Chris Lee & Partners Ltd

Market News 25 May 2020

My observation is that people are trying to get out and be financially active again.

It goes without saying that employed people are relieved to get back to work and for the balance of 2020 they will tolerate being asked to use up annual leave or agree to some Leave Without Pay to ensure businesses survive.

Consumers are active because they want to be, and because they want to support businesses with the cash they accumulated whilst locked up (down – Ed)

Through my open line to Grant Robertson;

I say that I am not a fan of the Helicopter Money proposals, however, if they are to happen please don't just deliver a lump sum to everyone.

It shouldn't be hard to avoid giving me any cash (target people on the lowest marginal tax rate) and it shouldn't be hard to deliver something like $100 per week for 12 weeks (via IRD) to direct the cash to regular consumption and not unnecessary bits of hardware.

Ignore the election (funny boy – Ed), don't buy votes, invest in economic success.

If we manage to temporarily remove Covid19 from our population for just a few more months we have positioned ourselves to take huge advantage economically speaking (relative to others) so let's not waste that opportunity.

Lastly, being the Minister of Spending is easy, I'd like to now hear more from the Minister of Acorns to remind people what we will soon be up against and that it must be taken seriously.

INVESTMENT OPINION

What to own– Given that central banks are willing to buy almost anything now, what should we invest in?

There is a saying – ''never bet against the Fed''. It means don't sell what the central banks are buying, or place bets that they won't succeed.

Central banks have more financial horsepower than you, or us together.

George Soros did it successfully once against the Bank of England, but you'll have observed that commentators are still using this story of private investor versus central bank 31 years later because there are no other recent successes!

If I take the Reserve Bank of NZ as an example, they are willingly buying NZ government bonds and Local Government bonds.

After announcing this investment intention, the relative yields on government and council bonds fell sharply. Owners of these bonds benefited immediately with a lift in value, but a decline in future yields.

An astute client who purchased some of the recently issued Local Government Funding Agency bonds at 1.50% asked me ''why has the yield fallen to 0.75% so soon after issue?''

Because Wyatt Earp rode into town.

''I thought 1.50% return was rubbish, but I wanted some very strong bonds''

Well, now the forward-looking yield (0.75%) is worse but today your bonds are worth 10% more ($110) and you can be sure they will not now lose value.

So, in response to my opening question, in NZ you can assuredly buy government and council bonds and know that you will always be able to sell the bonds and are highly unlikely to lose any value.

In America this safety net applies to almost all senior bonds, some subordinated bonds and now Exchange Traded Funds that invest in bonds.

In Japan it also includes equities!

Even though the RBNZ does not buy shares, and surely must never do so, our share market rises because investors try to arbitrage reward for risk around the world.

Meridian Energy in NZ has a certain set of financial risks and rewards that are distilled down to a current share price of $4.82 but I'd guess a clone of MEL in Japan would have a share price of say $7.50 given that the Bank of Japan is a willing buyer.

Whose money are they using?

Taxpayer money, that's who.

If central banks end up owning everything then we no longer have a marketplace.

If this was North Korea, I could understand the strategy; the central bank is trying to put the investment banks and brokers out of business but otherwise it is a long-term nonsense.

If the NZ government ended up owning everything, via our central bank, then by the time I reach National Super age they won't deliver me cash but instead a fortnightly potpourri of government bonds, corporate bonds, Exchange Traded Funds and Shares! (It would put brokers back into business – Ed)

Ultimately real savers of money, from productive activities, need to lend money (own bonds) and buy shares (own property and companies). The nonsense of central banks owning everything must stop, but quite clearly that change is many years away.

In conclusion:

Your safest investments, in terms of capital value, are ones that your central bank is willing to purchase;

Your most rewarding (ongoing return on capital) investments will be the ones that a central bank does not purchase*.

*A short-term exception to this rule is if you own an asset today at normal pricing, that the central banks declare (tomorrow) that it will start buying. On this asset you will gain a sharp capital gain overnight.

