Chris Lee & Partners Ltd

Market News 22 February 2021

Here’s another example of regulators overplaying their hand and letting their ego get in the way:

Queenstown Lakes District Council asked the Valuer General to defer Rateable Value updates for a year (since 2020) because “they felt it unlikely that credible valuations would be possible in 2020 given the unique circumstances of the global pandemic”.

The valuer general agreed to defer it until early November 2021.

What an absurd waste of time and energy; expressing a predictive view about property values when considering the collection of rates to finance a council.

Councils need to collect ‘X’ dollars (measured against the budget, and long term plan, for managing the city or district, or region) from Y property values at Z ratio.

X is a defined sum, so Y and Z aren’t all that important. Whatever Y is, Z shall be implied thereafter.

There is no value in the mayor of Queenstown expressing an egotistical view about property values. Maybe he is influenced by his previous (failed) attempts at property development in the region? (Threepwood for those new to the region)

Property transactions were occurring in the district. Sufficient data existed for risk takers to make decisions about buying and selling properties, so it should not have been difficult for the valuers and councils to agree on data driven changes.

Whatever hours the council and Valuer General spent on this matter were wasted.

There is never a good time to be wasteful, but surely now in the midst of the pandemic that so worried the council it is the worst of all times to worry about the irrelevant.

INVESTMENT OPINION

GDP Live– Westpac and Cameron Bagrie are worried about a NZ recession, with the former thinking its coming and the later thinking it’s here.

GDP Live agrees with Cam. We are in the midst of a negative quarter for GDP right now and the forecast is for more of the same during the second quarter.

http://www.gdplive.net/Dashboard

Much of the world, still suffocating under Covid19 restrictions, are wondering what scale of economic bounce back they will enjoy once freedom of movement returns.

They would gain knowledge from observing the NZ experience, with a sharp increase in domestic spending, until the longer-term realities settle in and the going gets a bit tough.

I think ‘we’ need to acknowledge that the new economic results, of less collective spending within the economy, implies a lower level of gross domestic production, which has an impact on everyone, including inflation (or deflation).

 

NZX – Our Stock Exchange must be reveling in silencing its critics of recent years.

Without even knowing that the likes of Sharesies would set up in NZ (a little like the Robin Hood broking business in the US, of GameStop fame) the stock exchange has enjoyed huge increases in market activity (volume and value of trading).

Connected with their recent strategies they have simplified the operation and have enjoyed growth in two of their non-markets businesses, namely NZX Wealth Technologies and Smart Shares managed funds business.

The value of funds in Smart Shares is now at NZ$4.5 billion, up almost $1 billion since February 2020, and has developed a fly-wheel like momentum that implies its scale will be greater again in 2022 and beyond.

What they earn from Smart Shares is modest as a ratio but it is ever-so-reliable as a contributor to the revenue line.

NZX total earnings are up 10% and net profits up 20%. Remember that it was this past year when the NZX also had to deal with the aggressive technology attack.

They’ll no doubt be forced to spend more on managing technology in future but those of you with a few NZX shares have long known the embedded value available to the business and the rising share price suggests that the market is catching up with your wisdom.

The NZX is working hard to entice new businesses to publicly list on the stock exchange; success here may well disclose new shoots of economic success and help some of our many small businesses to become medium and then large businesses.

Fingers crossed because a healthy expansion of our stock market should be the disclosure of an exciting expansion in our economy.

AKC130 – Speaking of critics, do you remember those who unfairly criticised Auckland Council (the media) for wasting ratepayers’ money after issuing some new 30-year fixed rate bonds?

The writers mathematically calculated that lower interest rates on the market, for small volume transactions, implied lost value to the council.

Market yields on these bonds are now back at the same level as when the bonds were issued, so the council doesn’t look so silly after all and investors can again buy bonds to yield about 3.00% from a very strong borrower.

Mutual success.

Gold – The Bank of England reported a significant increase in the volume of gold being stored at the UK central bank (+240 tonnes), some of it belonging to the UK, the balance as custodian for others, but the interesting thing is that it is the first increase in many years.

This lift on stored gold holdings might disclose a rise in financial anxiety but it also confirms that central banks don’t yet see a space for crypto currencies in the stored value menu.

Mind you, if I extrapolate my thinking further, I might ask; if we are now happy for central banks to print as much money as the economy needs why do we feel any need at all to hold stored value in gold?

Wouldn’t ‘we’ the population not be better off if we stored taxpayers money in the brains of clever people via perpetually funded science institutes to continuously improve health outcomes?

