Market News 26 February 2018

Jetstar cops a lot of flack, some of which is deserved, so for balance I wish to provide a compliment.

Last week Jetstar took me on three flights for $49 (cheap), including meteorological commentary (informative), humour (always worth supplying), real life tests of Airbus A320 limitations (comforting), staff carried smiles and they were quick to solve outstanding issues (happy, attentive).

Cyclone Gita disrupted my arrival home by a day. Disruptions happen, but the process is much easier to tolerate if problems are solved promptly and well, which they were in this case.

Investment Opinion

FPF – Regular readers may recall us commenting (5 February) unhappily about Fisher & Paykel Finance’s decision to repay all of its depositors early and at par plus accrued interest.

Repayment early was always allowable but we disputed the planned repayment price with them.

We know that investors also complained about the pricing of repayment, the loss of market value and the wording in the Disclosure Statements.

Ultimately the Financial Markets Authority did contact us and explained they would seek more input from the trustee before considering additional steps.

The FPF Chairman contacted us several times to discuss our concerns and to negotiate with us on points of difference within the situation.

The Chairman ultimately did what he should and reviewed the situation, sought more input from other professionals following which the board agreed to change their approach for the early repayment of FPF term deposits.

FPF will now repay par plus accrued interest on 28 February 2018 and have engaged KPMG to make recommendations about any additional payments to some depositors based on a Market Price method. These additional payments will be made at a later date.

I can’t tell you what this means from a value perspective partly because all investors have different terms (maturity and interest rate) but the inference is that additional value will be paid out to investors with FPF interest rates that are very clearly above current market yields.

When we started this process of debate with FPF I would have described myself as a pessimist, not expecting a change in approach. I retained that view through much of the negotiations.

However, the optimist would have been proved correct. Repayment terms have been improved.

We are grateful to FPF, and its Chairman, for reviewing the matter and having the character to show that decisions can be changed and that one doesn’t need to remain cemented to a single perspective that may be based on refracted facts from the other side of a prism.

Might I say though, that if today’s decision had been the one presented in late January at least two lawyers and one accounting firm would have missed out on some revenue.

Lawyers and accountants need to eat too, right?

FPF investors do not need to take any action.

A2 Milk – A2 Milk is rapidly becoming the ‘Apple like’ brand story of New Zealand.

The A2 Milk company (ATM) has very few tangible assets but it is very quickly gaining sales recognition for its point of difference in the dairy product market.

From a scientist’s commitment to the view that milk product from cows with the A2 gene was better than A1 and that consumers’ would grow to understand this and change their consumption habits, accordingly.

New Zealand consumers seemed indifferent, judging by space on supermarket shelves but Australia and then China have charged into the product.

A2 is now a company with a share price that records it as New Zealand’s largest by capitalisation at NZ$9.5 billion (I had trouble settling on this number because it was changing by a magnitude of hundreds of millions every hour, breaching $10 billion at one point!).

By contrast the capitalisation of Auckland Airport is $7.6 billion, F&P Healthcare is $7.3 billion, Spark is $6 billion and Fletcher is $4.5 billion.

A2 Milk is an outstanding story for NZ business. In fact it is becoming a little easier to think of more and more outstanding NZ business stories, including; TradeMe some years back, Xero, Z Energy out of Shell NZ, Ebos, Synlait Milk, PushPay, Delegats, Heartland Bank, Gentrack, Vista and Comvita.

I’ll put in a shameless and biased plug for Eroad to become one of the next large success stories for a NZ based business.

There will be far more unlisted and less visible businesses succeeding for NZ with Fulton Hogan immediately springing to mind.

The progress by A2 Milk is remarkable for a business just on 18 years of age and where its value was only one twelfth of today’s in 2016.

Sadly the company’s two founders are no longer alive to enjoy the success of the business they believed in so much.

Fonterra’s belated entry into this market for A2 milk products is a significant acknowledgement on their part and it will surely result in many dairy farmers considering genetic (A1 to A2) change across their herds to gain access to what looks like reliably higher sales price.

A2 milk (ATM) shareholders can be spotted at supermarkets, nice restaurants and in car yards with unmistakable smiles.

Housing Prices – I know commenting on investment in housing is outside our area of competence, but when did that ever stop me from having an opinion?

So, if you are willing to tolerate some ‘incompetent’ commentary, here it is.

I have been brought up, professionally speaking, in markets. I understand how they work and what drives them.

I do believe that setting prices for housing should be done by a market, but I equally respect President Xi’s view that ‘housing is for living in, not investment’.

Prior to the emergence of AirBNB I would have said that houses are not productive, they are for shelter and this remains the primary focus. I accept that AirBNB is theoretically helping some property owners to be more productive (international tourists) and to repay more in personal debts.

The willingness of those with access to more funding to invest in multiple properties has created an unhealthy price tension across the property market; unhealthy because it moves affordability of shelter away from those with the greatest need (i.e. those without a home).

Unproductive, or not, New Zealanders invest hugely disproportionate amounts of their savings into housing.

For NZ’s sake, ‘we’ need to direct more of our savings into productive businesses and into debt reduction (especially personal debts) and in my view this strategic focus still requires more regulatory incentive, or disincentive to be accurate, alongside building more properties (supply solution).

I don’t propose that it be illegal to own too many properties, this clashes with my markets training and preference for reasonable freedom of choice but I am quite comfortable with regulators putting in place firm financial disincentives for those who choose to own many residential properties.

Regulatory tension introduced by central and local government is appropriate in my view and should include higher debt costs, lower tax benefits, greater tax capture and locally targeted rates (e.g. tourist accommodation related taxes).

Maybe this property debate will open the door for the government to introduce a land tax, as recommended in the Tax Working Group of 2010?

It doesn’t seem hard to me to change laws to dictate that all property titles in NZ must be linked to the IRD numbers of individuals (owners, trustees, shareholders etc). Where an IRD number features more than one the person must nominate which property is ‘home’ and the rest will incur the land tax.

NZ already has a good land register, so it shouldn’t be hard for them to work well with IRD on the matter.

Quite clearly residential property investors with multiple properties are in business, and not simply providing shelter to their families.

If the government and councils are successful at both adding supply to the housing market and increasing the costs for property investors they may well halt the rise in market prices. They might even succeed in lowering the market price of housing, especially at the cheaper end of the scale.

Yes, I say succeed, because I think it would be a success to lower the price of housing for the wider population.

If you have one house, for shelter, then you should be reasonably indifferent to the market pricing of housing around you.

If you have already managed to upgrade the quality of your home (premium priced house) then the least well off will never feature as a support for the market value of your house, so expanding the supply of less expensive housing has very little impact on you.

If you do not have a second house and are not using your home for commercial income, such as AirBNB, then you would not be impacted by the regulatory costs that I describe above.

At this point I think I should apologise for the ramble.

What’s the take out?

