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Market News 30 July 2018

Anecdote I

Even the chickens have followed the lead of the nurses and increased their pay rates by 10%.

A tray of free-range eggs has increased from $20 to $22.

This shouldn’t trouble the Reserve Bank though because I doubt chickens’ increased consumption potential will be inflationary.

Anecdote II

It stretches my mind to read that the Tui oil field now claims to be operating an ‘environmentally friendly’ oil rig.

I wonder if it will wash for the Greens?

INVESTMENT OPINION

Trump vs Erdogan – Today these two leaders (term used loosely) look interchangeable; if they participated in a sabbatical in each other’s countries I am beginning to doubt whether anyone would notice.

President Erdogan has been trying to dictate the actions he wants to see from the Turkish central bank, namely lower interest rates for the people.

Financial market reaction to his imposition into management of monetary policy was to sell the Turkish Lira resulting in a sharp decline in the value of their currency.

Last week the market believed that the Turkish central bank should increase interest rates to counteract rising inflation pressure. When they chose not to do so the markets pushed the currency down again and the longer-term bond yields up (inflation fears).

It’s a stretch to bring Venezuela into this paragraph, but this is an example of a possible outcome from poor quality economic manipulation.

Last week President Trump tried to grab the steering wheel from the Chairman of the US Federal Reserve with his familiar ‘bullying by text’ as he explained that he wants lower interest rates too, not higher.

Erdogan and Trump are very clear reminders of why independent central banks are so important.

Countries need good economic governance and independent central banking forever, whereas political leaders come and go, although some linger for far too long.

Turkey has a serious problem, but there is no doubt in my mind that the US Federal Reserve will not be swayed from its legislated purpose by tweeted opinions.

The Fed is confronted by hundreds of different opinions every day about their actions, many of them from far more skillful people than the President, so I have no doubt that Trump’s opinions on monetary policy will be placed alongside all the others.

President Trump’s real objective may well have been to tackle the strength of the US dollar and its negative impact on US exporters who now face higher tariffs in many target markets and currency manipulation by some of those nations (let’s start with China).

I once spoke of how a trade war is likely to spill over into a currency war and then quite possibly a financing war (block payments made in US dollars, the world’s reference currency) but we all hope upon hope that the guns remain in the cabinet.

The European Union’s visit to the White House last week was a useful display of a willingness to keep talking.

Investment in NZ–I am treading a little close to politics with this item, but I am troubled by the union’s (E Tu) media effort with NZ plastics manufacturer Sistema and I think it runs a risk of reducing investment and employment in NZ as a result.

Rather than negotiate quietly and effectively E Tu has decided to publicly have a crack at Sistema over employment conditions and pay. It has unimpressively placed emotional ‘ism’ labels on the owners and the employees to try and enhance its pursuit of public support for their negotiations.

The public do not have a role to play in specific employment negotiations.

The union is thus guilty of the ugly behavior that they accuse the company of.

The NZ founder of Sistema (now sold to an international business), Brendan Lindsay, will be hugely unimpressed with the situation given the lengths he took toprotect this manufacturing business operating in NZ, and thus to protect the jobs of 600-700 people.

Ignoring this fact, the union accused Lindsay of establishing the sweatshop conditions now being preserved by the new owners.

The union was quoted as saying they ‘make people work like robots’. Yet, Lindsay and his wider team chose to employ people and not build robots for such repetitive tasks.

Brendan Lindsay should be thanked for negotiating that Sistema stay in NZ once ownership changed, not criticised, and if union negotiations stick to the theme published last week it seems certain that the new owners will remove production from NZ as soon as the agreed time limitation expires, rather than stay for the awesome workforce.

Therein lies my concern; economic activity in NZ.

NZ has too much private debt (proportion of the economy) to be taking actions that would reduce employment opportunities.

Our government has addressed the minimum wage level and legislated when it must reach $20 per hour, a change that I support, but I am concerned that 600-700 Sistema people will lose access to this change if Sistema manufacturing leaves NZ.

Maybe I am still too focused on the negative economic anecdotes?

Long term thinking – Trustpower provided a reminder to investors of the need for long term thinking when it comes to investment decisions; the company has spoken out about the government’s 2050 zero carbon emissions targets but called for clearer signals from government (bipartisan) before the company will make significant new capital investments.

TPW sees a need for as much as a 75% increase in electricity generation over that period but will not commit to large new projects without more certainty around regulatory intentions (risks).

They highlighted the concerns around the poorly planned recent fossil fuel ban: ‘decisions such as the recent ban on offshore oil and gas exploration that deplete the capital needed for the task and don't achieve the objective must be avoided’.

A 32-year window is a smidgen longer than you and I would naturally focus on but the point remains valid (need to plan well into the future) as we focus on 5-10 year increments ahead of us, and not 12 months.

The better our own long-term investment planning is the better our rewards will be.

For example, in your fixed interest portfolio alone you can collect an extra 0.25% average return across the portfolio by knowing what proportion of your fixed interest investing can (and should) be made for longer terms.

Beyond holding an emergency sum in a call account, having an accurate knowledge of income versus spending over the 12-18 months ahead (asset and liability matching) is important to support longer term investment choices, and thus higher returns.

Fortunately, we don’t have to plan quite as far ahead as companies like Trustpower.

Portfolio Stress Test – Regular readers may be familiar with commentary about bank stress testing; Kevin has touched on it often when covering the status of banks and bank regulators.

The central banks run ‘what if’ tests over bank balance sheets to check that they would have sufficient equity to remain in business if extra-ordinarily high losses were suffered (remember 2008-2009 real losses).

We often speak about the importance of investors having investment policies that define the parameters under which they will make each new investment decision, which in turn help to measure risk and potential losses in a portfolio.

Investors do not like being forced into proactive portfolio changes, preferring to react to maturing fixed interest investments, or if they spot unusually large profits on rising share prices.

This relatively passive approach is fine, if you have a sound investment policy that frames your decisions.

And, if you do have such a framework I am going to propose that you take a lead from the central banks of the world and run a stress test across your investment portfolio.

You can do this anytime but now feels like a good time to me as share pricing is frequently being described as ‘optimistic’, ‘high’, etc (insert noun). They are certainly upper quartile in their expectations of achieving many less than certain financial outcomes.

So, if you agree with this opinion of a lopsided state for share pricing it would be wise to assess how much wealth might be lost if the market was to recede back to a more neutral point and how you’d feel about such a decline.

How much theoretical stress should you place on your portfolio?

I’d suggest different levels for the property sector and non-property sector shares within your portfolio, perhaps applying declines of the following amounts:

Property – minus 15% and minus 20%;

Shares – minus 20% and minus 30%.

There are no ‘correct’ ratios to use. I am trying to describe market volatility ranges that exclude the distress experienced in 2008.

The commercial and industrial property entities have traded within a 20-25% price range over the past 5-7 years. Some of the price expansion reflects real increases in rental income so it seems logical to me that any retreat in share prices based on swings from optimism to pessimism would be less than 25%.

Other shares have a much wider range of variables, hence the higher range for your proposed stress test.

The pricing of the US share market (S&P500) is up 30% over the past 24 months, and whilst some of this is driven by earnings changes it is very reasonable, in my opinion, for your stress test on shares to consider a return to 2015-2016 pricing (-30%).

Please now run the ruler over your portfolio (current, stress 1 and stress 2).

Without necessarily experiencing a change to the cash flowing from your portfolio, how much ‘wealth’ ($) did you ‘lose’?

How did that make you feel?

Did you quickly shift your focus to your investment rules and ponder if they accurately reflect your potential to tolerate risk?