Politics – What fun this world of politics can be.

Even in a democracy like Italy, changeable monthly though it is, you’ve got to love that they can contact their previously successful central banker, Mario Draghi, and invite him to become the next Prime Minister.

For fun, financial markets already call him Super Mario, but he will surely earn the cape if he delivers well for his country and remains its Prime Minister for ‘’years’’.

I hope this comment from his speech resonates for a long period:

This is our mission as Italians: deliver a better and fairer country to our children and grandchildren,” said Mr. Draghi, 73, asking whether his generation was willing to undertake the sacrifices that “our grandparents and parents did for us.”

I also like his closing one liner: Today, unity is not an option — unity is a duty.

If the Italian parliament, and population, are to engage with Draghi’s will then they need to respond now. Super Mario is 73 years of age so it’s now or never if they want the benefits of his leadership.

Climate Influence – Regardless of whether you believe in the climate science debate, or that businesses will invest capital well to assist the environment, there is an unquestionable rise in demand from investors wishing to invest in (support) businesses that are (or appear to be) assisting the planet with its carbon reduction goals.

Many of you witnessed the influence of this trend during January when the share prices spiked for Meridian Energy and Contact Energy, and then receded!

The money being invested is becoming huge.

Bloomberg reported that ‘Governments, corporations and other groups raised a record $490 billion last year selling green, social and sustainability bonds. A further $347 billion poured into ESG-focused investment funds—an all-time high—and more than 700 new funds were launched globally to capture the deluge of inflows.’

The numbers reported next will be in the trillions, which I observe Infratil reports is happening already in the development of sustainable electricity generation businesses.

For the moment it seems irrelevant what profits these sustainable businesses might make; its all about investors wanting to steer money into those businesses and fund managers and brokers want to collect fees for arranging such investing!

There’s so much renewable generation yet to be built (and invested in); In the US alone renewable electricity generation from solar in wind has ‘only’ grown from 0.10% in 1990, to 1% in 2008 and now 10% today.

The trend is accelerating but the scale remains far smaller than is targeted.

Infratil investors will be more than a little pleased about their investment in Longroad Energy as they read data like this and improved regulatory settings from President Joe Biden.

‘Climate related regulatory changes and investment trends’ are unquestionably hot news in financial markets and now will be for years.

Losing Focus – Here’s another piece of evidence that some participants in capital markets are nearing the outer reaches of sanity, again; A one-time software business in the US called MicroStrategy Inc has raised money twice to invest in Bitcoin.

Investors are clambering to hand over their money.

Such is the level of excitement, inspired by greed, that US$900 million was invested at 0.00% in Mandatory Convertible Notes, that will convert into shares in Microstrategy Inc, who have clearly given up on software development and become Bitcoin investors.

Adding an unnecessary layer between the investor and the product doesn’t add value.

It’s a cynical grab for a risk-free margin managing the flighty wealth of the desperate.

This particular scenario will not play out well.

EVER THE OPTIMIST

The sequential rise in the price of milk products is great news for the NZ economy, especially the rural sector. The top end of the pay out range is currently $7.50 but several forecasters now view this price as the centre of expectations.

ETO II - Vaccinations

Global ‘jabs’ processed – 205 million;

Total Covid19 cases – 112 million;

Active Cases – 22 million

 

Investment Opportunities

Westpac Bond – Last week WBC issued a new senior bond, maturing in 5 years, at an interest rate of 1.439%, which highlights the fact that bonds are ‘better’ than term deposits at present.

These WBC bonds rank parri passu with term deposits as obligations of the bank (the same default risk setting). A 5-year term deposit at WBC currently offers a return of 0.90% p.a., more than 0.50% p.a. lower than the bond issued by the same bank.

Bonds are back (thank goodness – Ed)

These bonds will begin trading on the market shortly for those wishing to buy them, and we’d expect other banks to offer similar bonds throughout the year.

Thank you to those who participated in this bond offer through Chris Lee & Partners.

My Food Bag – Thank you to all who participated in the IPO of My Food Bag with Chris Lee & Partners.

 

Infratil Bond – The 5-year bond (maturing 15 March 2026) offer yielding 3.00% remains open to investors.

TRAVEL

Edward Lee will be in Auckland (Remuera) 11 March and Auckland (CBD) 12 March.

Michael will be in Tauranga (Mount Maunganui Golf Club) on Monday 1 March, then Hamilton (Airport) on 3 March and in Auckland (Milford Cruising Club) on Thursday 4 March.