I think NZ investors are too focused on residential property investment and I think the regulators really are coming after them this time (with your blessing it seems – Ed).

Maybe if you have too great an exposure to investment in residential property these thoughts will resonate with you, even if only as a reminder for the need to diversify your investing.

Insurance – after my teasing comment about insurers making large profits last week ‘because we aren’t suffering damaging earthquakes annually’ I received a note from a client about the more serious subject of the lack of competition in insurance.

Just like housing above, this is well outside our brief but I want to comment all the same.

Our client detailed a situation that was appalling behaviour by an insurance company, including a vindictive corporate act that undermines the person’s future insurance outcomes.

Remind yourselves that there are really only two meaningful competitors (groups) in the NZ insurance sector.

The Commerce Commission spends a lot of time and energy on some business behaviour matters that appear to be at the very fringe of unacceptable outcomes for consumers or the potential for monopolistic behaviour but I am not aware of them looking into the uncompetitive nature of the insurance market.

ComCom rejected the Sky TV – Vodafone merger even though there is a rising selection of competitive products for consumers.

ComCom rejected the NZME – Fairfax merger, regardless of the intense competitive pressure within this sector.

So, why isn’t the Commerce Commission looking into the failing competition within the insurance sector?

The story that was relayed to me was undoubtedly a very negative outcome for consumers and was grossly unacceptable behaviour in my opinion.

There must be hundreds, or thousands of these stories in Christchurch alone.

The story told to me sounds like it is only the tip of the iceberg, where the iceberg is a decidedly uncompetitive insurance sector.

Investment News

Missing Chooks - Tegel was quick to blame cyclone Gita for losing a few chickens.

Actually, they explained the risk of a $2 million profit reduction from a damaged water supply.

The world doesn’t yet know whom KFC in the UK wants to blame for losing all of its chickens.

Stranger than fiction, but it’s a reminder to investors that risks can emerge from many places.

Still Volatile – Don’t be lulled back into your quiet corner just because share markets appear to be rising again in value.

Financial market volatility continues to hold up and I’ll stick to my previous warning that this period of disruption is ‘unfinished business’.

It makes more sense to me to say that any investors who felt uncomfortable during the week of sharp declines should be using these better weeks to re-position their portfolios.

Good results – Without delving into each specific report it has been nice to see so many businesses reporting very good profit performances for the December period (some half year, some full year).

It is consistent with the well performing NZ economy.

A few of the names that stayed with me were Ebos, Delegats, Port of Tauranga, Heartland Bank, Tourism Holdings and Summerset.

Many Heartland Bank (HBL) investors have both shares and make use of the bank’s call account and term deposits. These people may wish to look at the good results in more detail, here:

HBL continues to succeed with building a bigger bank via lending growth in all areas. I was specifically pleased to see the greater than anticipated growth in the Home Equity lending, especially in the Australian division of the bank (headed up by a Kiwi).

People have moved on from the fear of home equity release and it has clearly become a win: win for the customer (financial freedom) and the bank (robust, rewarding, long term lending).

Win: win scenarios are good business.

Banks make money when they can borrow at lower short term interest rates and lend at higher long term rates; home equity release is providing HBL with good quality long term lending opportunities.

I look forward to reading more good profit results this week, and hope that they are the ones that our clients have some exposure to.

In contrast, and even though it is old news, I remain surprised that many in the building and construction sector (NZX listed) are reporting poor or very poor performance.

Fletcher Building, Steel & Tube and Metro Performance Glass have all been unimpressive with their latest performance.

Ever The Optimist – Ethical investing is continuing to gain traction. Small anecdotal examples are reported often.

Last week’s was when US teachers learned that 12 states are invested in gun manufacturers causing Florida teachers to demand that these shares be dumped.

Maybe this is the best counter action to the belligerent attitudes of lawmakers and the NRA.

President Trump’s solution was to advance school property as a war zone by offering to arm the teachers.

Investment Opportunities

Goodman Property – issued its senior, secured 5-year bond last week with an interest rate at 4.00%.

The success of this bond should be a tonic to those who are invested in Goodman Property Trust shares (GMT).

Transpower – is to offer a new senior bond to the market, with a 7-year term and an interest rate that is likely to fall between 3.50% - 3.80%.

As a government owned entity with a AA- credit rating Transpower is a very low default risk, hence the low yield.

Any investors wishing to purchase a holding of these bonds are welcome to contact us.

Fletcher Notes – FBI has announced they will rollover their Capital Note on Election Date (15 March 2018 – FBI110), issuing a new 5-year replacement (15 March 2023 – FBI170) at 5.00%.

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 started 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:

Investore Property Ltd – senior bond;

Sky City Casino – bond;

Vodafone – 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.


Michael will be in Hamilton on 1 March and Tauranga on 5 March.

Chris will be in Christchurch on Tuesday 27 February (pm) and Wednesday 28 February (am) and again in Christchurch 27 March (pm) and 28 March (am).

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

Kevin will be in Christchurch on 22 March and Ashburton on 12 April.

David Colman is planning trips to Palmerston North, Whanganui and New Plymouth. He plans to make regular visits to Lower Hutt.

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 19 February 2018

Insurer Suncorp reports that its first half profits are up 81%.

IAG reports that its earnings are up 231% for the same period.

Both cite the lack of earthquake costs as a reason for the higher profits.

Does anyone else feel like they are paying insurance premiums now priced off the ‘potential’ for damaging earthquakes every year?

Investment Opinion

Fantasy Land – An article I was reading last week, after the start of the market disruption for long term interest rates and share prices was titled ‘Fantasy Land is no more’.

My immediate vision was of the park in Hastings, now known as Splash Planet. This park is also Fantasy Land no more.

The commentator was pointing out that economies and investment decisions will no longer be fuelled by cheap money, the pricing of which fell to nominal levels of zero percent (and lower in some countries) and to negative real interest rates in most of the major jurisdictions (i.e. interest rates below inflation rates).

I have copied one paragraph for your reference (I apologise to the Author whose name I didn’t record – from Bloomberg):

The reality is, it’s been 10 years, and a lot of people that are in the market today have had ten years of a Federal Reserve that has artificially repressed volatility. And as they step away from that, reality starts to kick back in. There’s been a 10-year fantasy land that investors have been living in. And that’s a fairy tale that’s about to end.

This simple opinion resonated with me, probably because I agree with it as an underlying driver of investment decision making today, relative to one month ago.

Some financial market participants will barely have 10 years employment on their Curriculum Vitae, let alone 10 years in financial markets, and those folk will find it a dramatic change (the departure of dirt cheap money) and be rather underprepared.

Sadly, from a truth and reconciliation perspective, I have 31 years of observation under my belt, 10 of which have been here with Chris Lee & Partners.

By deduction, Bloomberg has described my 10 years with Chris Lee as being in Fantasy Land.

That’s one way to look at it, if you have a sense of humour.

My wife and kids certainly think I have, and still do, operate in Fantasy Land, which is part of the reason that I escape to the office quite often.