I am not trying to predict doom, nor isolate a cause for market retreat for you, just to have you more alert to the elevated potential for some sort of retreat in pricing and to reflect on how you’ll feel ‘when’ it happens.

Ideally, ‘when’ the market retreat is upon us I need you to conclude; ‘OK, here it is and I comfortably prepared for the impact it has on my portfolio value’.

INVESTMENT NEWS

Tesla on the slate? – I hope Elon Musk has set aside some cash in the bank to support his family because financial market pricing is trending further toward predictions of failure for ‘his’ business.

The latest dip in confidence is not about his silly little submarine effort, for Thailand, but reports that Tesla is trying to minimise cash use, including requests to have some cash returned from suppliers on items not delivered yet.

If accurate this behavior reveals imminent and serious cash flow tension.

Tesla’s share price has been falling from its previous excitable highs but of more interest to me is the bond market now trading one of its subordinated bonds at a 24% discount in price ($76 per $100 once insurance is factored in).

If lenders lose confidence and cash flow is tight a company needs additional equity from its owners, and if that isn’t possible, well either the business fails or is sold cheaply in a trade sale.

Which of the world’s major car manufacturers is furthest behind on hybrid or electrical car design?

Iran–has never, in my observation time frame, had a stable relationship with the US.

At one level I am pleased that all the current yelling at each other is only occurring through capital letters on social media.

My parents often quoted ‘sticks and stones…’ to me and that was in response to words presented face to face (1:1).

So, it surely must be more settling if those words are delivered from a geographical distance of 10,000 kilometers, via the safety of a keyboard, on a widely read media channel used for egotistical purposes (1:1 billion)?

At another level though, the art of political success, and global benefits, is weakened by such negotiation methods.

Proxy Votes – I have seen many proxy votes across my desk in recent weeks. It is time to ensure you are heard by the companies.

I hope you are all either submitting your votes or passing ‘Open’ votes to the NZ Shareholders Association (as your proxy) to ensure that your vote has influence.

EVER THE OPTIMIST– The new Hawaiki submarine communication cable, led financially by four New Zealanders, is open for business.

It connects NZ, Australia, some Pacific islands, Hawaii and mainland America and undoubtedly improves our communication options for the future.

http://hawaikicable.co.nz/

ETO II – I have often thought some of the Commerce Commission’s cases drew a long bow, based on the claims made, but I confess to being pleased at seeing them trying to take Wilson Parking to task!

ETO III – Is it the ultimate in friendship, or Trump weirdness, for the US Senate to pass a new law called the Kiwi Act?

Kiwi stands for Knowledgeable Innovators and Worthy Investors Act, which allows New Zealand nationals who qualify to enter the US multiple times for trade and investment purposes over two years without having to apply for a new visa each time.

INVESTMENT OPPORTUNITIES

WEL Networks –closed last week.

Thank you to all who participated in this bond offer through Chris Lee & Partners Ltd, we appreciate it.

More bonds – an unexpected silence.

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.

TRAVEL

Edward will be in Remuera on 6 August and Albany on 7 August.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

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

Michael Warrington

Market News 23 July 2018

France’s bonanza continues with the world also following le Tour de France, the event that is 3 parts tourist marketing and 1 part bike race (no parts pharmacy? – Ed).

I assume President Macron has a pair of suitably sponsored lycra and a fancy bike to be seen supporting this massive event.

INVESTMENT OPINION

Recession II – As I hinted at last week, I’ll need to be careful to check my focus from time to time, and ensure that I don’t become myopic, but I continue to pick up on recession related news items.

The most recent story that had me reading slower, and searching for more, was the relationship between industrial metals and US long term interest rates.

The correlation between price movements in these two items is very high. Strong prices for industrial metals reflect an optimistic, and perhaps busy, economy; falling prices the opposite.

A strong economy, and its potential inflation risks, have a tendency to press interest rates higher, with falling yields for the opposite scenario.

For the past couple of years pricing of industrial metals had been following a rising trend alongside the expansion of the US economy, a trend which is showing signs of changing during 2018 with a new, short term, declining price trend developing.

When overlaid, the declining trend for industrial metals is consistent with the recent declines in the yields on US 10 and 30-year Treasuries (government bonds).

I think this falling price for industrial metals is important enough behavior to keep an eye on, certainly more than the chaos theory emanating from a single person switching their coffee order from large to regular and tripping off a sequence of change (1 butterfly in the jungle).

There are so many indicators, but it was this one that caught my attention this week.

At this point it may well be worth you re-reading Kevin Gloag’s Taking Stock of 5 July (Newsletter Archives on our website).

Recession III – Oh dear, another item that I paused to consider:

The ANZ has recently delved into the impact higher housing prices may have on the wider economy based on the impact of claiming a greater proportion of the population’s discretionary income.

Media reports provide anecdotal evidence confirming the ANZ’s conclusions with rising homelessness and greater use of food banks (hardly discretionary items).

Another long-term concern for ANZ is that the energetic and entrepreneurial behaviours displayed by the young will be limited if they have large mortgages and absolutely no discretionary financial position to build from.

NZ is already low on the productivity scale so the thought of slipping backward is a serious concern and does not support higher wages (cruel spiral).

One logical response is for kids to use inter-generational equity to make their way through this period of excessive house pricing, or reduce their net property cost, meaning; live at home longer, seek deposit equity from the older generation(s), or rent properties from landlords who will allow use of Airbnb business skills in return for good rent and good property management.

Fed Trade – Is the US Federal Reserve actually the ‘smartest bond trader in the room’?

Subject to the credit strength of the bonds in their portfolio, the Fed stands to make a lot of money if long term interest rates begin to fall again, based on the financial market’s rising anxiety that the next recession is only months away.

The near flat line US yield curve is the market speaking to the US Fed; ‘we suggest that you stop your monetary policy tightening now to try and avoid the recession that is appearing upon the horizon’.

For now the seven members of the Board of Governors of the Federal Reserve are sticking to the 2017 song sheet that is orchestrating a lift for the Fed Funds rate up to a new neutral position of 3.00%.

The problem is that the market only sees 2.00% inflation, 2.00% economic growth and thus doesn’t consider a 3.00% overnight interest rate to be ‘neutral’.

Chairman Powell has just finished explaining to US Congress that he remains confident that US growth, stable inflation and low unemployment will continue in the years ahead.

Here in NZ we currently have inflation and inflation expectations very close to our mid-point target of 2.00%, we enjoy economic growth between 2.50% and 3.00% and our central bank is very comfortable with an Official Cash Rate of 1.75% (as does Australia, near enough).

You are welcome to pause and look up Europe, Japan, the UK, etc but you’ll find the same weak data.

For a while ‘we’ (financial markets) were pondering if the US was getting it right by finally getting on with the task of lifting interest rates, and was the rest of the world getting it wrong or just in much deeper strife?

Now, the market is deciding ‘not so much’. The market is beginning to disagree with Powell and there’s a rising risk that the Fed may be getting it wrong (forecasting errors).

Frustratingly, but predictably, Donald Trump has jumped in with his opinion too.

But how wrong might the Fed’s actions be?

I ask my opening question again; is the US Federal Reserve the smartest trader in the room?

Who has one of the biggest bond portfolios in the world now?

Thanks to a research item on global central banks (www.yardeni.com) the biggest bond portfolios are:

People’s Bank of China – US$5.6 Trillion (not recorded versus GDP);

European Central Bank – US$5.5 Trillion (39.5% GDP);

Bank of Japan – US$4.9 Trillion (96.5% GDP);

US Federal Reserve – US$4.3 Trillion (21.9% GDP).