Kevin will be in Christchurch on 1 March.

Please contact our office for an appointment.

Thank you

Mike Warrington 

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Market News 15 February 2021

It is very hard to take Elon Musk seriously as a businessman.

An ideas person, and business risk taker, sure, but not as a part of the management based on his variety of unusual behaviours.

In the era that was ‘Trump’, prattling out loud with obscure messages across social media briefly became a governance and business norm.

It is not normal.

So, last week when I read that Tesla (read Elon Musk decision) had purchased US$1.5 billion of Bitcoin I had to check the diary twice; no, it’s not 1 April and the announcement was made in a formal filing with the US Securities and Exchange Commission.

This is the real deal, albeit evidence of poor governance and poor management in my view.

Like Trump, Elon Musk clearly hates the haters (shake it off – Ed), despite the irony and he is using his current popularity to apply financial pressure to them.

He supports the Robin Hood like squeeze of GameStop shares to deliver losses to the ‘haters’ of this business.

He was found guilty of talking up Tesla share price to combat the haters by flippantly declaring on social media that he would take Tesla private at US$420 to defy those who were selling shares in his business. He was forced to give up his role as Chairman of Tesla as a result of this poor judgment.

This latest move sees Tesla (Musk) deciding that they should invest valuable capital into a method of payment rather than improving production or increasing sales and margins for the core business products.

Musk says Tesla is preparing to be able to accept Bitcoin as payment for new vehicles.

If Bitcoin is to become one of many hyper-efficient payment methods then surely one doesn’t need a float, like that held in an old cash register; after all, it’s not cash!

In my view Musk has been distracted by a view that scarcity should increase the value of Bitcoin and that he can exacerbate the scarcity situation by purchasing US$1.5 billion, describing how its use might be widened within the economy (paying for a Tesla) and then broadcasting the news widely to his disciples.

It does not add value to the business of producing electric vehicles and electricity storage.

Tesla founders (now gone) must be very disappointed with such distractions from their original strategic plan.

Traders of Tesla shares and Bitcoin will be loving this high speed, misleading, wave riding, technique of trying to manage wealth but investors will surely be unimpressed.

If you happen to be an owner of Tesla shares, keep your eyes on all of your mirrors looking for more threats than I would feel comfortable with and remind yourself you have Elon Musk onboard as a ‘passenger’, with his own steering wheel.

INVESTMENT OPINION

Climate– Further to my comments last week about commerce applying more pressure than politicians for evolving toward strategies for reducing climate damaging emissions, the world’s largest investor (BlackRock) has used its annual letter to CEO’s to exactly that.

Larry Fink (BlackRock Chairman) effectively instructed companies they own to develop measurable climate-compatible business plans backed by data on their emissions and said:

There is no company whose business model won’t be profoundly affected by the transition to a net zero economy—one that emits no more carbon dioxide than it removes from the atmosphere by 2050

Between 2015 - 2019 Fink only used the term ‘’climate’’ 3-4 times yet in 2020 and 2021 he used it 45 and 63 times respectively.

It’s not credible to think businesses will ignore the expectations of the world’s largest suppliers of capital.

Having touched on both Tesla and the climate above, I’ll add that it is unsurprising to see Toyota gradually expanding its supply of hybrid and EV vehicles in line with consumer demand and regulatory settings.

Tesla has been an impressive new business to the vehicle scene but something tells me Toyota will progress as an unstoppable tidal force in this market place. Good on them, because if we are to lose our emotional connection to internal combustion engines we definitely need competition and variety in the electric options.

Duration – The short-term nature of bond investment in New Zealand often results in our businesses looking to overseas lenders to borrow money for longer terms.

Ryman Healthcare was the latest to participate in this market, given that it is ‘open’ again. It sometimes closes as an option during periods of market distress.

RYM successfully borrowed US$300 million across terms of 10, 12 and 15 years. I didn’t see the interest rates published, and they may not be, but you and I both know the interest costs will be very modest for such valuable long-term funding, held against a long-term asset business.

I hope that the NZ market continues to mature and to reach a point of willingness to include long term bond maturities in the normal menu for investment.

Interest Rates – Over the past couple of weeks the financial media have been batting around a theme of interest rates rising under the threat of potential increases to inflation.

US inflation expectations are rising again; expectations being the key word there.

Our training and financial markets experience means that such analysis reads well in that it feels familiar, but the problem with the thinking is that nothing about the current financial market settings is familiar, to any of us.