We have tried to keep it real for you throughout the past 10 years, but I do agree with the underlying thrust of the article; investment drivers will be quite different during the next decade so please make your strategic decisions from this new perspective.

In the latter part of the decade long fantasy there was an ever-stronger influence of ‘Fear Of Missing Out’ (FOMO) investing across markets, most noticeably in the Bitcoin story but it was seen in most asset pricing markets.

At the beginning of the departure from Fantasy Land, witnessed by behaviour immediately after the US share market fell 1,175 points in a day, there was a new fear; FOSI – a Fear Of Staying In.

In reality the departure from Fantasy Land began in mid 2017 when the US Federal Reserve made it clear they would enter a cycle of increasing the overnight Fed Funds rate and begin ‘selling’ its bonds back to the market.

In a plug for the financial advice community; investors with well thought out strategies do not suffer from either of these fears (FOMO and FOSI).

If an investor has felt fear over the recent weeks of elevated volatility, this is a signal that the investment strategy is incorrect and does not match the requirements of that investor.

Volatility is a measure of risk; the risk that value will change (up and down) in larger increments, and do so more often.

The increase in market volatility (beyond your control) has increased the current risk of your portfolio, without you lifting a finger. One logical reaction to counter this development is to consider reducing the overall risk of your portfolio with each new investment decision (something you can control).

Maybe the ratio held in shares needs to be reduced?

Maybe speculation should be reduced?

Maybe subordinated bond repayments should be reinvested in senior bonds/deposits?

Maybe long term fixed investment (6 years+) is removed from the current menu until relative rewards increase?

Your friendly financial adviser will help you with each of the ‘maybes’ (smile).

As I stated earlier, I agree with the Bloomberg commentator that the financial market environment of the past 10 years (Fantasy Land) has changed and it will be different over the coming 10 years (which should be enough see me out).

I am not talking about the arrival of Simba’s Badlands (can lands arrive? – Ed), just an acknowledgement that the investment landscape has changed for the medium term outlook.

Keep your eye on central banks, led by the US Federal Reserve, for the rate of change in the new direction.

Interest rates the spark? – When the share markets started their tumble in price many market commentators hunted for causes that could be captured in a single headline.

This is not much use. (other than to sell ‘papers’ – Ed)

‘Look, the interest rates in the US are rising, significantly’

This only poses a financial problem for those who have excessive debt levels.

These entities, and people, have had a perpetual stream of warnings about the risks of excessive debt use. We do not need to hold their hands. We also do not want to lend to them.

On this point, I wish Hon. Grant Robertson had said ‘that is the borrower’s responsibility’ when he was asked ‘are you concerned about rising interest rates for borrowers in NZ?’.

The Minister’s answer included a tone of concern for the risks these borrowers are facing.

Should I be concerned about social decision making if we struggle to demand self-responsibility with commercial decision making?

Sorry… I drifted off topic.

Rising interest rates are a problem for those with high debt levels and for the present value of businesses (share prices).

However, emerging markets have found ways to succeed with interest rates that are always higher than ours, probably by trying to keep their debt ratios down.

Maybe highly indebted markets should look to the survival methods adopted by emerging markets! (other than serial defaulters like Argentina – Ed)

Interest Rate Bear Market – How long can traders sustain a bear market in bonds?

Sustaining a bear market (falling prices, rising interest rates) will be easiest in a market with excessive debt levels (volume of bonds on issue).

To profit from rising interest rates (if not using derivatives) traders sell bonds that they do not own, hoping to buy the bonds back at lower prices (higher interest rates).

If you sell something that you do not own, you must borrow that item from a third party to effect delivery to the purchaser.

When borrowing a bond, one secures it with another asset, usually cash, and agrees to pay a fee per day for the loan. Long-term owners of the bonds are grateful for this fee to add to their portfolio returns.

The easier it is to borrow the asset (high level of supply) the lower the fee for borrowing shall be.

The US bond market is the largest in the world. The US government has willingly increased its bond supply to fund its ever-increasing spending spree.

The departure of the US Federal Reserve as a bond investor adds to the net supply of bonds in the market.

Borrowing US government bonds will typically be an inexpensive exercise.

By collective deduction, as long as rising inflation concerns fuel the direction for US interest rates it will be very straightforward for traders to sustain a bear market in the US.

Where the US market goes, most other developed markets will follow.

Investment News

Fletcher – There’s something about most very big businesses and their rising capacity to underperform financially.

It has been a nightmare few months for the shareholders of Fletcher Building.

I don’t think the Fletcher directors knew all of the true detail of the errors being made in the Building + Interiors division, which implies that the executive staff were…. carefully now…. not providing directors with an accurate picture of the risks and rewards within this division.

Polite enough?

Mind you, how casual, untrained or naïve were the FBU directors in not asking more questions given the risk and reward scenarios from that sector. Surely, the directors knew about this financial threat that the new CEO spotted in less than six weeks on the job?

Maybe the next greatest error made by the board was appointing Mark Adamson as Chief Executive Officer to oversee it all in 2012. There is no way shareholders will ever digest the $2.9 million severance fee paid to him after presiding over an incompetent B+I division and $1 billion in cumulative losses.

Sir Ralph Norris was foolish to try and apportion blame elsewhere, when he made reference to sub-contractors. I have a friend who had been a sub-contractor and he hated the oppressive nature of the agreement that was in FBU’s favour. He worked very hard to avoid doing business for FBU, only accepting work if it was commercially important to allow it into his work schedule.

This has been the view of FBU sub-contractors for a very long time and this alone should have left directors pondering the financial tension within B+I, or their inability to work well with the rest of the sector.

Side story – Fonterra is another business that I am told sub-contractors try to avoid.

This saga is surprising evidence that the board didn’t even know how to ‘clean the slate’ in the way Ross Taylor appears to have done.

I know I shouldn’t say this next statement, because ‘show me, don’t tell me’ is the only method of assessment due to Fletcher, but I liked what I heard from the new CEO (Ross Taylor) in the aftermath of this appalling period for the company.

Without questioning Ross Taylor’s skills I’d like to recommend that he read the book about Fulton Hogan and its long road (yes, pun) of success.

To clients, be a little patient with your decisions and avoid making them based on a headline or a 30 second radio excerpt.

Inflation – The Reserve Bank was unequivocal in its most recent Monetary Policy Statement that inflation was absent and that cuts to the Official Cash Rate were as likely as increases.

But, doesn’t that statement define equivocal?

Sitting on the fence?

You might recall that this doesn’t surprise me because being an interim Governor there is no point in sticking your neck out prior to the arrival of a new permanent governor.

It is true that current pricing statistics on inflation are mild, without threat, but expectations are not and the central bank often reminds us that they cannot influence tomorrow’s actions all that much believing the impacts of their actions take 18 months to settle.