So, if the US Federal Reserve squeezes short term interest rate costs higher to notionally cool the heels of the more excitable sectors of the economy, and apply pressure to the grossly indebted who cannot borrow for longer terms, they may achieve two aims; controlled inflation and a very profitable bond portfolio.

If recessionary data does become more obvious in the US and long term interest rates do fall back toward lower ranges (say 2.25% for US 10 year Treasuries) I’d feel more comfortable (for US tax payers) if the Fed stepped in to sell a trillion or two of its bond portfolio, so as to re-fuel for the next period when their liquidity was required (printed money).

The US Fed certainly has an undeniably strong position to influence interest rate markets, and maybe contrary to market expectations the central bank is getting exactly what it intended.

Transparent Markets – Transparency International NZ (TINZ) must have been a bit short on story lines last week when they decided to have a crack at the NZX.

The NBR described the corruption watch-dog as ‘lambasting’ the NZX for the volume of trading that is agreed off market, before being reported to the market.

TINZ may need to go on a junket overseas to discover the prevalence of ‘dark pools’ and off market ‘proprietary trading’ before accusing the NZX of running a market place that belongs on their corruption risk radar.

I discovered on the front page of the TINZ website a copy of their ‘Corruption Perceptions Index 2017’ upon which NZ ranks…. 1st (good behavior).

Nothing to see here then.

NZ is a small market place.

The nominal amount of money held in managed funds is rising fast through the Kiwisaver doorway.

Arranging large transactions in a small market place is logistically difficult.

The difficulty of buying or selling (say) $1 million of securities in a market that trades commonly in $10,000 to $25,000 parcel sizes, introduces a disclosure risk to the large trader (fund manager) and that information disclosure risk is lost value to that fund manager’s clients.

If you were a client of the large trader, you would expect them to minimise this risk of lost value (pass the risk across as quickly and discretely as possible).

The best way to minimise this risk is to execute your complete transaction objective ($1 million) in one call, by asking another single entity to take the other side of the transaction. In doing so 100% of the information and financial risk change hands at a single point in time.

If the other ‘single entity’ to the transaction is a broking firm, which is commonly the case, they have a subsequent obligation to report the transaction to the NZX.

The NZX is developing rules and new fee scales relating to proportions of trading completed on market, and off market, to try and encourage more on market activity and information for the wider audience. However, they must not remove the facilitation of off market trading or they would reduce the liquidity of financial markets and harm the wider economy.

I read a disturbing, and related, story on this subject recently, which resulted in a financial markets trader being sentenced to a prison sentence (incorrectly in my view).

In this story, a client asked a trading firm to execute a very large transaction for them, agreeing that the trader would accept some (but not all) of the price risk whilst completing the transaction (a particular price range was agreed, but execution in a tight time frame compulsory).

Essentially the client and the trader openly agreed to share the risk, and reward, of the transaction as it was progressively completed on market. All transactions were publicly reported (no secrets).

Five years later the US regulator decided that the trader had taken advantage of the situation by profiting within the sequence of trades and charged him (found guilty but is now under appeal).

I have intentionally avoided writing about the micro detail, but I understand the situation and hold a view that the US regulator (jury) was wrong.

Anyway, my point here is that this legal case will reduce the market’s willingness to help clients with progressive execution of large trades on the open market (progressive transfer of risk in a small time window).

Note again my comment above that a fund manager does not like disclosing his/her trading information to the wider market in small bite size amounts when it adds up to a very large imperative (progressive but slow transfer of risk across a wide time window).

This only leaves one option for large fund managers completing large transactions; an immediate transfer of risk at a single price and this can only be done off market in negotiation with a similarly large risk-taking counterparty.

TINZ may not like it but off market trading is a necessary part of a well-functioning financial market.

TINZ’s lack of financial market experience may mean they didn’t realise they were asking for valuable information that they are not necessarily entitled to.

Corruption is ultimately avoided because the NZX, FMA, and wider market participants gain full access to the actual exchange of risk, for review, once a transaction is completed.

INVESTMENT NEWS

Trade – Japan and Europe have offered the only appropriate response to the Trump led trade war; they have signed what they describe as the largest bilateral trade deal ever including efforts to reduce tariffs on trading between the two.

It’s nice to start seeing some counter-balance to Trump’s actions.

Z Energy – investors in ZEL, and those who have been skeptical about the future of ‘an oil company’ (and pie, or coffee company – Ed), should take note of the increased investment in MEVO, a short period car hire firm (electric vehicles).

ZEL is joining the Wellington City Council in providing the city with charge points for electric cars, and importantly, locations for rental cars to ‘stand’.

Anyone who thought that a Z Energy, or BP (etc), fuel station would become redundant isn’t watching closely; ZEL is already assessing how people will transport themselves in future and logically wants to be invested in the choices.

Given the aggressive fuel taxes, especially in Auckland (to start) consumers will move toward electricity faster now and MEVO hopes consumers will also move towardshort-term vehicle hire.

Z Energy is clearly pondering whether or not ‘dead space’ on their land can become a pick-up/drop-off and charge point for those vehicles.

Side story – I have just thought of a deal, Z Energy and Flick Electric should establish a partnership (multi fuel). Some of you will recall my bias in this proposal.

ZEL recognise that they are already a transport hub and would like to remain as one decades from now, maintaining a strategic vision that should please their shareholders.

Oil Producers – Hong Kong Shanghai Bank predicts that by 2019 Texas will be the third largest ‘oil exporting nation’ (my label) in the world, behind Russia and Saudi Arabia and immediately ahead of Iraq and Iran.

The estimated daily output in 2019 will be:

Russia – 11.5 million;

Saudi Arabia – 11 million,

Texas – 5.9 million;

Iraq – 4.8 million; and

Iran – 3.0 million.

The huge increase in domestic oil production will impact global politics, hopefully for the better.

‘Green’ politicians will be unimpressed by the developments and the energy sector quotes such as ‘it’s remarkable, nothing less than a blessing for this country’.

Fossil fuels are not going away in my life time.

However, our government and council charge into additional taxes on fossil fuels will provide a useful incentive to sharply increase sales of electric cars, fed from an energy source that our nation is very good at supplying.

Kiwisaver – This item is probably one to discuss with your children or grandchildren.

The investment industry is pressing to have ‘Kiwisavers’ choose more risk when assigning their ‘savings’ and if they won’t choose then automate risk relative to age.

Part of the commentary from the lectern is using ‘harry hindsight’ performance data to point out why people should accept greater risks but in fairness even forward-looking asset allocation decisions are consistent with more risk for most, especially the young.

Apparently, legislation determines that if a ‘Kiwisaver’ does not determine a risk type when they are automatically enrolled upon employment they are placed in a default fund and into a conservative risk position.

The industry is lobbying government (Kris Faafoi) to change this to a ‘balanced’ risk setting.

I think this is logical and Minister Faafoi sounds sympathetic.

Further, I was pleased to see the ANZ (NZ’s largest Kiwisaver Fund) quickly repeat its agreement with the proposed change to automatic risk settings and hope their corporate position was prompted by the fact that this was the view regularly pushed by the late John Body during his time as head of ANZ investments.

Cynics will claim the push for automated risk settings intends to capture greater fees, and we are fee watchers too, but the facts confirm that the wider population is demonstrably poor at making good risk decisions and seeking financial advice.

The reality is that one’s savings rate is the greatest conveyer belt to wealth, not the marginal return, so ‘we’ should all spend more time teaching the younger generation how to save more and consume less, than burn too much energy arguing over managers and risk settings.