It’s true that the interest rates on longer term US Treasuries have been rising of late. Maybe the financial markets are testing the resolve of the US Federal Reserve?

Maybe Robin Hood brokerage account holders have moved on from playing games with GameStop shares (sorry about the pun) and are moving on to threaten the Federal Reserve’s manipulation of interest rate markets?

Now that would be funny, the ultimate David and Goliath.

Maybe China and Japan have taken advantage of the market yields trading below inflation and begun to reduce their holdings of US Treasuries and will move the cash elsewhere in the world, or indeed home to finance their own difficult circumstances?

These conspiracy theories are just that, and such theories seldom hold water.

One real strand of evidence denies the proposition that interest rates will be rising soon: Interest rate returns on the highest yielding bonds (junk) are falling, now back below 4.00% and it seems probable that they will set new lows for marginal rewards relative to default risk free US Treasuries.

The US Federal Reserve will relish this information because it confirms that cheaper credit is actually reaching the weakest businesses in the economy (those very close to default), which for the most part are the ones badly impacted by the Covid19 disruptions.

Apparently, businesses with the very weak CCC credit ratings have set records twice this year for the volume of money they borrowed from the markets (lenders).

The Fed certainly won’t now change position and starve these businesses of oxygen by increasing benchmark interest rates or stopping their bond purchasing programme designed to hold longer term interest rates down.

Maybe the US Fed has allowed 10-year Treasury interest rates to widen to about 1.00% so they can perpetually borrow short term near 0.00% and buy 10-year Treasuries at 1.00%. A nice risk-free earner if you can get it; risk free in that the central bank controls the pricing and the taxpayer repays the debt obligation.

Another strand of contrary thinking can be seen in the economic forecasts from the International Monetary Fund (IMF) who continue to forecast slower GDP growth rates (+5.5% in 2021 but then +4.2% in 2022).

It still seems to me that the deep supply of cheap money is being received by the few (wealthy) and thus the financial impetus to drive inflation (increase in discretionary income for the majority) isn’t in place.

In New Zealand, for example, the dramatic increases to the pricing of property, and thus rental costs, is reducing the discretionary spending capacity of the younger generations who would otherwise be encouraged to spend more money.

I know I can’t see all, and crises happen because nobody can, but what I can see doesn’t alert me to concerns about a new ongoing increase to interest rates.

For our investors it has been nice to see longer term interest rates increase a little, witness Arvida bonds back ‘up’ to 2.80% but don’t budget on a return to interest rates well above inflation.

If by some unexpected chance interest rates do rise back to the point of offering positive real returns, worry not about bond valuations because almost all NZ portfolios are so short in average term (duration measure) that you’ll quickly be able to reinvest in the wave of new returns, and I suspect will be very grateful for the opportunity.

Forward Planning – Each time government representatives (central and loval government) fly through Auckland they should stop and ask an Auckland Airport executive to show them around and explain what is happening.

AIA Is quite clearly using its ‘’down time’’ to accelerate property development in preparation for the inevitable increase in business activity in the years ahead.

EVER THE OPTIMIST

The rising oil price, now back up to $60, indicates a return to economic activity around the world, at least to the point of aligning with the restricted supply after OPEC and Russia got over their little tiff on the matter.

Now those oil producers walk the narrow line of increasing sales, without constricting activity with higher oil prices, observing that they are also running up against governments that are increasingly determined to increase electricity as a percentage of energy use by the economy.

ETO III

The world’s major shipping lines forecast a decline to more normal costs from the second half of the year, after some had doubled, and trebled, due to tensions around supply and demand imbalances on the major routes.

ETO III

I know I shouldn’t raise this weekly but, I’ll unquestionably be watching:

Global vaccination shots delivered – 178 million

Total recorded cases – 109 million

Remaining Active Cases – 25.5 million and declining currently

Daily New Cases – approximately about 400,000 down from a peak of 750,000

The deaths are recorded as being 3% of the closed cases, but the serious or critical condition ratio within the active cases is ‘only’ 0.40%. I do wonder how many people have experienced Covid19 but have never been tested and thus are unknown to the statisticians.

Many months ago a person with relevant skills told me he expected the actual ratio of deaths to be below 1%, which still makes sense today.

We are going to beat this virus, by which I mean we will regain control of the health situation and relatively normal life routines will return. The virus itself will not depart the scene but we will be in control.