No, don't sell your government bonds to reinvest in Covid19 Biotech Ltd shares, but do not expect high long term returns from assets that a central bank is willing to buy off you.

Negative Interest Rates – I almost wrote another paragraph about negative interest rates but decided against it. They are not coming to a town near you any time soon.

NZX listing benefits – NZX CEO Mark Peterson must be loving his opportunity right now to promote NZX listing and NZX trading; it should be easy.

Easy to raise additional capital if under financial duress – MOA, Sky TV, Auckland Airport, Z Energy.

Unlisted businesses are trying ring-arounds of private investors and online pledge campaigns that are hugely inefficient and easy to avoid.

Sky TV's discounted Rights issue of new shares is a lesson in an unavoidable way to raise new capital.

Easy for investors to trade – March may have been a bit scary; you can change your risk profile on the same day.

Too much in your Property sub portfolio whilst owning a variety of NZX Listed Property Entities? Make the reductions in one phone call, which is something that cannot be done on property syndicates.

Being an NZX listed investment entity unquestionably adds value both to the business and to the investor.

Politics – It was once only Donald Trump who used the unpleasant approach to global politics, the willingness to introduce tariffs trying to strong arm greater economic results from other nations.

What may well have been an appropriate tactic became a game for him personally.

Now, many governments are adopting the same strategy with China introducing tariffs against Australia (barley exports) simply because China does not like the political pressures being thrown up at present. It has nothing to do with financial outcomes.

President Xi has the luxury…. no, the autocratic pigheadedness to simultaneously ban his population from eating bread and drinking beer!

Australians will need to drink more, if that's possible?

None of this is good news for global trading activity, nor the settling down of political disruptions.

Trump's latest effort is moving beyond restrictions on trade movement and pricing, now he wants to influence capital and wishes to ban the US savings pool (managed pension plans) from investing in specific enterprises (China's HUAWEI in this case).

Having lost our international tourism export New Zealand needs to be very small, quiet and fast moving with our trade efforts and stay well out of these boxing matches between the heavyweights.

''Covid19 free milk, meat, wine, fruit, vegetables, get them here''.

Sky TV – has announced an underwritten Rights issue for shareholders to raise $157 million and strengthen the financial position.

As I said above, it is a benefit enjoyed through its NZX listing that this capital raise can occur quickly and successfully.

It is a credit to SKT that they are offering a pro-rata Rights issue that is distributed across all current shareholders, unlike the many others who have been raising money via placements with allocations defined by a few people in privileged positions.

I encourage all SKT shareholders to read the Investor Presentation here: https://www.nzx.com/announcements/353469 as it provides you with an excellent summary of the current situation and the updated plan for the year ahead.

SKT020 bondholders should be pleased that this capital raise reinforces the capacity to repay their bonds on 31 March 2021. Equity investors are increasing their support for their business, as they should when the going gets tough.

This is good form by the board of SKT, on two fronts; capital raise via a pro-rata Rights issue and a demand that the owners support the business.

ANZ Bonds (ANBHB) – The interest rate has been set on these bonds at 3.76% for the current quarter ahead of us (quarterly resets now, until at least 2022).

Rapid declines in underlying interest rates continue to be unhelpful to investors.

EVER THE OPTIMIST

Airlines are beginning to report less cancellations than feared and the emergence of new bookings.

I always knew there was an Exchange Traded Fund for almost all risks available to investors but it made me smile to learn about the JETS ETF offering exposure to airline investment (for the brave – Ed).

The JETS share price chart is a sad looking image, a little like an earthquake Faultline, but it may become one of those lead indicators for monitoring global mobility, just as an old favourite, the Baltic Dry Index, measures trade via shipping activity.

Investing in airlines is one of 2020's most difficult prospects but I'll offer a wager with my lunch money that Air NZ (NZ) share price chart will outperform the airline portfolio offered via JETS. The Greg Foran (plus staff) factor and the near monopoly playing field should be sufficient for me to win such a bet.