Automatically ‘balanced’ risk sounds like the easy hit for Minister Faafoi in my opinion.

EVER THE OPTIMIST– Gas supply companies have shown the confidence to sign new 11 year agreements for supply to Methanex (Methanol producer) in Taranaki.

However, this ETO comes with a ‘but’; that 11 years is also the currently defined period for ‘known reserves’.

The lack of a longer-term agreement will undoubtedly reflect the uncertainty of remaining exploration permits and the current government’s cancellation of new exploration permits.

INVESTMENT OPPORTUNITIES

WEL Networks – Waikato Electricity Network’s offer of a 5-year subordinated bond (WEL010) paying interest at 4.90% closes this week.

All application forms should now be in.

Thank you to those who acted early, which is very helpful, and enabled your higher interest rate on investing to start as soon as possible.

More bonds – silence on the horizon, at this point….

If Z Energy is to announce a replacement for the ZEL020 bond maturing on 15 August 2018 they’ll need to do so shortly.

TRAVEL

Edward is in Queenstown 26 July, Remuera on 6 August and in Albany on 7 August.

Kevin will be in Christchurch on 23 August.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

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

Michael Warrington

Market News 16 July 2018

Anecdote I

There are plenty of reasons to point the critical rod at Russia, based on political behaviour, but the country deserves applause for its handling of the FIFA World Cup.

What a success.

It may well have cost them more to ‘gain’ the tournament than to run it, but, moral issues aside, they have run it very well from a viewer perspective.

Congratulations to France also for winning on merit.

Anecdote II

The value of the UK Pound fell on the resignation of Boris Johnson, presumably linking some of their potential economic success to his presence.

Given the contempt that most electorates hold for politicians one might have expected optimism to lift following political resignations.

INVESTMENT OPINION

Trade War – Donald Trump has already moved on to round two of his tariff war and amongst the headlines of disruption another thing stands out to me; the US share market has been drifting higher and the Chinese share market has been falling.

I think the aggressive trade stance being adopted by many countries is going to cause economic disruption on a significant scale, but the ‘weighing machine’, as legendary investor Ben Graham described the markets, is progressively delivering a verdict about the early impact of Trump’s war.

It is only first impressions, and even the markets have few clues about what Trump will do next, but very large sums of money are moved around in the US financial markets so the changes are worth observation by investors globally.

Valuable Women – Iceland has made it impossible (illegal) to pay women less than men for the same job.

I sincerely hope that Iceland’s economic growth now lifts in a way that is demonstrably linked to more women in the workplace, and in senior roles.

Then the rest of the world will be forced to move on from paying lip service to the unfair differences of treatment between male and female employees.

A greater proportion of women in the workplace, across the spectrum of seniority will unquestionably be good for outcomes.

Investors should look for more women at senior levels as part of their investment analysis and question its absence if that is the discovery.

Sky TV – Holders of Sky TV shares may be pleased by the recent lift in the share price to $2.75 from lows of $2.20 and an extended period below $2.50.

It appears to me that ‘new’ buyers of SKT shares have mopped up the shares that people wanted rid of, post the large reduction in last season’s earnings, and the share price is now settling into a new range as investors await news about this seasons earnings.

I have one little anecdote of progress by SKT for you; their new relationship with Spark (SPK) has secured me as a customer again where $30 per month was sufficiently well priced to choose ‘sport by internet’.

The history of my use included the original service, then MySky, until usage didn’t warrant the $100+ pricing. I returned as a customer when Sky introduced occasional purchasing of sport via FAN PASS ($15 per day), but again I dropped out when they insisted on $100 minimum per month.

They may now be positioning themselves well to compete by providing different service types to different customers and by doing so may stabilize, or increase, their cash flow.

I remain curious about the strategic ambitions of the new shareholders on the SKT share register (and of Murdoch’s push to take back control of private television in the UK with BSKYB)

Investment News

More deceit – Whose reporting can we reliably believe?

Nissan has conceded that they too ‘deviated from the prescribed testing environment’ for the exhaust emissions.

That looks like a quote from a sheepish, senior, male employee looking at his shoes with lawyers standing behind him.

Truckometer – I have always liked this index, right from the day Cameron Bagrie’s (era) team launched this data series for the ANZ.

I love the name and I like the usefulness of its data, especially the large truck series.

The latest results (June) show a slight softening, which is consistent with the circling economic expectations, but ANZ reminds us that over a wider window the ‘economic engine isn’t running out of fuel yet’.

It does seem that our GDP growth may now stay below 3.00% but ANZ wishes to argue that it won’t be far below.

Bank’s Stronger – occasionally investors’ will ask us to reassure them that the NZ banks are ‘safe’ to place deposits with, and own bonds from.

Some of the enquirers have been told by ‘the barman at the local’ that Open Bank Resolution law will raid some of their wealth one day. This can be quickly put back in the box with rational explanation.

However, another slither of additional strength (less risk) is appearing based on the Reserve Bank’s review of capital on bank balance sheets.

In the past the major banks were granted approval to internally assess their credit risks (chance of failure of each loan made) and then apply the regulated percentage of equity capital to the bank’s balance sheet to support that lending (as a rough reference let’s call that $10 equity for each $100 loan).

However, do you recall the criticism of Westpac in 2017 where they had breached the terms of their risk agreement with the Reserve Bank?

This behaviour, and other concerns about vagueness across the major banks approach to risk assessment, may result in the central bank insisting on a homogenous approach to risk assessment on loans.

The poor behaviour of the major banks’ parents in Australia will have left our big banks with very little negotiating strength.

If the central bank sets risk measurement rules across the industry you can be sure they will not set them at the sensitive, or stretched, end of the risk spectrum.

The result would be similar to insisting that banks hold a little more equity in support of their lending; call it $11 per $100 of loans, and the impact would be a slight reduction in the default risk of our banking sector (and an increase in the real cost of debt to borrowers, which is no bad thing).

Depositors and bondholders rejoice.

Recession Anecdote –The ongoing flattening of the US yield curve (a yield curve is a plot of interest rates measured across maturity dates out to 30 years), with barely 0.25% additional yield between a 2 and 30-year term, is sponsoring plenty of ‘Recession Pending’ headlines and story lines.

It’s never wise in financial markets to say ‘it will definitely happen again, because it happened last time’ but adopting a concerned footing is an appropriate starting point for monitoring the horizon, in my opinion.

Once one forms a firm perspective they typically only see the factual and anecdotal evidence that suits their expectation; for now I am scanning for information that reinforces the probability of a US recession.

Plenty of data declares that the US economy is doing rather well at present, but I side with those who are concerned about the US economy based on the short term ‘sugar-like’ effect of recent tax cuts and the long-term distortion resulting from excessive debt as both are unsustainable supports for the economy.

And it’s not just the US economy; Auckland is showing signs of excessive public debt.

Their cheeky proposal to isolate part of the sewerage system and then apply a ‘toilet tax’ to each user was a crass attempt to increase the community debt levels and increase the money collected from the community.

It’s not clear to me whether they intended to attach the new ‘toilet tax’ to the new debt being raised (security for the lenders) or whether the lenders would have simply demanded (as I suspect) the normal local government security against rates (special rate) but either way the outcome is the same; more debt and more servicing costs to the community.

I certainly smell an investment bank in behind offering Phil Goff clever ideas to increase council debts and increase their investment banking fees.

New Zealand should not be feeling all high and mighty about the world’s problem of too much debt because our private debts and many of our councils’ debts are uncomfortably high (our government debt is fine, but it needs to be as an offset).