 

Investment Opportunities

Arvida – completed its 7-year bond issue, setting the interest rate at 2.87%. Popularity, due to investors holding an excess of cash at present, resulted in scaling on this offer.

Thank you to all who participated in the offer through Chris Lee & Partners.

 

My Food Bag – This is the first share offer to join the NZX for the year (Initial Public Offer – IPO). It opens this week and is being allocated this week.

The offer document can be found on the Current Investments page of our website. Please review the offer document carefully.

If you wish to participate please contact us prior to 5pm on Thursday 18 February to describe the number of shares that you’d like to purchase (priced at $1.85 each).

Air NZ – Has issued another public announcement confirming that it will be arranging a placement of ordinary shares no later than June 2021.

There is no action required now.

 

Infratil Bond – The 5-year bond (maturing 15 March 2026) offer yielding 3.00% remains open to investors.

TRAVEL

Edward Lee will be in Wellington on 19 February, Auckland (Remuera) 11 March and Auckland (CBD) 12 March.

Michael plans to be in Tauranga (Mount Maunganui Golf Club) on Monday 1 March, then Hamilton (Airport) on 3 March and in Auckland (Milford Cruising Club) on Thursday 4 March.

Please contact our office for an appointment.

Thank you

Mike Warrington 

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Market News 8 February 2021

And I thought China was the most aggressive, disruptive force in politics at present.

Check out the European Union's behaviour, selfishly blocking vaccine exports regardless of commercial agreements (including New Zealand's).

All for one, and…. Yes, all for one.

It discloses that the EU's approach to climate change regulations will not be globally holistic either.

It should be a little easier for people to understand Brexit now.

INVESTMENT OPINION

Climate – As I expected, it is commerce that will be more effective with improving how we respond to climate related risks, not politicians. Politicians talk too much and do too little.

Far more influential than our local climate report, which reaches down into the functions of a home barbeque, are the changes being made within the insurance sector (risk management), which will be followed by the banking sector (risk adjusted lending).

European mega insurers (think AIG, Swiss Re, Zurich Re etc) are beginning to refuse to underwrite risks for the coal sector or to invest their retained earnings (wealth used for insurance pay outs) into the bonds or shares of companies operating in the coal sector.

If a coal business can no longer access insurance to reduce its risk profile, how do you think lenders, like banks, will respond?

Most will refuse to lend. Some will lend but the cost of the debt will increase, further compromising the financial potential of the coal business.

Other major players in the world of finance, providing investment to businesses, should be joining this virtuous spiral and many are doing so.

Many are also lobbying the world's largest investors, BlackRock and Vanguard, to remove intensive carbon emitters from their investment targets. Sovereign investment funds, such as Guardians of NZ Superannuation, should be doing the same, and I am pleased to remind you that ours is.

NZ Super CEO Matt Whineray was a Co-Chair of NZ's Sustainable Finance Forum (https://www.theaotearoacircle.nz/sustainablefinance) and under his leadership the Super Fund has recently increased its carbon reduction targets and insisted that external managers assisting them to deliver to the same standards.

The Key recommendations from the SFF are worth a look.

Our politicians, James Shaw in particular, can make a meaningful change with one regulatory action (a recommendation from SFF): Explicitly include the consideration of environmental and social factors within fiduciary duties.

This new fiduciary responsibility over directors would then immediately appear in Codes established by regulatory bodies (FMA, NZX, Central Bank, MBIE etc) and quickly thereafter feature in define expectations for management and staff.

Thereafter, enforce the carbon related obligations and credible methods for measuring harm and benefit (carbon related) and then put a price on it (NZ Carbon Units) businesses will respond with change.

Consumers will respond based on a mix of personal preferences for the planet and financial incentives.

What can you and I do as investors?

First – be tuned in to business responses (governance) to the evolving carbon related regulations and how each specific business is managing toward climate improvement. I don't think you need to track government regulations because your businesses will quickly respond to them and begin reporting them to you.

Second – Monitor financial performance changes directly linked to new climate-oriented strategies, which companies will soon be reporting. Some will benefit from their changes, some will waste resources, others will hope doing nothing is the best strategy which will reveal short term planning as a risk.

Businesses that are proud of what they are achieving will be able to display measured financial benefits and thus they'll be reporting them loudly.

Third – Set your own preferences for who you will provide your investment capital to.

This is not the first item because it's important not to set investment limitations that either cannot be met or would unreasonably compromise your investment returns.