Actually, in an extended ETO, allow me to wander into the AIR story a little further; Virgin Australia announced that the short list of potential buyers are all private equity investors.

You know what this means; an aggressive financial stance placing the shareholder first, second and third in priority for service.

The Administrator of the Virgin Australia sale stated:

The high-level of interest in Virgin Australia at a time when the world aviation market is largely grounded shows the long-time attractiveness of the Australian domestic market, a duopoly between Qantas Airways and Virgin.

NZ barely has a duopoly, which confirms my view about one of AIR's great advantages. I think its staff are the second advantage, with the government as a dominant shareholder the third.

I am certain that AIR staff, its passengers and its shareholders will be pleased to have Greg Foran's team running our airline and not a private equity firm. Don't be cross with Greg as he downsizes the airline to ensure that we all have one to use in future.

ETO II - A small good news item; the Reserve Bank of NZ has agreed to register another bank in NZ, the Industrial and Commercial Bank of China.

It is further evidence of the strong trading relationship between our two countries.

SERIOUSLY?

Donald Trump.

Investment Opportunities

New Capital Raising Offers

Sky TV arranged a small placement last week and now moves into a more desirable Rights Issue involving all shareholders. Well done SKT.

We expect more businesses to approach the market seeking investors willing to buy new shares and perhaps new bond offers.

Share offers usually offer price discounts compared to recent prices on the NZX.

These offers will be fast moving and thus may have been and gone by the time you read the next Market News. The days of printed offer documents has surely ended.

We will broadcast news of these offers by email to our INVESTMENT OPPORTUNITIES group.

If you are not already on this list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment, we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite 'Yes' and an 'Amount'.

We will explain other details within each broadcast.

Thank you.

TRAVEL

The Level 2 sees us operating from our offices again.

Please do not visit the offices without calling to make an appointment.

We will maintain a visitor register for the purposes of assisting the Ministry of Health with any tracking and tracing subsequently required.

We will greet people with smiles, but not the old method of handshakes and hugs.

Serving customer needs by phone and email has been very effective so we would encourage this as your primary method for communicating with us.

Would the addition of video calling be of interest to you?

Please let us know now if you'd like an appointment in your town, once we can travel again; we will hold on to such notes and get back to you.

Thank you.

Mike Warrington

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Market News 18 May 2020

Shall I discontinue my Lockdown counter now?

I think seven weeks is enough.

Level 2 is trying to enable wider movement and guidance about desirable behaviours; not an instruction not to move.

On a different, yet regulatory note, I finally witnessed my first action that was quite clearly money laundering.

We were wandering past our local dairy and decided we'd best support them. The only payment method on us, surprisingly, was a $20 note.

''Is this OK for payment?''

'Of course it is' he said, claiming it from us with his kitchen tongs and promptly dunking it in an ice cream container full of soapy water!

No ID or Address Verification required.

INVESTMENT OPINION

The Budget – You've seen or heard a few summaries, but my favourite was the most succinct from the NZ Initiative (NZI):

The key takeaways? Bad forecasts that are still too optimistic. Heavy spending programmes that are light on ideas. Strategy talk with no strategic action. That was Budget 2020.

Their newsletter also disclosed that NZ is receiving higher demand than usual from people wondering if they could operate from NZ over coming months given the quality of our Covid19 outcomes; the world’s best skiers were cited, in preparation for the next Winter Olympics.

NZI proposed that we invite other operations (sports in particular) to NZ and ask them to pay their own way.

I would have offered one carrot; Hon. Grant Robertson will pay for a local agent and staff, per visiting group, to ensure they have a smooth experience whilst here. 

That would be good strategic use of some funds and would unquestionably return more than $1.00 of value from the money spent.

While I have my political hat on, Grant could also establish a Quarantine Village for international students, a bit like a Commonwealth Games village from the past, so as to get our tertiary education industry back on its feet.

Again, this would be $1.00 down and many dollars back.

No, I don't have time (nor interest) to join politics; Open letters to Grant are much easier, and I'm sure he appreciates the value of many minds to assist with his burden.