Well, with that in mind, and their sensitivity around inflation expectations the new governor won’t have missed last week’s survey of inflation expectations.

The one-year ahead expectations were stable at 1.86%, but worthy of a raised eyebrow the two-year’s forward number lifted from 2.01% to 2.11%, now travelling up above the centre of NZ’s target range.

It’s happened before, of course, but today things are different.

A new government strategy will increase budget spending and push the minimum wage from $16.25 to $20 over three years.

Just saying.

Post Script – US inflation for January was 0.1% stronger than anticipated, nudging long-term yields a little higher (US 10 year Treasuries 2.92%).

Trillions – Stories catch my attention when they refer to trillions.

Last week’s story exclaimed that the private debt in the US was now $13 trillion dollars.

Sadly I am becoming a little numb to trillions, zillions, mega-gazillions but I read on to see if anything was new.

I then added this to the US government debt of $20 trillion dollars, and rising, with an expectation of reaching $30 trillion in 10 years.

Even if private consumers do not increase their debts further they are confronted by a collective country debt of $43 trillion dollars by 2027.

I wasn’t great at statistics at school, but I like facts so gathering statistics makes sense to me. Here are the simple facts about US debt, using the $33 trillion current debt) that I gathered.

Population 324 million = $101,000 debt for every US citizen;

US GDP is about 18 trillion, spread across 154 million employed people.

Straight away you can see the debt per employed person is more than $202,000.

The average employee earns US$39,850 pre tax (Average of 34.3 hours per week at an average income of $22.34 per hour.

GDP per capita (not per employee!) is US$52,000 so some small subset is gaining a lot better than the average.

It is hard to run a household of two people (one employed, one not, on average) on income of US$39,850 let alone service your share of $202,000 debt.

‘We’ are not going to gain control of this debt (gross and as a proportion) in my lifetime. The financially conservative generation (born 1917 – 1947) are reaching the end of their natural cycle and the most recent two generations clearly don’t understand the simplicity of not spending more than you earn.

Excessive debt, and a large-scale default from somewhere, will feature in a future disruptive event for financial markets, but I’m not clear where from yet.

Code for AI trading – Artificial Intelligence used for financial market trading based on algorithms was found wanting two weeks ago as the US share market skipped and fell.

Proponents of AI trading in financial markets lobby antagonists and regulators impressing upon them the additional liquidity that high frequency trading brings to a market.


High frequency trading is ‘front running’ aka ‘insider trading’ based on an advantageous position of early information (knowing about your order) and greater speed to the front of the queue.

What happened to these ‘liquidity providing market participants’ when the US share market fell 5% (1,175)?

Hiding under their bed-covers is the answer. They profit from manipulating your information, not being capable of trading in highly volatile intra-day markets.

The Bank of England sees this artificial trading for what it is; an unfair tax on the majority of financial market participants and are about to discuss a new code of compliance for those operating such trading techniques.

There will be obligations placed on the trading tolerances, machine management and I’d expect to see them link ownership of such trading back to a business and on up to a human (Directors).

It’s like anything, if people push regulatory boundaries too hard, or unreasonably, the regulators will push back.

The rise of AI and high frequency trading, and the tax (theft? – Ed) it imposes on investing by natural persons, results in ‘our’ need to minimise participation in markets to avoid the value lost. Meaning: there’s value in ensuring that the majority of your portfolio is populated by passive investment holdings that do not require frequent change.

Bank on Fraud – After my comments last week a generous banker did contact me to discuss the topic of matching names to bank accounts in online banking.

He described the complexity of this task and that online banking had significantly reduced the incidence of banking errors from cheque processing, which is becoming a sunset part of the industry.

It was nice to hear that name referencing was a topic even if it was a challenging one.

I thinking the banking framework needs to resolve name and account matching and security of payment if they wish to avoid more serious competition from other forms of payment, including the many attempts at crypto currencies.

US Budget – Trump says it will take 20 years to reach balanced budget, let alone achieve debt repayment.

In the spending plan for fiscal year 2019 the White House abandoned a pledge, included in its first budget last year, to close the deficit within a decade. Instead, it said its new plan would see the budget in deficit until fiscal 2039. 

I’ll be 70 years of age before they get control of their spending, and frankly it is all just words (tell me). The actions (show me) are deficits all the way.

Ever The Optimist – The Crown’s operating surplus continues to rise as a result of good governance, higher PAYE from the employed and more GST from the consumers.

It’s a nice problem to have.

ETO II – The NZX has enjoyed the listing of a new business on the exchange; QEX Logistics Ltd, a transport and logistics operator chaired by Connor English.

Their competitive advantage is described as cutting links out of the chain between producer and buyer, especially for New Zealand’s link with China.

I hope they expand sufficiently well to land on the main board of the NZX.

Investment Opportunities

Goodman Property – has announced another senior, secured bond issue.

The term is five and a half years (maturing 2023).

An indicative interest rate range is between 4.00% and 4.10%, but in our opinion it should have been closer to 4.50% to be competitive in a rising yield environment.

We have started a list for those wanting to invest in this offer and have uploaded the term sheet and presentation to our website. All investors are welcome to contact us and join the list.

Fletcher Notes – FBI has announced they will rollover their Capital Note on Election Date (15 March 2018 – FBI110), issuing a new 5-year replacement (15 March 2023 – FBI170) at 5.00%.

The interest rate remains reasonable, albeit a little less so this week than last.

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 started 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:

Investore Property Ltd – senior bond;

Sky City Casino – bond;

Vodafone – 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.


Michael will be in Hamilton on 1 March and Tauranga on 5 March.

Chris will be in Christchurch on Tuesday 27 February (pm) and Wednesday 28 February (am).

Edward Lee will be in Auckland (Queen Street) on 28 February.

Kevin will be in Christchurch on 22 March and Ashburton on 12 April.

David Colman will be in Lower Hutt on 21 February and is planning trips to Palmerston North, Whanganui and New Plymouth in March.

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 12 February 2018

The dairy farm that I stayed on in late January speculated that the next Global Dairy Trade auction would lift a few percent.

They showed me that charts of the declining milk supply (over-heated cows, plus natural decline) plus their market knowledge about peers in other regions in making their prediction.

Last week the milk price increased +5.90%.

It is nice to see these farmers being so well informed on their product and its market pricing movements, which implies they manage their farm well.

I am certain they are not alone.

Investment Opinion

US Share Prices Slump – How did the rapid slump in the US share market last week (Friday, Monday and Thursday) make you feel?


Don’t be. If you have been investing according to a well thought out investment strategy, you have no need to be scared of the markets.

Certainly, the people at the beach on Tuesday (Waitangi Day) couldn’t have cared less when my mobile phone buzzed with information about the market price declines.

The market movements meant nothing to those throwing the Frisbee or chasing the kids back into the water laughing.

Market experience helped me to consider the behaviour rationally; curious but not disturbed, and the people at the beach put it further into perspective for me.