Some of your investments may not yet deliver the standards you aspire to longer term, but if their directors can display that they have a strategy for getting to that point I think you'd be wise to stick with them because they are setting good standards and are likely to achieve them without unnecessarily compromising the financial performance of the business.

Good governance usually delivers good performance.

Fourth – consider joining the NZ Shareholders Association, if you haven't already, and make sure your views are heard via the collective power of a single representative. The NZSA will begin to make good governance over climate matters a key feature of how they vote at annual meetings.

Do not rush to change your investment portfolio.

Take time to observe how the information evolves and then begin to respond to behaviours that align both with your preferences and deliver complementary financial performance.

Online – Increasingly you and I can pursue the actions required for our investments via online methods. I far prefer this over paper-based service.

I compliment Fletcher Building on its introduction of an online Election Process for its Capital Notes.

Holders of the FBI150 Capital Notes recently received the standard Election Notice describing the opportunity to reinvest, partially reinvest or exit and highlighted at the top is the opportunity to complete the process online via www.fbielection.co.nz

I don't recall the ratio of 'no response' from the past but I hope this now declines given the new ease of response.

I think it's very important that holders of Fletcher Capital Notes make a conscious decision at an Election Date and to deliver that to the company (via the registry).

The new terms in this case are 2.80% for a further five years.

Clients receiving a financial advice service from us are welcome to make contact and address the best choice for them.

EVER THE OPTIMIST (a lot to be optimistic about it seems)

Dairy pricing continues its rise and Fonterra has now increased its forecast pay-out ratio (per KgMS) to farmers by 20 cents. The new likely range is $6.90-$7.50 (mid $7.20).

This delivers approximately $11 billion to the NZ economy via our impressive farming community.

A decline in the currency pricing for NZD would be nice at this point.

Just a thought: I think James Shaw should buy a dairy farm. It would give him a hands on, fact based, experience of how to actually make both economic and environmental progress, making him a better Climate Minister.

ETO II – Medsafe (finally) approves the Pfizer BioNTech vaccine for use in NZ. I hope they have immediately moved on to reviewing for approval the various other vaccines on the market (including the Russian one? – Ed)

Well, that could be very interesting.

Even in the midst of public protests and what looks like poor social distancing, Russian new infection rates are falling at a faster rate than the global collective results.

Stranger than fiction?

Managed by the Russian Olympic Committee?

Or, the real deal?

The Lancet medical journal reports Sputnik V as having 91.6% efficacy.

I see Germany, on behalf of Europe, has said it is willing to review the scientific data for the Russian vaccine and may disclose some unnecessary political blinkers.

It does seem that scientists are proving they can confront the virus. Now what we need is confidence in manufacturing very high volumes, fast.

Interesting fact: The number of people who have been vaccinated now comfortably exceeds (128 million) the total who are reported as having had Covid19 (both at 106 million at the time of writing).

ETO III – NZ unemployment has unexpectedly fallen to 4.90% (from 5.30%).

The tales of woe, the forecast increases, and the half-empty glasses lacked foundation.

NZ may prove to be an accurate microcosm for larger economies like the US, who are still struggling to beat Covid19, for how their economy may perform once they do gain control.

Nice thought.

I hope our government is removing more of its emergency funding programmes because the economy is showing that it can (still) stand on its own two feet.

Before you jump straight to the theory that ''inflation risk is imminent'', ponder why last week the Reserve Bank of Australia doubled the volume of bonds it is willing to buy in their Quantitative Easing programme.

 

Investment Opportunities

Arvida – (retirement village operator) is offering a new 2.80% (minimum) 7-year senior secured bond which closes 12 Feb. Payment will be due on 22 Feb.

The maturity will be 22 February 2028, interest will be paid quarterly and the bonds will be listed on the NZX (ARV010).

This will be a fast moving issue, booked by contract note and clients do not pay brokerage costs.

We have a list for those wishing to participate; please contact us with your firm allocation request prior to 5pm on Thursday 11 February.

 

Infratil Bond – The 5-year bond (maturing 15 March 2026) offer yielding 3.00% remains open to investors and is due to close next month.

TRAVEL

David Colman will be in New Plymouth on 15 February.

Edward Lee will be in Napier on 11 and 12 February, Wellington on 19 February, Auckland (Remuera) 11 March and Auckland (CBD) 12 March.

Michael plans to be in Auckland on Thursday 4 March and is gathering appointments for a circuit through Hamilton and Tauranga.

Please contact our office for an appointment.