I’m no economist, it is just common sense that too much debt will be suffocating, or I hope it is because it makes sense to me.

Another anecdote that is consistent with being careful with investment decisions is the rising credit margins on bonds (the additional interest rate paid for additional risk).

A rising credit margin is the market concluding that the chance of default (non-repayment of loans) is increasing, and in return the market logically wishes to earn more if the risk is higher.

When looking back at the historical (1985 – now) credit margin for a BBB Investment Grade bond in the US the margin spends a lot of time around 2.00% over US government bond yields. It drops lower in times of confidence about loan servicing and rises higher in times of duress.

If you remove the +6.00% credit margin from the heated period of the Global Financial Crisis, the typical high point for this measure is around +3.00% credit margin.

This month the credit margin is again rising slowly and may soon breach +2.00%, and heading higher.

The theme of the Bloomberg article I was reading was the prevalence of recessions that follow each movement of this credit margin back above +2.00%.

Other than in the event of a crisis these indicators do not move sharply, so we have more time to monitor developments but some alertness would be wise if it continues toward +2.50% or more.

The jigsaw puzzle that reveals what happens next in financial markets is never completed, there are always pieces missing (in the vacuum, eaten by babies, coloured in by pen) so you’ll never see a clear picture.

I have only offered you two pieces above, but I happen to view them as centrepieces that you build your image around, like the key in St Peter’s hand in the Vatican City.

Cash– Not everyone is convinced about the theory that crypto currencies will replace cash within a short time frame.

According to our central bank the New Zealand public and other economies are very happy to continue using NZ cash for transactions; so much so that the volume of cash outstanding in the economy is rising.

Adrian Orr reported this news by disclosing that the old series 6 bank notes were taking a long time to be returned to the central bank, replaced by the new series 7 notes.

NZ is a large user of EFTPOS methods of payment so this may contribute to slightly slower movement of notes, but the volume outstanding has been continuing to increase also, so plenty of us are happy to view notes as a reliable source of value.

And, it’s not just ‘us’ in NZ, apparently one third of NZ notes are used outside NZ and thus respected as a reliable store of value much more widely than on our shores.

That is a good anecdote for the respect with which NZ is governed and the way our financial markets are regulated.

It’s also a settling thought for the way external perspectives of NZ will be formed in the event of a future financial disturbance, specifically, ‘we’ shouldn’t have too much trouble sourcing funding for our government, our banks and our most reliable businesses even during periods of duress.

Tax Monitoring – I don’t recall if I passed on to you another development in the evolving space of tax monitoring.

Come the year 2020 if a person does not provide an IRD number when sought by a registry (or deposit taker such as a bank) the withholding tax rate will be set at 45%.

Further, if an investor fails to provide an IRD number to a PIE managed fund requiring a Prescribed Investor Rate (PIR), that fund will force repayment of the investor’s money from the fund.

Common Reporting Standards (CRS) and the Foreign Account Tax Compliance Act (FATCA) are leading a global clamp down on tax evasion.

97 countries have signed up to the global Multilateral Competent Authority Agreement (MCAA), to automatically exchange information based on Article 6 of the Convention on Mutual Administrative Assistance in Tax Matters.

These developments will cause no concern for investors who are well organised administratively but there will be no room for negotiation.

Ever The Optimist– Tractor sales are up 25% year on year;how can that not be great news?

I also learnt from the story that we have a Tractor and Machinery Association.

This sounds like a real person’s association where I expect the uniform involves Red Bands, the car park has extremely large spaces and there are dog kennels at the front of the clubrooms.

ETO II – For NZ, but more specifically Wellington, Shopify has selected Wellington for a regional customer service hub, employing up to 100 people who can operate remotely (home if suitable).

The launch is targeted for 13 August, so straight into it.

ETO III – During the shoulder season between summer and winter you might expect a dip in NZ tourism numbers, however, Statistics NZ reports that May 2018 was a record level for May.

‘Total guest nights in May rose 1.6 percent to 2.54 million from May last year when they grew 7.3 percent’

President Trump’s tariff war and the US Federal Reserve lifting interest rates is placing downward pressure on the NZ dollar, so, we now look a little cheaper to the international tourists.

Maybe we will be a beneficiary of Trump’s antics?

He can’t place a tariff on our landscape exports.

ETO IV – Retail sales are up, although some might claim this isn’t great news in a country with a poor savings record.

Seasonally adjusted retail spending on credit and debit cards rose 0.8 percent in June following a 0.6 percent lift in May, Statistics New Zealand said. Core retail spending, which excludes vehicle-related industries, rose 0.6 percent in June, matching the increase in May.

This data will satisfy one sector of our economy but I rather hope the weaker NZ dollar will result in slightly weaker spending numbers (other than the forced purchase of fuels at higher prices).

Investment Opportunities

WEL Networks – Waikato Electricity Network’s offer of a 5-year subordinated bond (WEL010) was successfully launched last week, with very high demand.

The interest rate was set at 4.90%.

If you received a firm allocation from us please urgently deliver your application form to us. Interest begins at 4.90% from the day your application form is processed, so there are few reasons to wait.

We have a waiting list that people are welcome to join, if they missed the opportunity to join us prior to bidding for our allocation.

More bonds – We have been told to expect more bond issues in the weeks ahead, giving fixed interest investors the opportunity to be fully invested before spring!

Travel

Edward is in Queenstown 26 July.

David will be in Palmerston North and Wanganui on 17 July and New Plymouth on 18 July.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

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

Michael Warrington

Market News 9 July 2018

Brexit will be an irrelevant topic for a while if England continue to progress toward a possible win in the FIFA World Cup!

INVESTMENT OPINION

Confidence – Ask any sports person; confidence matters to results.

If you know you are on your game, you have an upper quartile chance of success.

Confidence also applies, very directly, to how we make financial decisions too. When we are very confident more money can or is coming in, we are happy to release (pre-release) a little more money now.

So, it is a small jig-saw piece of concern to see NZ business confidence declined in the last quarter to its weakest point since 2011.

‘A seasonally adjusted net 19 percent of firms surveyed in the New Zealand Institute of Economic Research's quarterly survey of business opinion expect economic conditions to deteriorate over the coming months.’

‘What’s concerning is the businesses are no longer expecting a recovery in profitability over the next quarter and that is starting to impact on their planning.’ (NZIER)

Some of this concern will relate to the rapid increase in New Zealand’s minimum wage, although my personal view on this is that our wages were too low and employers need to factor in higher wage costs to the pricing of their businesses.

However, including my view, this higher cost will take some time to work through the economy and some of it will be at the expense of shareholder returns.

The acting Prime Minister reacted belligerently with comments I expect he will regret: ‘business confidence and real GDP growth show no correlation in this country.’ Rather, the facts around growth ‘suggest an inherent political bias is pervasive in the business sector and the perceptions of stagnation do not have any basis in reality.’

Political opinions are easy to change, but financial decisions by business are made on tangible inputs.

The focused among you may have noticed that our long-term interest rates have been declining again recently; this isn’t a sign of confidence in economic growth or a fear of inflation risks.

Regular readers will be sick of my repetitive references to the likely victory to be gained from longer-term fixed interest investment.

Side bar – the ability to borrow long term funds at very modest nominal interest rates (and in real interest rate terms) is supportive of stable share prices for businesses with high cash flows.

Genesis must be privately shaking hands around the room with its $240 million subordinated bond funding at 4.65% for five years. Genesis shareholders should be pleased about this situation.

