revenue is now structurally $500 million higher than forecast and likely to remain that way on higher employment and taxes collected from that activity.

I hope the current government recognises that better employment outcomes are the best way to increase government income and spending options, not by increasing the tax ratios.

ETO IV – Here’s another NZ (Wellington) success story from a different science sector; NZ medical scientists and technology experts have built an early stage business with a focus on reducing the mortality and cost of breast cancer.

The business is called Volpara Health Technologies Ltd and interestingly, for another Wellington based company, they chose to list on the Australian Stock Exchange (VHT.ASX).

Through the venture capital circles that I have a connection with I have witnessed many clever business ideas trying to gain traction, but I was prompted to put Volpara under ETO today because their latest public statement observed that ‘it exceeded its goal of lifting annual recurring revenue 200 percent for the financial year ended March 31, 2018’.

Volpara is active in the US and reports that ‘approximately 3.2 percent of all women screened in the US are now contracted to Volpara’s software (approximately 1.27 million women)’.

It’s early days (year two since listing) so the revenue change is from $1.1 million to $3.6 million, but they deserve a mention under ETO based on their early success and my bias to businesses started in NZ, especially Wellington.

I have another bias, which is not a recommendation, I own a handful of shares after being introduced to the story by a contact who lost his wife to breast cancer; hence, I follow the story.

Health warning - Good science can lead to good commerce but it takes genuine advantages, a lot of capital, a lot of skill and a lot of time. A start up business is not for the faint-hearted investor because the majority fail.

Investment Opportunities

Bank of China – has launched a new 5-year senior bond offer.

The bonds will be rated ‘A’ by Standard and Poor's.

Bank of China has not set the interest rate yet, but it will likely be in the range of 3.95% - 4.05% p.a. (paid semi-annually) following bidding for allocations in the tender process.

The offer closes on Wednesday (11 April) at 12pm.

This is to be a fast-moving issue, booked by contract note with clients paying the brokerage costs.

If you wish to invest in this bond offer, please contact us immediately.

Investore Property Ltd (IPL010) –All applications should now be in.

Thank you to all who participated in this bond offer with Chris Lee & Partners Ltd.

Fletcher Notes – FBI rolled their Capital Note on Election Date (15 March 2018 – FBI110), into a new 5-year replacement (15 March 2023 – FBI170) at 5.00% (now trading on market at a yield of 5.25%).

If FBI follows a consistent pattern they are likely to sell their holding (millions) of these notes to the market after 15 March.

Accordingly, we have a list that investors are welcome to join if they’d like to purchase some of these new Capital Notes, should they be offered to the market.

Possible deals for 2018:

Sky City Casino – bond (no news yet, but an issue remains logical for the company to do);

Vodafone – IPO of ordinary shares (cold water poured on this by Vodafone CEO);

UDC Finance – IPO of ordinary shares (iterative speculation by us).

All investors are welcome to join these lists by contacting us.

The fastest way to hear about new investment offers is to join our ‘Investment Opportunities’ (New Issues) email group, which can be done via our website or by emailing a request to us to be added to this list.


Chris will be in Auckland April 17 (pm) at Albany Motor Lodge and April 18 (am) at Waipuna Lodge, Mt Wellington.

Kevin will be in Ashburton on 12 April and Christchurch on 3 May

Edward will be in Remuera on 10 April and Albany 11 April.

Mike will be in Auckland on 8 May.

Our future travel dates can also be found on this page of our website:

Any person is welcome to contact our office to arrange a meeting.

Michael Warrington

Market News 2 April 2018

Last week, on four sequential days, the US share market was down 3%, down 2%, then up 2.6%, then down 1.5%.

Volatility (risk) is back.

President Trump is proving to be good for traders, but not for economics.

Investment Opinion

Facebook – I am neither a promoter, nor a critic, of Facebook and the various other online communication portals.

Correction, I am critical of the negative influence they have over my children and their time management!

As an investment they have been a spectacular success.

For all investors, businesses such as Facebook have taught us how important it is to make good use of technology for its aggregation and leverage. Toys R Us failure seems to be a simple study in the combination of too much debt and an outdated distribution strategy (poor tech use).