Thank you

Mike Warrington

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Market News 1 February 2021

Hooray, something new has grabbed the headlines: GAMESTOP.

Read more below about how this proper noun became a verb.

INVESTMENT OPINION

Renewable – I wonder if the 'green loving' investors behind the funds aggressively buying Meridian Energy (MEL) shares know that MEL was found guilty (by the Electricity Authority) of intentionally spilling their valuable, renewable energy (green), resource (water) last year purely for commercial gain?

No climate beneficial strategy was involved.

MEL took the stored, renewable, resource and sent it back out to sea without extracting energy at the lowest marginal cost and environmental impact.

Wait, say that again – Ed

OK.

The EA confirmed that MEL spilled water unnecessarily so as to influence the overall electricity price in NZ, for their benefit. The EA is considering penalties now.

If the evidence supports accusations of anti-competitive behaviour then presumably the Commerce Commission will become involved too.

Might one consider this to be more wasteful, for the planet (and true competition – Ed) than Genesis Energy striving to run its thermal generation plant in Huntly as efficiently as possible?

You could build that argument.

You would probably have found that by helping to hold up the price of electricity and reduce the access to hydro generation MEL may have forced Genesis Energy to burn a little gas and coal to make up the shortfall in electricity supply (double negative for the planet).

This won't cause the international investors to sell MEL shares (NZ is a mere speck of dust in the scale of these managed funds) however, it reminds one of the overly simple way that these investors approach decisions or define their environmentally tolerable targets.

I hope MEL doesn't have a subsidiary trading in guns for killing rabbits and wallabies near its facilities (said in jest) because this would surely ruffle the feathers of the new investors.

While I am poking the MEL bear with a stick, a friend reminds me that alongside my contempt for the latest electricity price discount for the Tiwai Point aluminium smelter, the Australians (Rio Tinto) also receive a free (taxpayer financed) grant of NZ carbon credit units to offset against their annual production of one million tonnes of carbon dioxide. (Current pricing equates to a subsidy of about $38 million per annum).

Giving these credits away is hardly consistent with the intention of placing a penalty price on CO2 to encourage a reduction in such emissions.

I wonder if MEL's new shareholders thought about the link between their investment and this 'less than green' situation.

I'm sure I am preaching to the converted when I say this 'green' investing objective is harder, and murkier, than we would all like.

Social Media– I hope you've all read, or listened to, the GameStop story about recent trading activity in the shares of this gaming company; it's awesome.

It is not an investment story, it is a lesson in financial markets behaviour for you. Stuff can happen that you do not expect and would find difficult to define but show up through a temporary imbalance between supply and demand.

Usually this imbalance is forced by those with the most equity or the greatest mental fortitude for using high levels of debt, a Goliath if you will, but not this time, which is why I described the story as awesome.

On this occasion a market price was aggressively influenced by a gathering of Davids, aided by the immediate ability to communicate as a group (social media).

Financial market journalists started throwing up some new labels; Digital Flash Mob and a new verb 'Gamestopped', both of which are relevant and fun.

Regulators like the FMA may not like it but they will find it impossible to regulate private opinions about financial markets and investment on social media.

If I were such a regulator (which will never happen) even I would despair at seeing a herd mentality gathering opinions on social media resulting in one of the great 'short squeezes' witnessed in financial markets, such as that witnessed last week in America.

A 'short squeeze' occurs when some people were selling a company share aggressively (often selling what they don't own) in the belief that the price should decline (so as to achieve a profit), but then they come up against an even larger force of buyers forcing the share price up.

Eventually the higher share price delivers such painful losses to the sellers that the sellers concede, turn around, and begin buying shares themselves to neutralise the risks they have.

When everyone is buying, a share price behaves a lot like a Rocket Lab projectile.

Historically the greatest force was exerted by the few with the most wealth, or ability to borrow in large scale, but last week the greatest force came from the collection of the many smaller participants.

It really was an incredible feat of influence.

It is another excellent example of financial risk: an unexpected change in conditions and financial outcome.

Last week's story, influenced by shared opinions on social media, was share trading in US listed GameStop Corp (GME.US).

If you look at the share price over 12 months you see a share price around $4 often, rising to between $10-20 before jumping to $150 last week. It doubled in a single day from $75 to $150.

Actually, the next day (as I write this next paragraph) the share price has jumped $300, then $500!, before finally receding.

Imagine how you would feel if you were selling shares at $15-$20 disliking the actual financial performance of the business only to find yourself losing 5-25 times the value one week later.