Returning to business confidence:

No investment decision is made on a single strand of information, but as a lawyer would say, enough strands of circumstantial evidence produces a rope when they are combined.

Weaker business confidence is just one strand, but it is meaningful enough that it should prompt you to look around for corroborating evidence, or contrary evidence of a similar scale.

MAF – Last week Minister Twyford was expressing confidence in his ministries to handle various decisions relating to housing and transport risks, including scenarios that Treasury was not comfortable with.

At face value Twyford has done what a good leader should do, show trust in the group of people addressing a task, but making decisions around risk is much easier when one doesn’t have ‘skin in the game’.

Making decisions relating to risk taking with little or no financial connection to the decision maker lacks an important final contribution to those decisions. As we have often said, when making decisions with other people’s money there is often an ease in reaching conclusions that should be more weighty, and sometimes involves crass abuse of the situation.

Shortly after Phil Twyford’s decision to support ministry decision making the High Court decided to award a $400 million judgment against the Ministry for Primary Industries for its error in allowing the import of Kiwifruit pollen from China, which turned out to be carrying the devastating PSA virus.

This is a huge win for the Kiwifruit industry, assisted by litigation funders who immediately saw MPI’s error.

Why didn’t MPI spot the weaknesses in their pollen importing proposals?

Clearly none of the decision makers owned Kiwifruit orchards.

The kiwifruit orchards are hardly ‘winners’ here; they will claim they have simply been made whole after the enormous losses incurred as infected orchards were ripped up.

They successfully argued that devastation was unnecessary.

The NZ taxpayer will pay (approximately $100 per person) for this failed decision making process at ministry level.

Business progress always involves risk taking, and a process of trial and error is typical, but in this case the potential failure value of the ‘error’ massively outweighed the likely benefits.

The kiwifruit decision was not made by the best informed risk takers (orchardists with livelihoods on the line), and this circles back to my opening point; has Minister Twyford tasked the correct people with his decision making?

This is one of the benefits of Public Private Partnerships, put risk decisions into the hands of those committing financial resources to the project.

Germany – I had a respectful view of Angela Merkel as Chancellor of Germany, and admired the long-term thinking applied to their governance.

I also thought Merkel’s policy of allowing relatively large immigration during times of upheaval was generous, but the public’s response has been ‘that was a bridge too far’.

Now, Merkel is facing the sniping pressure from the other politicians who smell blood, and a chance to try and usher Angela Merkel out of office and create a path to greater power for themselves.

From a holistic perspective I think all democratic politicians should review the German situation as a message from the electorate that three terms in power is the limit. Merkel is in her fourth term.

Society changes and our governance should, to some extent, change along with it.

Politicians think they evolve with their voters’ expectations, but most do not, so after a ‘reasonable’ period contributing to government all should move on.

This opinion means that I clearly have difficulty with those who assume a dictatorial role (Erdogan, Bainimarama, Xi etc) and think the public should be grateful for their enforced long-term tenure.

The reason for these thoughts, for investors to consider, is my view that the political landscape is becoming less settled and this is likely to result in more volatility.

Volatility is a contributor to the definition of risk. More risk requires more return, yet returns are low now, after an extended period of political and economic stability and are quite likely too low for the rising level of risk that I see.

Angela Merkel’s reluctance to retire of her own decision (as John Key wisely did) is only one negative piece in a larger jig-saw puzzle, but the picture that is forming isn’t one that makes me bullish about investment.

Post Script: Germany’s football manager was also long in the chair (10 years).

Investment News

Xiaomi – This may be another little piece of sand slipping from the shapely pyramid, likely to also knock market confidence (see above);

China’s mobile phone manufacturer Xiaomi has listed on the Hong Kong exchange with less volume than hoped (HK$36 billion, where HK$100 billion was trumpeted) and at the lowest price discussed (HK$17, from a HK$17-22 discussion and far below earlier discussions of HK$32).

The company also cancelled plans to list in mainland China where the share market, and technology stocks in particular, have recently fallen by over 20%.

I think Xiaomi made another mistake when they applied for, and were granted, permission for some original share holders to have greater voting rights than new share holders; weighted voting rights they called it.

This is an error from a financial markets perspective. It is selfish, not commercial, and will ultimately hurt the business.

The ‘near’ failure of its share market float is indicative of being hurt by bad decision making.

As I say, just little signs, but signs nonetheless.

Post script I – Xiaomi started trading today at HK$16.50 (-3.00%).

Post Script II - This was the share market listing that a scam caller had tried to use on a client last month (so that it could be seen if a skeptical person Googled the subject of the call). Hide behind a real deal as you ask a person to deliver real money, before disappearing.

NZ Dairy Centre – New Zealand, and specifically Fonterra with its Global Dairy Trade (GDT) auctions and the NZX with its dairy derivate trading platform, is becoming a dominant market for monitoring, and managing, the supply and demand of global dairy products and thus pricing.

When a buyer or seller of soybeans wants to check market pricing conditions they go to the Chicago Mercantile Exchange (CME) as the source of the best information and activity in soybeans, which in a virtuous way encourages even more trading on the CME rather than elsewhere.

Market platforms strive to be the ‘go to’ market place.

In vegetable market parlance the Te Papa market in Wellington is significantly bigger than the vegetable market at Johnsonville Primary School.

Fonterra’s GDT has become the global benchmark for pricing deliverable product in the dairy market.

Now, the NZX, in the same time-zone as the successful GDT, is becoming a dominant market for trading of dairy derivatives (agreements to buy/sell on future dates).

Following the large drop in the pricing of dairy products in the most recent GDT the volumes of derivatives traded on the NZX jumped to set new highs of 6,500 contracts in a single day (up from the previous high of 5,900).

NZX CEO Mark Peterson will be pleased to report such trading growth (which they are also experiencing in Smart Shares Exchange Traded Funds) as a counter to the repetitive disappointment about the lack of new share listings in NZ.

The rising liquidity in the dairy derivatives markets makes it much easier for dairy farmers to manage their own specific financial risks, so our economy should never again experience the sharp dip in business confidence linked to the dairy sector that we felt in 2014-2016 period.

NZX shareholders might be pleased also.

Trouble? – The list of well informed and influential people speaking out about the unsustainable nature of financial market pricing (low interest rates, high asset prices) is becoming so long it’s now impossible to remember them all.

Some have an obvious bias toward profiting from their predictions but many don’t and one such person last week was a very successful hedge fund manager Paul Tudor Jones.

During the video interview it was obvious that Paul was not lecturing the listeners to adopt his view and to invest based on subtle hidden influences, he was simply telling us what was happening and that the pricing of today is very clearly unsustainable.

He did not ‘say’ buy this, sell that, give me money. He just said, be very careful. Things look OK today, and probably tomorrow too, but not for all that long.

Paul’s personal wealth is now so large he spends much of his time giving it away (poverty in the New York area from his Robin Hood Fund is one of his outlets).

We find it easier to align ourselves with these words of caution for investors than to encourage the full throttle approach of those wearing earmuffs.

Venezuela – Plenty of people bat aside aggressive headlines deemed to be from the overactive imaginations of commentators and this may seem fair enough in well governed lands, but if you would like to review what happens when an economy is managed poorly spend a few minutes reading about Venezuela.

Venezuela’s inflation was 43,000% over the past year.

Two years ago, the Bloomberg Cafe Con Leche Index recorded a coffee cost of 450 bolivars. Today’s price is the equivalent of almost one-fifth of the monthly minimum wage, or to buy a cup with the most common bill in circulation -- the 100-bolivar note -- you’d need to gather up a stack of 10,000 of them.