I put my phone in the car to stop me constantly checking it.

On Friday 2 February the Dow Jones fell about 660 points (-2.50%) as the market aligned the debate about excessive valuations with the now persistent risk of higher long-term interest rates. US 10-year Treasuries had lifted from 2.40% to 2.85% in double quick time.

The speed of the interest rate hikes exposes a market of risk takers recognising that things have changed from their previous stable or declining interest rate views.

Friday’s share market decline was a small test of market sensitivity, a search for the vulnerable; being investors holding risk levels that they were not comfortable with.

On Monday 5 February the NZ market responded to the US Friday action by falling approximately 2% also; a measured reaction.

We in NZ then took a day off to settle our nerves (Waitangi Day). The people that I saw at the beach cared not about what happened next (on my cell phone).

The US re-opened for its Monday trading and fell another 1,175 points (being -4.60%); a big day in anybody’s language. This is now the biggest daily fall in terms of points (although Thursday’s fall went close to setting a new record), but only about one fifth of the scale of the 1987 single day decline in percentage value terms.

The ‘sharks’ were in the market and were being successful with their search for anxious investors and discovered a market with plenty of weak holders of shares. Those people panicked a little and rushed to sell excess shares.

This selling was then accelerated by computer-based trading activity, which jumps on any trend and pushes in the same direction trying to make money from the movement.

And, after reading several US summaries, the third strike of selling came from investors who had been trying to profit from the extra-ordinarily low volatility in financial markets (a bit like receiving premiums for insurance).

These investors were savagely caught out when market volatility leapt from 12.5% to 42% in a single day. The insurance-like’ risks they took were a little like AMI’s excessive insurance exposure to the Christchurch earthquake with too much risk and too much leverage linked to a single risk type.

Maybe these ‘investors’ confused themselves into believing they were insurance underwriters (receive a fee for accepting a risk type) and that ‘failure couldn’t happen here’?

Whatever they believed, they were clearly young and inexperienced (or using Other People’s Money – Ed) and should now have learnt that financial markets are just as unemotional and unforgiving as Mother Nature.

At one point on Monday (2:54pm US time) the share market fell 750 points (-3.00%) in 15 minutes. There will undoubtedly have been some startled market participants at that point in time.

Traders of financial options will be shattered after the market volatility monitor, the VIX Index, jumped by three-fold. Sellers of those options (as described above) have lost vast sums of money. The buyers of the options (those accepting insurance protection) will be the ones celebrating at the bar this week.

The irony of this aggressive second day of falling share prices, prompted by worries about rising long term US interest rates was that those interest rates responded to the new fear by falling again (back down at 2.70%, for now).

By late in the week though interest rates were rising again.

It is no surprise that in the face of this newly disrupted market crypto currencies have accelerated their recent declines in price.

If you pull the ‘big rug’ out, causing a shake for the Dow Jones and S&P500 markets, it should be no surprise that those who thought they were riding the ‘magic carpet’ (crypto currencies) discovered that they have further to fall when confidence fails (and gravity returns – Ed).

It didn’t help crypto currencies that India joined the naysayers by declaring that they will make it illegal for them to be part of the country’s settlement systems. This does not remove the potential for the public to ascribe a value to a crypto currency, as they do for gold, but it will not feature in India’s legal tender settlement system.

I think other countries are likely to follow this regulatory lead unless they find a sensible way to connect a regulated crypto currency to an intrinsic value that is acceptable to the regulators.

As I finished this sentence I read another very solid criticism of crypto currencies, from the Bank for International Settlements which now says; ‘they are a combination of a bubble, a Ponzi scheme and an environmental disaster’.

Not pulling any punches then.

In fact, it is beginning to look like a concerted effort by central banks to throw cold water over the disruption they see as being caused by crypto ‘assets’ (I’ll guess they will no longer like the use of the term ‘currency’).

Meanwhile, here in NZ our share market was surprisingly calm on Wednesday. Perhaps the 36 hours to reflect helped provide room for rational thought.

Rational thoughts such as:

The US share market was up 10.0% over the past two months, an absurd rate of incline, especially after 10 years of rising share markets;

NZ cut interest rates but did not participate in the more artificial monetary interference applied by the US, Japan and Europe;

I have been following my financial advisers’ preferences and been keeping my strategic asset allocation in check, including the expectation that market pricing needed to decline;

I have plenty of cash so will not be pressured to sell assets;

My Kiwisaver is a subsidised savings scheme, not an investment-trading scheme;

My investment time horizon is years, not days or weeks;

It would be nice if our market participants were this well-reasoned.

I love the fact that the media use the headline ‘US share market surges’ the day after the slump. If Captain Kirk returned from ‘Trekking’ on Wednesday he could be forgiven for thinking the value of his superannuation scheme (401K) was up in value last week, based on one day’s headline.

The calm on the NZ market continued on Thursday, which surprised me a little because I don’t think this ‘shake-down’ is over yet. (Thursday’s fall in the US confirmed this).

With only three days of testing the downside for the US market so far, (Friday, Monday and Thursday), with Monday and Thursday’s falls being reasonably serious, I’d be very surprised if there weren’t a few more tests in the weeks ahead for anxious investors with excessive risk positions.

This is a thing that some market participants do, they come looking for anxious or loss-making investors and try to profit from forcing them out of their investment positions.

Financial markets can be an unwelcoming, take no prisoners, environment.

If you hold plenty of cash, alongside your longer-term investments that you intended to have and like, then you can and should stop reading and go back to throwing the Frisbee.

Beyond this near term financial market disruption the broad global economic story is beginning to look quite good. If you have an excess of cash and were contemplating arranging some new long-term investments, be patient; perfect your throw while you wait.

Investment News

ANZ to repay – As we have expected, the ANZ Bank has announced the repayment of another ‘perpetual’ subordinated bond (code ANBHA) on its 10th anniversary, and next Call Date; 18 April 2018.

The ANZ Bank has governed its capital needs well, unsurprisingly, and thus the bank can comfortably repay these securities on a time frame that most investors were led to expect.

The bonds paid 9.66% for the first five years and 5.28% for the second period of five years; a good outcome for investors.

The repayment returns NZ$835 million to investors; the second largest non-government bond offer in NZ, with Rabobank’s RBOHA holding the record at $900 million.

So, we are now left with only the ASB Bank to declare whether it will follow the good capital markets behaviour of all the other banks operating in NZ and repay old subordinated equity capital securities once they become stale.

In my opinion banks must repay old complex capital raising securities if they expect investors to support new complex securities ever again.

Indeed, for the sake of capital market maturity and financial market stability, I think all banks and the Reserve Bank should discuss the merit of recycling subordinated bonds (complex bank capital securities).

We await ASB’s decision, and declaration to its capital providers.

Infratil – The newly settled bus route negotiations under the Public Transport Operating Model (PTOM) have presented Infratil with the clearest view of the performance of this business for the next decade.