I think it is safe to say that actual business activities at GameStop were no different one month ago than one week ago, but the 'social herd' encouraged so much buying that it completely changed the share price and the names on the share register.

Bizarre, but true, and unregulated.

The easy first response is that this behaviour is unsustainable because ultimately the true value of a company will be revealed in its share price, but I am certain you have all read enough to know that the price of an investment seldom aligns well with actuarial value.

NZ house prices anyone?;

Within those rising NZ house prices, retirement village share prices fell below the value of those homes (Summerset share price fell to $4.33 in March 2020);

Meridian Energy share price at $9.50?;

Infratil share price at $3.80 in March 2020;

Tesla's current share price;

Bitcoin price;

Dutch tulips.

You get the point.

This story isn't about the absurdity of the GameStop share price but the exciting new influence on financial markets of the many, rather than just the influential few.

The natural instincts of the regulators, like the FMA, will be to fight against this development and try to regulate it away, which would be a mistake; they should sit back and smile at the evidence that the playing field is levelling.

Regulators aspire to deliver markets that are free (of movement) and fair. They spend a lot of time on demanding good disclosure (nothing misleading) and no deception etc.

It would be hard to describe wide ranging information on public networks (social media) as poor disclosure and the intentions were the opposite of deceptive with all welcome to participate.

The regulatory environment means that the public have access to licensed financial advice so skilled independent assessment is available.

Financial markets now have more breadth, more depth and influence is being shared by the many.

What's not to like?

Will some participants in the GameStop trading lose money?

Of course they will, so did the buyers of tulips and Meridian Energy shares at $9.50.

There is almost no way that an investor can factor such aggressive herd-like behaviour into their personal strategy. Think of it as the financial market equivalent of a bird swarm (murmuration), beautiful to watch but seemingly unpredictable unless you are amidst the flock.

I don't know about you but I don't have enough time to be constantly watching social media to try and spot the next fast changing sequence of behaviour by the new herd of share market traders.

Vaccination – I hope you are watching the progress. It is the single most important data feed at present because the taming of the virus (fingers crossed) has such wide influence on all people and all economies.

The next trend I'd like to see in the data is a decline in the daily rate of infection and shortly thereafter the death rate.

The first (infection count) has just begun happening in the late January data. Fingers crossed that in 14-21 days the death rate will also begin a decline (daily count).

Doses per day (globally) is rising, albeit with massive distortions in location.

Israel is a remarkable example of a successful negotiator and commitment to its population, now 51% (4.6 million) have received at least the first round of the vaccination.

I do subscribe to the fact that NZ has less immediate need than other nations, but this seems to penalise us for good overall pandemic management, which is a classic political conundrum.

It's unimpressive that we didn't negotiate well enough to secure a small batch of the vaccine (say 50,000 units) for use on staff operating on the frontline at our borders, MIQ facilities and then health workers.

Had we achieved this, then we may have been more active with enabling people to visit NZ for our economic benefit, such as harvest workers, students, industry specialists etc.

It is what it is, and reminds us of our lack of political horsepower in the world.

https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/

https://www.worldometers.info/coronavirus/

Kingfish – investors in Kingfish are coming up to the date when they can exercise the 2021 Warrants and purchase more units in the fund (currently at a price discount).

A decision is required.

Clients receiving a financial advice service from us can view a research item on the subject written by David Colman.

EVER THE OPTIMIST

The power is with the people; see above thoughts under Social Media.

 

Investment Opportunities

Arvida – (retirement village operator) is to offer a new 7-year senior bond next week (open 9 Feb, close 12 Feb).

The maturity will be 22 February 2028, interest will be paid quarterly (interest rate set next week but will exceed 2%), the bonds will be listed on the NZX (ARV010).

This will be a fast moving issue, booked by contract note and clients do not pay brokerage costs.

We have a list for those wishing to participate; please contact us with your firm allocation request prior to 5pm on Thursday 11 February.

 

Infratil Bond – The 6-year bond offer yielding 3.00% remains open to investors.

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TRAVEL

David Colman will be in Lower Hutt on 2 February and 4 February.

Edward Lee will be in Napier on 11 and 12 February in Wellington CBD 19 February, in Remuera 11 March & Auckland CBD on 12 March

Kevin will be in Timaru on 12 February.

Michael plans to be in Auckland on Thursday 4 March and is gathering appointments for a circuit through Hamilton and Tauranga probably in late February.

Please contact our office for an appointment.

Thank you.

Mike Warrington

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