Gentrack Expands–Gentrack has been a successful business, pleasing its shareholders since NZX listing and has recently purchased several businesses to expand its scale and depth of service.

Last week they announced a rights issue to raise $90 million and significantly reduce its debt ratio.

Call me a speculator, but I wonder what is next on their radar, or the radar of its very active major shareholders.

Ever The Optimist– It’s a relief to see that three people still have a glimmer of hope for the future of the Ruataniwha irrigation scheme in Hawke’s Bay.

This group has paid a token sum of $100,000 to become the new owners of the research, the development work and the life-long resource consents that cost $27 million to achieve.

Where there’s hope…

ETO II – There’s a silver lining from the sharp slip in value of the NZ dollar; our exporters will receive more NZ dollars for their exports and we might move closer to recurring trade surpluses again.

ETO III – The government’s operating surplus for the 11 months to May 2018 was 9% higher than forecast, at NZ$5.23 billion.

Investment Opportunities

Genesis Energy – this bond offer is complete, in all its complexities.

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

WEL Networks – The old Waikato Electricity Network business is being welcomed to the NZX with its new offer of a 5-year subordinated bond (likely code WEL010).

WEL has set the interest rate at 4.90%.

Thank to all who have sought to participate in this bond offer with Chris Lee & Partners; we will email participants with their firm allocations by tomorrow.

The issue opens to receive applications on 10 July and closes on 27 July. We would like all application forms in by Tuesday 24 July please.

We have a waiting list that people are welcome to join, if they missed the opportunity to join us prior to bidding for our allocation today.

More bonds – We have been told to expect yet more bond issues in the weeks ahead, giving fixed interest investors the opportunity to be fully invested before spring!

IPO Process – This is an update note to investors highlighting that the process of participating in new investment offers continues to change and investors need to evolve with those changes to ensure they are successful with participation when wishing to invest.

Clients are becoming familiar with the ‘retirement’ of the cheque as a method of payment for investments. The Direct Debit (DD) payment method on the application form is nearly identical in behaviour to the permission you grant when issuing a cheque and this DD process works extremely well.

DD payment also supports the newly preferred deliver method of scanned and emailed application forms (see below).

The shorter time frames of many offers (7-10 days between launch and close) are demanding a greater speed from our clients and us. The Xanadu era of 4-6 weeks to deliver an investment is a distant memory in a hidden stately pleasure-dome (without internet services – Ed).

The ‘retirement’ of NZ Post’s mail service (i.e. extraordinarily slow) has all but struck out mail as a delivering option.

Registrars are accepting scanned application forms, so we encourage clients to deliver to us their completed applications by scan attached to an email.

If this technology is beyond your preference we would encourage you to consider assistance from a trusted family member, friend, or the likes of your local Warehouse Stationary business (or similar).

Before considering the ‘snail mail’ and the risk of failing to deliver the intended investment in time, please contact us to discuss the situation. Our ambition is the same as yours; the smooth transmission of your investment application to the company registry as quickly as possible.

Ultimately we would like our industry to use online applications (as the government did for its SOE share sales) where the CSN and FIN can be used as identifiers and digital signatures, but for some reason this hasn’t kicked into life for wide use yet.

Because of this accelerated need to respond to new deals, one needs to hear about them ‘very quickly’….

Travel

Edward is in Queenstown 26 July.

David will be in Lower Hutt on 10 July, Palmerston North and Wanganui on 17 July and New Plymouth on 18 July.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

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

Michael Warrington

Market News 2 July 2018

I agree with the various commentators, globally, that declare productivity will be down for the second quarter of 2018 as a result of the FIFA World Cup.

The following for ‘the beautiful game’ is enormous, it is deeply emotional and it provides a much-needed distraction from the ‘work to survive’ and ‘political nonsense’ surrounding us.

INVESTMENT OPINION

Government – I wonder whether our government is beginning to change things too fast for everyone to keep up, including themselves, and it is becoming unsettling for private businesses.

Being unsettled will result in a more conservative approach to investment and employment, which will show up in economic growth, consumption, profits and taxes.

At some level I’d like to be able to compliment the government for being willing to change a position if it discovers facts that require a change; ‘if the facts change, I change my mind Sir, what do you do?’

However, launching but then changing major strategies within months appears skittish to me.

I don’t raise this item to lobby for, or against, any particular political perspective, but to reinforce another reason for investors to be patient with each new move; uncertainty is rising, both in NZ and abroad.

Investing almost never provides certainties when making decisions but minimal uncertainty is the preferred situation.

Keeping the thread of change within the same paragraph, but switching institutions:

The Reserve Bank of NZ reviewed our Official Cash Rate (OCR) last Thursday, leaving it unchanged (1.75%) and declaring itself on the fence by stating that current conditions mean they are ready to move interest rates up or down. (no clear direction in the short term).

Economists are forecasting no change to the OCR until the second quarter of 2019 (hope), but I’ll wager that behind closed doors they are quietly pondering whether the expectation for a rate hike may slip out into 2020 (probability).

The global trade wars are beginning to hurt confidence in emerging markets, which is leading the faster moving investor money to head back to the US Dollar as a preferred base position.

USD strength is resulting in a weaker NZD, a weakness that is compounded by our market placing a realistic possibility of a cut in the OCR being the RBNZ’s next move.

By extrapolation, a weaker NZ dollar is great news for our exporters, but it will also have the impact of doubling the price rise pressure on imports such as petrol/diesel (alongside the new 11.5 cent tax), and it will increase the price of the important ‘flat pack’ houses that Minister Phil Twyford has added to his ‘let’s do that’ list.

The minister knows he is unable to deliver on the massive housing volume promises but he’ll feel like he can’t catch a break if he sees the Kiwi dollar fall too.

Low interest rates won’t help home builders if they cannot employ builders and can’t afford building materials.

I don’t recall the dates of the Market News’ when we referred to the need for investors to avoid holding too many short term fixed interest investments, hoping for rising interest rates, but a re-read would be valuable.

Even though we all need some, short term fixed interest investing will (balance of probabilities) be the least rewarding investment over the immediate years ahead of us.

With this in mind, it is a deflating thought to remind you that 90% of all money deposited in NZ banks is held for terms of 12 months or less, and an unreasonable majority of Kiwisaver funds are allocated to conservative assets, which include a higher proportion of short term fixed interest investments.

Financial Advice – speaking of Kiwisaver, and in a shameless plug for asking you to engage with a financial adviser (ideally located in the 5032 or 7910 post codes) I saw an article during the week that explained that Kiwisaver investors who received financial advice were demonstrably better off as a result.

The majority of the gains weren’t as a result of stock picking, just the importance of understanding risk tolerance and then placing one’s investment in that appropriate sector of the market.

Déjà vu - The Land and Water Forum has come up with an idea for the Minister of Primary Industries;

Establish a new government agency for Land and Water, to ‘provide national direction and oversight’.

It’s always fun when new people think their ideas are new.

They could, if they wish, simply dust off the mountain of valuable science from the old ‘Water & Soil’ division of the Ministry of Works, and its successor the DSIR.

Good Grief – Another frustrating story, linked to rapid change in government decisions, was the one last week where Minister Twyford (in the spotlight is Phil – Ed) stated that he is considering providing cheap loans (government borrowing rate) to property developers!

This is the government that has a philosophical block with businesses making profits, especially out of projects and services provided to government, yet here is one minister offering property developers funding via the government’s balance sheet.

Twyford describes it as needing to be on the property developers balance sheet, not that of council or government but the only way the market will deliver 2.50% funding costs (to pass through) is with a government (tax payer) guarantee.