After years of trying to develop a genuinely successful commercial bus service Infratil has had to concede that public transport has now been bundled into a pre-defined box where the floating financial risks fall on regional councils.

This isn’t what I like to hear as a ratepayer. However, it is what it is.

As an Infratil investor I am pleased about the new utility style financial performance that NZ Bus will operate under after such a drawn out period of change by the government.

Having said that the financial performance of NZ Bus may have become so predictable now that it leaves little room for Infratil’s management to develop additional revenue for the business, hence Marko Bogoievski’s announcement that they’ll now look at options for new ownership structures (or shareholders) for NZ Bus.

It’s nice to see the future of this investment being cleared up.

Banking Fraud – Be very careful when making payments to other bank accounts when using online services.

Always double check that you have the correct bank account number and that you have keyed in those numbers correctly. If you make an error it cannot be reversed.

One of our great frustrations is that banks do not name match for you when making payments to bank accounts. You could accurately key in my personal bank account to pay some money to me but then put ‘Batman’ in the name field and the bank would process the payment.

This is nuts.

Far more checking went on in the days of manual banking. Tellers would look at the Payee on a check and observe whether the payment was ‘Not Negotiable’ or ‘Account Payee Only’.

Today, in the impressive (??) world of modern technology, we are told to accept that this checking does not occur.

This means my ability to arrange banking has improved (access, time etc) but the accuracy of the banking process has worsened.

It is a failure on the banking process that the Reserve Bank of NZ and its member banks do not use the technology that we operate on the demand name and account matching as an additional payment accuracy test.

Why do we tell you this?

A client contacted us to say they thought they had made a payment to us (used CJ LEE TRUST ACCOUNT in the name field) only to discover it had gone to the wrong bank account and been stolen.

It wasn’t a simple error by the client. Their email had been hacked into and a legitimate request for payment had been altered to include the thief’s bank account number and re-delivered to the client’s email address.

The thief nominated a bank account that was clearly not ours, specifying one with a very different number sequence.

The client responded to the email by making the payment to the account now presented to them in the email from the thief.

We are being told that many brokers are being told the same type of story.

In this case, Westpac contacted the client to alert them to the ‘possible fraud’ of the payment being processed.

This seemed like good service by the bank, however, the bank has completely undone its good work by actually letting the payment continue, making it impossible for the client to cancel it.

Westpac and the client are discussing this error and where liability rests.

To repeat, the purpose of this email:

Be certain that you have the correct bank account number for the person you are paying.

Chris Lee & Partners (and our Trust Account) has never changed its ANZ bank accounts over the past 32 years and has no intention of changing them. If you have our accounts programmed into your banking services and someone asks you to use a new bank account number, please telephone our office before acting.

Always double check that you have accurately keyed in the bank account numbers intended before confirming a payment action.

Banks do not compare the Payee name and the bank account number.

If you are reading this and have any leverage at all in banking circles, please raise the need for name and account matching in the banking process to try and remove the incidence of theft described above and reduce the potential for honest errors.

Eroad – has now launched its Placement of new shares to current shareholders, probably at a price of $3.04.

Shareholders should look out for communication from the registry shortly and respond promptly if they wish to purchase a few additional shares.

In my opinion Eroad is right at the apex of displaying success with their efforts in the US, or not doing so.

2018 will be very instructive to the firm’s future value.

Crowd Funding – Our concern with Crowd Funding, from an investor’s perspective, continues to grow.


‘Hope’ is not a funding strategy.

‘Non-voting’ is seldom an appropriate concession for investors to make (Fonterra gets away with it).

If you like the look of a crowd funding offer, and wish to support the entity, please consider your payment as ‘forward purchasing’ of the product involved (if offered) or philanthropy.

Further, please limit any participation to an amount that does not disturb your financial welfare.

CBL Insurance – Last year there were a few murmurings that CBL Insurance might consider a bond offer.

I think you can safely say that this is off the table following their announcement of a $75-85 million loss and a need to raise additional ordinary equity for the balance sheet.

I am pleased to read that they are focusing on raising ordinary equity rather than debt (senior or subordinated).

Meanwhile, the NZX and FMA are enquiring into whether or not the company disclosed necessary information at appropriate timing.

The regulators might also look at who was selling shares during the steep price decline in late August 2017 and see how that trading aligns with when the company knew about negative, price sensitive, information.

Ever The Optimist – Rosy employment data from the 4th quarter of 2017 has been released.

Employment grew by 0.50%, unemployment fell further to 4.5%, employment participation has held up at 71% (still near the highest in the developed world).

If it ain’t broke…

Investment Opportunities

Goodman Property – has announced another senior, secured bond issue to be issued over the next couple of weeks.

The term is five and a half years (maturing 2023).

They will announce interest rate expectations early next week during the roadshows, but in our opinion they will need to be close to 4.50%, or indeed exceed this level, to be competitive in a rising yield environment.

We have started a list for those wishing to hear more details about this offer (once made). All investors are welcome to contact us and join the list.

Fletcher Notes – FBI has announced they will rollover their Capital Note on Election Date (15 March 2018 – FBI110), issuing a new 5-year replacement (15 March 2023 – FBI170) at 5.00%.

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 started 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:

Investore Property Ltd – senior bond;

Sky City Casino – bond;

Vodafone – 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.


Michael will be in Auckland on 20 February, Hamilton on 1 March and Tauranga on 5 March.

Chris will be in Christchurch on Tuesday 27 February (pm) and Wednesday 28 February (am).

Edward Lee will be in Auckland (Queen Street) on 28 February.

David Colman is planning trips to Lower Hutt this month and to Palmerston North, Whanganui and New Plymouth in March.

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 5 February 2018

The full, blue, red (conflicted) moon has delivered us into February, already.

Investment Opinion

General knowledge - I unexpectedly completed some Continuing Professional Development two weeks ago, during a holiday in the South Island.

We went on a tour of the smaller and underappreciated towns in the South (East side) and tried to stay with members of the community and not just in their hotels.

Accordingly, we successfully used the Airbnb and Book a Bach (crib – Ed) online portals to select our accommodation.

This was the first CPD knowledge; the impact of Airbnb is having on our economy and confirmation that these technology-based consolidators (removing intermediaries) are having a significant impact on consumption behaviour.

You cannot yet buy shares in Airbnb, but I think they will be a ‘nice to have’ one day.

More importantly, I concluded that Airbnb is delivering a portion of the tourism dollar more widely across NZ than other accommodation channels because almost all international travellers are aware of Airbnb, but few will know about our local marketing/administrative portals, such as Book a Bach.

Hotels in NZ do employ many people but the return on capital employed usually goes to a small focused group of shareholders. Motels and home based accommodation delivers the revenue both to local employees and as a return on a wider pool of private investment in property.

Even though a fee is owed to Airbnb for each booking it would be unwise not to include this service in one’s methods for marketing accommodation businesses in NZ. Airbnb’s consumer audience is too wide to ignore.