The data gathering by today’s businesses, not just Facebook and Google, is well known. The sale of the data and the ‘eye ball time’ with users is a key driver for how they make their money. This process makes them similar, but much more efficient, to advertising and lobbying channels of the past.

It would be more useful if we taught users, especially children, how to think for themselves than to try and tear down the contemporary information channels.

This begins to touch on my point, for this paragraph;

Alongside the tidal wave of criticism directed at Facebook I’ll bet my lunch money that the impressive US student protestors, developing ways to challenge the gun lobby and corrupted politicians, used the leverage of Facebook (and Twitter etc) to rally massive scale for their protests.

Facebook, Twitter, Google etc are not going away, no matter how big the storm of upset becomes during week three of March 2018.

However, investors in these businesses would be wise to consider the anti-trust cases taken against Microsoft in the past when regulators became concerned about market domination and abuse of power.

RBNZ–The government has defined new Policy Targets (PTA) for the central bank with the only meaningful change being the introduction of another measure: ‘Maximum Sustainable Employment’.

Everyone involved is making nice noises about the evolution of the PTA but I find myself viewing the ‘Maximum Sustainable Employment’ as a woolly, well-meaning goal that will be very hard for the central bank to demonstrably deliver on.

Employment provides income for life’s uses and hopefully provides NZ Inc. with one lever for productivity, alongside machines. Where productivity exits employment will exist. So, alongside our nation’s very generous social welfare framework did we need a ‘Maximum Sustainable Employment’ driver within our central bank? (i.e. not central employer).

Outside of the government machine (as the biggest employer) job supply rises and falls based on the performance of business, not based on the small marginal cost of debt on the balance sheet.

In jest: If employment falls a little Adrian Orr could simply approach the largest employer (government) and instruct them to employ a few more people.


The lower price of debt (interest rate movements by the RBNZ) may inspire a marginal increase in debt use to drive profits, and hopefully productivity and employment in the private sector, but after the information being assessed from the past 10 years I am becoming doubtful about this link to greater employment.

There is a very clear link to benefits for shareholders from lower interest rates, but the link to employment is less clear in my opinion.

The more I write, the more I assure myself that the Minister of Finance will pass me over when he seeks his next Reserve Bank governor (no risk there – Ed).

Banks though, do have a meaningful influence on employment outcomes as they consider application for debt use in a business. Access to debt definitely plays a role in the expansion potential of a business, far more than the marginal price of that debt.

This is where the RBNZ’s other regulatory levers play a role (minimum capital requirements, Loan to Value ratios and pending Debt to Income ratios); the tighter the regulations the less lending banks will provide, and vice versa.

However, these levers are directly linked to the financial stability mandate and financial stability is far more important to long term business conditions, and thus employment, than a short-term sugar hit from loose regulations.

(Do you have something for investors, rather than politicians here? - Ed)

Indeed, we can expect a frustratingly low, possibly negative in real terms, Official Cash Rate during the decade ahead.

We can expect a positively shaped yield curve for the rest of my career.

This leads to financial advice, which I need to reach more of the wise and hard-working, but unadvised, New Zealanders who behave well and save money for they, sadly, invest vast collective sums of money into rolling 6 and 12-month term deposits with the banks.

Other than call accounts, term deposits for periods of 12 months or less, will offer the lowest returns to investors (excluding years of retreat for share markets) in the years ahead.

So, with my usual sweeping conclusion approach, it is my opinion that the new ‘Maximum Sustainable Employment’ obligation for the RBNZ will result in very poor returns for short term investors, better sustainable returns from higher risk categories (hopefully this will result in financial advisers encouraging Kiwisavers to take more risk) but it will not result in a marginal improvement to employment outcomes in NZ.

Post Script – consistent with my low short-term interest rates thesis above is the European Central Bank’s latest broadcast, which declares they will continue pumping cash into the system. Specifically, they said:

‘an ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term’

UDC – Further to my proposal to ANZ about the possible Initial Public Offer of shares in UDC (approach Heartland Bank as an underwriter to a successful float), I have another proposal (which, they have been waiting for – Ed).

ACC could be another cornerstone shareholder, alone, or alongside Heartland Bank and they could share the underwriting risk.

It is harder for investors like ACC to gain sufficient depth in their NZ fixed interest portfolio, so, one way to tackle this problem is to take ownership of a high-quality lending business.