That leaves the risk with the government.

The minister can be sure that those property developers will ask him for 100% debt financing.

Madness.

Many unimpressive and unscrupulous property developers ran public savings into the ground (pun intended) during the era they were financed by finance companies, surely we’re not going to give the sector another bite at the public trough?

The best developers don’t need discounted debt financing to be successful, so it would be an unnecessary free lunch for them. My parents’ taught me there was no such thing as a free lunch; I guess they didn’t expect a minister like Phil Twyford.

TV by internet – Spark NZ will most certainly be watching the Optus saga extremely closely, with delivering the Football World Cup in Australia.

Telecommunications company Optus decided to jump headlong into the video content marketand secured the rights to present the FIFA World Cup in Australia, via the internet,beating the television businesses that deliver content via radio waves.

Spark is to do the same thing in NZ with the Rugby World Cup in 2019.

However, Optus has experienced the worst possible outcome; a complete failure of delivering the signal (audio and video) across the internet to subscribers.

Initially Optus would have upset the public who prefer not to use the internet, and also those who use the internet only for simple processes.

The active internet users thought the price was good for the service proposed and signed up, in large volumes.

The result was 100% failure to satisfy, the entire audience.

The signal was then offered to an ‘old fashioned’ television service provider (SBS) to ensure that Australia could view the sporting spectacle (to hopefully distract from the technical debacle – Ed).

The Optus board and Chief Executive must be agonizing over the brand damage, which I would guess won’t have featured highly in the enthusiasm to pursue the new strategy of selling video content via the internet.

Per my opening line, Spark NZ will now be doubly anxious to understand the causes of the Optus failure and ensure that they have seamless backup options for service delivery (TVNZ? Sky TV?) should they run into the same problem of technology not coping with the volume of demand.

I admire Spark, and Optus, strategies to expand their service footprint, but I wouldn’t want the anxiety that surely now circles around the people at Spark tasked with the delivery of Rugby World Cup 2019.

Disclosure – I own a few Spark shares and I’ll be ‘watching’.

Trade Wars – Trump is clearly forcing others to ‘put up’.

The current trade war via hikes in tariffs is expected to expand to include trade bans and investment bans, with the latter being consistent with apoint I raised once which may see the US banking system instructed not to process USD payments for restricted governments or entities.

To us Trump’s behavior appears unthinkably destabilising, but to him it is no doubt his ‘biggest negotiation ever’, and he loves the ‘art of the deal’ and clearly thinks he is good at it.

He’s good enough to write a book, but is he good enough to right a country?

It’s becoming clear though that the US President has a multi-step strategy to his trade negotiations with other countries and he intends to exert the financial strength available to his country to make progress (from his perspective).

I have often said that change can be good, but rapid change is often unwise when you need a large group to follow; President Trump is delivering rapid change, so the objective may be appropriate (again, from a US perspective), but the speed is likely to cause some damage along the way.

The Chinese share market is beginning to form a pattern of lower pricing, which may well be a distilled opinion from financial markets that the Chinese negotiating position is weaker than that of the US?

The Hong Kong share market index is down 20% over the past month.

China is trying to pressure its currency pricing lower.

These trade war disruptions make it easy to adopt my position of patience with respect to share investing.

Investment News

BoE and BlockChain – Most central banks have taken a look at crypto-currencies, and then made vague statements about their future, but the central bank of England says it is considering including Distributed Ledger Technology in its Real Time Gross Settlement for banking payments.

This is a wise development in my view and important to monitor.

They are not leveling a conclusion about Bitcoin, or any crypto-currency for that matter, but they are acknowledging there will be a need to provide a connection to this pathway of potential financial settlement, and in doing so capture it under its regulatory framework.

On precisely the same subject, I was pleased to read that our RBNZ has been looking at providing its own digital currency to the public and considering the link between external payment methods and legal tender NZ currency.

For now the RBNZ has concluded it will not progress with its own digital currency, or an interface with others, but you can tell this file remains open.

The RBNZ thinks that an interface with BlockChain technology has too great a risk of weakening financial stability and whilst this is the conclusion a new connection will not be tolerated.

This situation now needs some clever thinkers to address the financial stability of that bridge, between a Distributed Ledger (BlockChain) and the central bank’s legal tender currency system.

A privately owned clearing house (bank owned?) would achieve this, by agreeing to isolate financial failure risk from the central bank in return for an acceptable equity return to those owners.

Imagine a spider-web of BlockChain payment interactions meeting in a centre-point (the clearing house, that I’ll call Charlotte). The owners of this clearing house would guarantee all settlements as ‘Charlotte’ then interfaces with the Reserve Bank settlement system.

This private guarantee of settlement risk would help to settle the central bank’s nerves.

Turkey – I didn’t check the odds at the TAB for Recep Edogan to win the Turkish Presidential election, but I’ll make an assumption that the payout was $1.01 or they weren’t accepting bets at all.

One of Erdogan strongest opponents was in prison, arrested recently under the State of Emergency that has been in place since the 2016 attempted coup.

The Turkish Lira has been falling in value for years and this trend seems highly likely to continue under the current political regime.

Retail –There has been plenty of commentary about online retail consumption options and how they will collectively destroy retail businesses that you and I can visit (bricks and mortar).

The competitive threat is real but without getting into the debate around GST payment, the other value gain is scale and some cheaper real estate for storing inventory (ie not main street city rentals).

However, countering the imminent demise of bricks and mortar retailers are:

Some very good financial performance by many of them (Kathmandu, Hallensteins, Briscoes);

The desire to establish new businesses in NZ (Costco, David Jones, H&M, Mecca, Tiffany & Co, Zara, and Victoria's Secret); and

Frankly, my preference with many items is to see the item and consider it first.

This doesn’t mean that investing in the retail business sector is easy, but the good performers are to be admired for their efforts to compete with those who prefer to reach us via the location of our computer mouse only.

Ever The Optimist – AgriHQ reports ‘New Zealand structural log prices rose to the highest level for 25 years as local mills compete with the export market to secure supply for the domestic construction market amid strong demand from China’.

Given the government’s ambitions for Kiwibuild housing it’s hard to imagine the demand for wood reducing in the 36 months ahead.

Investment Opportunities

Genesis Energy – confirmedthe issuance of $240 million of their new subordinated Capital Bond (code GNE050) with the interest rate set at 4.65%.

Demand for the issue was high, resulting in significant scaling.

We have contacted the clients who joined our list to confirm allocations. Thank you to the participating clients for the quiet, but effective, approach taken to participating in this rather complicated bond offer.

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

The success of this new offer confirms that repayment of the old bonds (GPLFA) will occur on 16 July (although this was never really in doubt).

WEL Networks – The old Waikato Electricity Network business is being welcomed to the NZX with its new offer of a 5-year subordinated bond (likely code WEL010).

We estimate a yield to be set above 4.50%. (minimum rate set shortly)

We have started a list and investors are welcome to join it now (and up until Monday 9 July at 9am).

We bid for a firm allocation next Monday, 9 July.

The issue then opens to receive applications on 10 July and closes on 27 July.

Kevin Gloag will soon do a research item and place it on the Private Client Page of our website.

More bonds – We have been told to expect yet more bond issues.

Travel

Edward is inBlenheim 3 July, Auckland 5 July and Queenstown 26 July.

Kevin will be in Christchurch on 12 July.

David will be in Lower Hutt on 10 July, Palmerston North and Wanganui on 17 July and New Plymouth on 18 July.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

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

Michael Warrington

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