We asked most property owners who used Airbnb about their visitors and they all confirmed they had far more international guests than locals. Fantastic news I thought.

By extension, Airbnb is helping to ensure that more tourists pass through many of our smaller towns, at a slower rate, because they can find accommodation in ‘other’ places before they get here.

Contrary to my personal preference, at the start, we stopped at every second hand or antiques store spotted along the way, whilst we were in these small towns. And, yes, we left behind some money for those towns.

Ultimately, I discovered quite an impressive NZ history within these shops, including some genuine value and always some fun locals who left us better informed on the area or the aged products of NZ’s history.

I hear the upset from hoteliers and moteliers about Airbnb and being undermined by this additional accommodation resource (private residential properties) and the different regulations applying to each category. However, I like seeing under-utilised property resources being made available to the accommodation market, especially with its potential for delivering tourist dollars more widely.

It wasn’t long ago that some commentators were claiming there would soon be a desperate need for more hotels in NZ. I don’t recall the statistics, but I’ll wager that Airbnb has helped relieve us of this problem in many areas.

It is great to see the sunken capital in the various residential properties increasing their productivity through accommodation to international tourists (and a few friendly domestic travellers).

You don’t have to wait long to read articles from economists about New Zealand’s poor productivity growth; well, seeing a dairy farmer earn an extra $10-20,000 per annum without any additional capital investment is quite clearly improved productivity for this business. Note the simultaneous removal of a need to invest capital in new hotels.

I hope our regulators do not decide to foist the same regulations across the board for all accommodation providers and undermine the increased economic efficiency being enjoyed. Indeed, this debate may well result in the exposure of some excessive regulations governing the current motels and hotels.

Do regulators expect too much from them?

As is often the case, I would recommend regulating disclosure obligations so consumers can apply self-responsibility and make their own choices based on good information. For example, forced disclosure of no wheel chair access, the possible absence of emergency exits or onsite hazard signs etc.

Queenstown is setting out to impose a tighter set of regulations on small private accommodation services. It will become a test spot for appropriate ways to have all accommodation resources operating well in the same market.

We are not alone in the world with trying to understand where people are staying and how to regulate it. A friend in China sent us a poster where they stayed – ‘foreigners who reside in domiciles other than hotels shall within 24 hours of arrival go through the registration formalities with the local police station’.

Anyway, regardless of the growing pains Airbnb disintermediation is helping the NZ economy.

My next CPD was during a home stay on a dairy farm in Culverden and it covered both irrigation matters (the success of the Waiau River scheme) and all things commercial about dairying.

After being invited to help with the morning milking, and duly arriving at 5:30am, not 4:30am because I figured the cows would still be walking, I was provided overalls, gumboots, gloves and an apron.

Excessive wardrobe?

Not once you get down in the alley between the cows!

Cows have very enquiring eyes. Each one interviewed me with a long gaze before ambling on to its next task. The other end of the animal is less, shall we say, discerning.

I was very grateful for the 20-degree temperatures, making the early start bearable.

Dan and his brother were the ‘next generation’ taking over from Dad and they were really good tutors (very patient having a townie in their work space – Ed). They love the data that is now available to them on their smart phones linked to the irrigation scheme and to Fonterra for a myriad of product data.

They are very aware of genetics and the growth in the A2 milk story but would not spend vast sums to change herds, preferring the idea of NZ spending a decade to gradually breed out the A1 genes.

They were good to their animals and followed well-defined processes for effluent control.

The return to milk pricing above $5 and learning that they can access income from under-utilised farm property has delivered a skip in the step for these young farmers.

They were not up to speed on the use of dairy derivatives for managing their exposures to market pricing of milk but they didn’t have time for a lecture from me. Since I left the farm I have been wondering whose role it is to gradually bring NZ’s dairy farmers up to speed on derivative tools for reducing their business risks.

Fonterra? NZX? Banking relationship manager?

It’s not easy because farmers are spread so far and wide and whilst an online slide show would be useful it doesn’t come with a hand-shake and a set of real eyes to lock onto for agreement.

They had not been tangled up in the use of interest rate swaps for debt management so I couldn’t enquire about the bank servicing with this matter (You may recall the stir caused a couple of years ago when some farmers accused the banks of poor form by introducing them to interest rate swap agreements).

The irrigation effect in this region made me smile.

We should be capable of this all over NZ.

My Aunt lived in Culverden when she was teaching and said the place is unrecognisable now (the land) by comparison. The productivity differences must be enormous.

Just reading about Capetown’s near zero water stores for its urban population should remind our government departments and the environmentalists just how important it is that NZ does not waste its competitive advantage with rain fall.

It is too important that we catch it, store it and slow its journey to sea (or evaporation) to ensure that urban use never fails and that commercial use supports good production levels from the land.

In my opinion we waste more energy talking about the subject than we gain from electricity generation and productive land use from the actual water flow being debated.

If we could plug the ‘talkfest’ into Transpower’s national grid we might solve the electricity loss but this doesn’t help the farmers.

All the same, in one little specific case dairy farming was in good form and a happy state when we visited.

The third subject I learnt more about was fertilising options for the land.

The majority purchase fertiliser mixes from the likes of Ravensdown (Nitrogen, Sulphur, Phosphorous, Calcium, Magnesium, Potassium) but one farm we stayed on had decided to switch to humates (decomposed prehistoric plant and animal matter)

Humates are carbon-based chemicals such as Humic Acid, Fulvic Acid, Lignin and Ulmic Acid.

I am not a soil scientist (ring your Dad – Ed) so I’ll guess that the switch won’t suit all soil types, but the farm we stayed on was struggling with the cost of repetitive fertilising and for trial and error decided to run a few seasons with humates instead.

The results of the trial were impressive so they switched products and have not looked back. The land now holds more moisture, the grasses are healthier, the stock are therefore healthier (look out for Shortland Station lamb) and the farm’s costs are down.

Decision making on a farm takes a while, probably more so for the older generation, and their neighbours aren’t keen to change…. yet.

It was a nice story to listen too, even though I took up another valuable hour of a busy farmer’s time.

This family farmed near Naseby (lovely village) and their accommodation was a wonderful ‘off the grid’ experience. Sing out if you’re keen and I’ll connect you.

I don’t yet have an investment angle for you on humates but it was good to see a skip in the step of a sheep and beef farmer too.

Another observation from our trip was of the tremendous job that our roading and engineering contractors are doing along the damaged highways, especially SH1 North of Kaikoura.

This work was impressive to see, both for the scale of the damage and the rapid repairs being delivered. It may be another three or so years before this stretch of road is completed to the standards sought by the engineers but I applaud them all for enabling us to drive the stretch of SH1 already.

Mrs Warrington had a minor gripe though.

We would drive past ‘Men At Work’ signs (I know what you’re thinking but hold that thought)… and whilst I was telling jokes to our 15 year old about why such a successful Australian rock band was in the area Marie would protest that it was usually young ladies with big smiles on the Stop/Go paddles, not men!