ACC will undoubtedly own many bank shares in its equity portfolio, but the relative simplicity of the UDC business model would see it more comfortably recorded within a fixed interest asset mix; more so if they offered a financing facility that would purchase securitised (bundled) loans to assist UDC with future growth ambitions.

The NZX listing of, say, 35%-45% would ensure sufficient market liquidity for additional equity raising or for ACC to manage its position up, or down, over time.

If UDC was to securitise its best loans, for sale to ACC, it might then be able to offer better returns on the riskier proportion of lending (albeit well managed) to those investors willing to tolerate BBB credit ratings (or maybe BB+) for unsecured deposits.

I remind readers that my UDC ramblings are entirely hypothetical or speculative and bear no resemblance to the facts in front of ANZ CEO David Hisco. (quelle surprise – Ed)

Sky City – Reading SKC’s Investor Day presentation I was left in two minds about the company:

I nearly placed these comments under Ever The Optimist based on the announcement that they would increase minimum staff wages to $20 per hour one year ahead of the government law changes.

However, the other item had me asking why do that?

SKC announced that it is determined to maintain the company dividend at the greater of 20 cents per share or 80% of net profit even in the face of high debt levels, high capital expenditure requirements and several underperforming assets.

The company describes strategies for improving returns on capital, such as exiting Darwin casino and sell leases or management contracts over parking areas but to promise the current dividend whilst confronting these financial tensions is inappropriate and unnecessary in my view.

SKC ordinary share is not a bond, the directors do not need to promise anything with respect to the certainty of next year’s dividend.

Regular readers may recall my respect for Hallensteins and its honesty around performance reporting (good or bad) and its genuine link of dividend payments to actual performance.

Maybe SKC directors are trapped in the thinking that keeping the dividend up will keep the share price up just in case a capital raise (rights issue) is ever necessary?

You can see by Sky Television’s example that high historic dividends do not hold up share prices if sustainable financial performance weakens.

Personally, I think the directors should have focused their attention on the big strategic transactions that are required and not made any commitment on dividend payments until the last possible moment (semi-annual reporting periods).

SKC has a very good Chief Financial Officer (past work mate) so I am confident that good financial decisions will be made; it was the principle of the dividend promise during a period of financial tension that I didn’t like.

Let me finish on the positive principle though, of SKC moving to the higher minimum wage level sooner than obliged.

Oil– Protestors may well wish that the flow of oil would simply stop, but this commodity remains an enormous influencer of economic performance and its use will outlast all of the protestors. (or NZ Cabinet Ministers – Ed)

Demand for oil is rising, not falling. Consumersare dependent on oil for economic progress. Most of the producers are dependent on oil for its hard currency income.

The US is not dependent on oil sales to flourish economically, but more important is the fact that the US isalmost self-sufficient in oil supply giving it a hugely strong political position in the world.

Recent oil company reports (Anadarko, ConocoPhillips etc) show that the US oil sector is becoming financially stronger also, with a third of the shale oil producers announcing dividend increases based on the performance of the shale oil fields, even though they have been relatively expensive to develop.

If oil exploration increases profit those explorers are not going to reduce their involvement in this commodity.

Global dependence on oil (energy) is not quite as high as air and water, but it is rather closer than most would care to admit.

Reading about increased use of renewable energy (solar, and the movement of air and water) is good, but the displacement of oil as the planet’s primary energy source will be slow.

On the consumer side, the world’s second largest economy (China) is now confirmed as the world’s largest importer of oil (8.43 million barrels per day) and has agreed to trading of oil futures settled in Yuan on the Shanghai Exchange.

I read one view this new futures trading is a further step by the Chinese government (dictator) to have the Yuan achieve a higher status as a global clearing currency, just as the US dollar, Sterling, Yen and Euro are. I see no harm in this because having multiple global settlement choices may help reduce some of the potential risks emerging in the trade war tactics.

I don’t expect the Shanghai oil contract to achieve a controlling position in world oil market trading for many years, but its true that global suppliers will be very interested in pricing signals from the market of the largest consumer. (just as global consumers of milk product are interested in futures contracts for milk on the NZX).

Please don’t chain yourself to a structure until we stop using oil and please don’t make investment decisions on the basis that only the other energy sources are acceptable.