How refreshing.

Open letter; to the CEO of Fulton Hogan (and peers) – a few ‘Ladies at work too’ signs with smiley faces wouldn’t go amiss.

If Fulton Hogan was listed on the NZX I would have a warm investment opinion for you.

Kaikoura was looking good and the cash is definitely flowing again. They deserve it.

Speaking of post-earthquake progress, the centre of Christchurch city has a nice buzz about it again. There were a lot of shoppers, and diners in the new central area and it is quite obvious that the city centre will again be a busy, and attractive, place even before the rebuilding is completed.

And, if traffic flow is permissible as a single economic measure the region is in rude health.

So there you have it, 10 days of CPD, all of it more useful than a conference with free Minties and sponsors pens and I returned buoyed by the optimism of almost everyone that we met in the South.

Pacific Edge shares – We assume there is a share-trading enquiry proceeding in the background.

On Thursday 1 February PEB announced to the NZX that they had reached a commercial agreement with Raffles Diagnostica Pte Ltd to offer its suite of Cxbladder tests in Singapore.

The PEB share price jumped to 45 cents.

The only problem, as we see it, is that on 24 January the PEB share priced had ‘pre-empted’ this news by initially jumping from 38 to 42 cents.

Investors can be forgiven for thinking ‘someone always knows’, but those who act on sensitive non-public news cannot be forgiven.

Investment News

FPF Repayment – It is sad to report to you that the respected board and management of Fisher & Paykel Finance are undermining our past respect by making a selfish business error.

Fisher & Paykel Finance (now branded Flexigroup under the new Australian ownership) has announced that they will repay all depositors on 28 February 2018 (unless the deposits mature prior to this date).

FPF has the right to make early repayment.

The repayment amount will be par plus any accrued interest, regardless of your interest rate.

If the offer documents had spelt out this as an option for early repayment nothing more would need to be said, even by those receiving higher interest rates running well into the future.

However, the relevant paragraph in the offer document reads as follows:

Under the terms of the Trust Deed, we have the right to redeem Deposits at any time at a price no greater than the then current market price for that Deposit which, due to interest rate movements, may be higher or lower than your investment. The market price for Deposits will be as determined by an expert appointed in accordance with the Trust Deed.

The bold highlights are mine.

FPF staff told me they had the expert’s opinion and a legal opinion that supports repayment at par plus accrued interest as being appropriate.

I asked to see the opinions but FPF declined to provide them.

That is unusually defensive behaviour I thought.

So, I contacted the trustee, with a helpful introduction from the FPF staff member.

The trustee understood my opinion and agreed with aspects of my complaint but confirmed there is a robust legal opinion that would not support challenging the FPF repayment methodology. He noted the 1984 age of the trust deed, and its wording, may have been unhelpful to the outcome.

Everyone has covered their decision-making bases (backsides – Ed) with independent professional opinions. They will not however disclose those opinions to investors (of which I am one, at 6.25% through to 2019).

Based on our client activity I’ll accurately guess that the residual FPF deposit book has interest rates ranging from 3.50% - 6.50% with maturity terms predominantly ranging out to 2020 and perhaps some in 2021.

With the moves of a gymnast the independent financial expert has concluded that the appropriate market price for repaying all of these investors, across a 3.00% interest rate range and 2-3 year time range, is, [pause for effect] - $1.00 plus accrued interest.

This is nonsense.

I am pleased they didn’t approach me to be the independent expert, seeking this particular outcome.

This market price (valuation) aspect of the professional opinions will not hold water with investors and, in my expert opinion, would not hold up in court.

So, the trustee’s problem must have been that the legal opinion concluded it would be difficult to insist that FPF pay premium market prices to some of the depositors.

One of the communications I received from FPF tried to talk in collective terms as if repayment at par was about fair across the wider group. It is not an investor group or managed fund, it is hundreds, or maybe thousands, of individuals with differing terms and interest rates. The most valuable residual investments should not be subsidising the least valuable.

Regardless of the independent expert’s opinion I know that ‘collectively’ our clients are losing ‘many’ tens of thousands of dollars value if they are repaid at par plus accrued interest.

So, investor conclusions will logically be that at the point of departure from the deposit-taking market FPF (Flexigroup) has acted selfishly and not in the way that investors would have interpreted the public offer documents.

FPF has not acted in the way they publicly describe themselves: ‘customer-centric financial solutions’. This won’t surprise the public who see such misleading marketing most of the time in business.

This FPF repayment situation must be a concern to the Financial Markets Authority who have a major purpose of public confidence in financial markets; the opposite outcome to that being experienced by FPF depositors.

I logged a call with the FMA, and I hope they review the situation, but I’m not all that confident that I’ll hear back from them.

There are plenty of examples of improved behaviour across NZ financial markets but this FPF behaviour drags us back to the undesirable behaviour of some in the past.

It is bad form and the error is a genuine surprise to us given the quality of the board members and management at FPF.

An optimist might say that FPF has 23 days to correct their error.

A pessimist would say they will not change their decision because they no longer seek the goodwill or respect of the investor and advisor community.

I was reluctant to Aussie bash (new owners), but if the shoe fits?

Fletcher Capital Notes – Fletcher Building has announced that it will rollover its 15 March 2018 Capital Notes (FBI110) at 5.00% with a new Election Date of 15 March 2023 (FBI170).

They have further announced that if investors in the old FBI110 elect to ‘Convert’ their Capital Notes FBI will repay these people with cash (Notes will not be converted into ordinary shares).

In our view the 5.00% interest rate is fair in the context of current market conditions.

If you do not own Fletcher Capital Notes, but would like to, please see the note below under Investment Opportunities.

Ever The Optimist – Rocket Lab. Three cheers.

Commercial success (satellites deployed) on their second launch with this generation of rockets.

Extra-ordinary, and all from a NZ founder and a local launch pad.

ETO II - Roger Federer is evidence that quality prevails.

Speaking from a position of 51 years I do wish the media would stop describing Roger as old at 36 years of age.

Investment Opportunities

Fletcher Notes – FBI has announced they will rollover their Capital Note on Election Date (15 March 2018 – FBI110), issuing a new 5-year replacement (15 March 2023 – FBI170) at 5.00%.

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 started 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:

Investore Property Ltd – senior bond;

Sky City Casino – bond;

Vodafone – 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.


Michael will be in Auckland on 20 February, Hamilton on 1 March and Tauranga on 5 March.

Chris will be in Christchurch on Tuesday 27 February (pm) and Wednesday 28 February (am).

Edward Lee will be in Nelson on 12 February, Blenheim on 13 February and Auckland (Queen Street) on 28 February.

Kevin Gloag will be in Christchurch on 8 February.

David Colman is planning trips to Lower Hutt this month and to Palmerston North, Whanganui and New Plymouth in March.

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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