The change away from oil use will be much, much longer than yours or my investment horizons.


Trustpower (TPW) – The NBR, well informed it seems, reports that TPW is close to being confirmed as the buyer of Vocus’ businesses in NZ, which includes internet service provider brands, fibre networks and some electricity customers.

If TPW is successful, this would be a good strategic step for a business which has returned to being NZ focused with a broadening portfolio of services for that NZ customer base.

TPW already offers internet services alongside electricity and gas so part of the deal simply adds depth to these services but owning its own fibre network adds breadth to the service offering and may open the door for video content too?

Collectively TPW’s is developing a significant point of difference to the other major energy service and telecommunication businesses in NZ.

Spark and Vodafone are pursuing video and audio content service offerings but surprisingly haven’t yet connected with the energy sector and thus TPW is walking through the middle of them all.

TPW shareholders (and Infratil shareholders by connection) should be pleased with the strategic developments for their business.

Shareholders of the other businesses, and Ministers of the Crown, might wonder why the other businesses aren’t competing more when the landscape is quite clearly wide open for competition (regardless of NZ First’s inquiry into the electricity sector).

In fact, the hybrid that is TPW, which others will surely try to compete with, will make the government’s electricity sector inquiry stall at a rather confused set of drawings on a whiteboard.

Green? – It seems that business is trying to claim goodwill value from the adjective ‘green’ and ask investors to lend money more cheaply, or accept lower equity returns.

I think I’ll absorb a little more information on this subject and write a paragraph about it in coming weeks.

There is no coincidence between this paragraph and the ‘green people’ protesting oil in the paragraph above.

Which makes me think, why have environmental pressure groups also claimed the ‘green’ adjective as a name? Why didn’t they use ‘blue’ from the ocean, which is far bogger than the globes land mass and at least as important in environmental terms. (getting off task – Ed)

Quadrillion – Global debt is now being measured in quadrillions, such is the new scale of this runaway train.

Emergency Fund – We have long encouraged investors to hold their own Emergency Fund, which acts as an insurance policy against ever being financially ‘stuck’.

The cost is about the same as other forms of insurance; $250-500 per annum based on the marginal loss of returns between a very short-term call account and an alternative long-term investment.

I was prompted to write this after reading a revelation from the International Monetary Fund that the European Union should develop an ‘Rainy Day Fund’ to ‘cushion members when they hit economic hard times’.

An emergency fund is hardly a revelation and I think most in Europe would say they are still trying to escape a decade of hard times!

Ever The Optimist–NZ enjoyed another trade surplus for the month of February (+$217 million).

We should celebrate every such data point, even if it relied on ‘stink bug’ to block the unloading of imported cars (probably worth $200 million!).

Investment Opportunities

Investore Property Ltd (IPL010) –offer of senior, secured, 6-year bonds is now open, paying 4.40% p.a.

The bond offer closes on 12 April.

Our allocation is now full.

If you have a firm allocation from please ensure that you deliver your application formto us no later than Monday 9 April.

Fletcher Notes – FBI rolled their Capital Note on Election Date (15 March 2018 – FBI110), into a new 5-year replacement (15 March 2023 – FBI170) at 5.00% (now trading on market at a yield of 5.25%).

If FBI follows a consistent pattern they are likely to sell their holding (millions) of these notes to the market after 15 March.

Accordingly, we have a list that investors are welcome to join if they’d like to purchase some of these new Capital Notes, should they be offered to the market.

Possible deals for 2018:

Sky City Casino – bond;

Vodafone – IPO of ordinary shares;

UDC Finance – IPO of ordinary shares.

All investors are welcome to join these lists by contacting us.

The fastest way to hear about new investment offers is to join our ‘Investment Opportunities’ (New Issues) email group, which can be done via our website or by emailing a request to us to be added to this list.


Chris will be in Auckland April 17 (pm) at Albany Motor Lodge and April 18 (am) at Waipuna Lodge, Mt Wellington, and in Christchurch on April 23 and 24.

Kevin will be in Ashburton on 12 April.

Edward will be in Remuera on 10 April and Albany 11 April.

Our future travel dates can also be found on this page of our website:

Any person is welcome to contact our office to arrange a meeting.

Michael Warrington

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