ZEL Placement – Following on from Chris and Johnny's criticisms, I couldn't help myself, even after taking a few deep breaths.

I have long admired the governance and management at Z Energy but last week they allowed their lead manager to make a pig's ear of their capital raise. 

ZEL issued new shares to raise $290 million by inviting investor participation in a same day placement.

Prior to knowing about the market demand they offered guidance on the share price they were expecting ($2.75 - $2.85) but then moved the goal posts after investors bids were in and decided to make the issuance price $2.90.

ZEL had responded to surprisingly good demand for the new shares.

I could mount an argument that the price move involved inside information (new information about demand not shared with all bidders).

In leading the market with price guidance that differs from the late price reset I could also mount an argument that ZEL misled the market.

Remember, ZEL did not run a tender (place your bids and prices wherever you see fit).

As if to comfort us ZEL declares that 95% of the new shares went to current ZEL shareholders trying to minimize dilution. This of course confirms that the 5-cent share price movement was barely beneficial to the business or the majority of current ZEL shareholders.

The retail shareholders, so poorly treated in this wholesale placement, now get a second bite at new shares via the $60 million retail placement so minimising dilution is not an appropriate argument for the mismanagement of the wholesale placement.

This is a process argument and in my view it was poorly handled.

In our case clients were invited to participate and then the goal posts were shifted after they made a decision about their next 'play'. ZEL took advantage of our client demand information (risk taking) and rewarded others (participation).

The NZX will be pleased to promote how easy it is to raise new capital when listed on the market but they need to look closely at this example and ask why did ZEL pursue this double placement method of raising capital instead of an equitable Renounceable Rights issue?

The ZEL share issue was underwritten, so financial failure was not a risk for them; the money was always going to arrive.

What is it about the NZX regulations that discourages Rights issues?

Once the NZX understands this then perhaps they could level out the playing field a little more and cement the goal posts in position.

FMA Financial Advice? – The Financial Markets Authority has unwisely stepped outside its brief and tried to offer financial advice to retail investors and in doing so is also trying to kill off much needed market breadth and depth.

I don’t think they thought this one through properly and succumbed to the desire to say something, often.

The FMA (headline) cautioned investors against piling into the share market if they haven't done their homework.

Financial advice is a recommendation, or opinion, that a person should buy, sell or not do so.

Let me break it down a little further:

'Caution' – issuing an opinion;

'Against' – to not do something;

'Piling in' – In being the operative word, synonym for 'buy' in this context.

An opinion not to buy; ergo financial advice.

To be fair the FMA's quoted terms were 'We would caution against developing a new, untrained, appetite for trading on the NZX during this period of volatility and uncertainty without doing sufficient research'

'Caution' – issuing an opinion;

'Against' – to not do something;

'Appetite for trading' – both buying and selling 

It is still issuing financial advice, which they should not be doing.

Did you notice the equally unwise conditionality; 'during this period of volatility and uncertainty'. Volatility and uncertainty are evergreen in financial markets. Markets are where people try to resolve such volatility and uncertainty.

I don't think the FMA means it is OK to be a new, untrained, trader during other calm periods either, and I am certain they don't want to offer guidance on when it is a good time to be such a trader.

Regular readers will recall me commenting in Market News a few weeks ago that traders love this volatility and investors should be careful not to leak value to them.

The FMA should not be surprised that 'trading' interest increased in synchronisation with market volatility. They are naïve if they think they can quell it with concerned words about risk.

Mark Peterson, CEO at the NZX, will have bitten his tongue when reading the FMA's headline. Mark is trying hard to expand the depth and breadth of market activity and price disclosure and the emergence of this new client activity meets with that part of the NZX strategy.

Maybe the FMA could have applauded the NZX for establishing new settings that support increased public involvement in capital markets (Capital Markets Task Force goals anyone?).

Maybe the FMA could have then encouraged the expanding population of market participants (traders and investors) to seek financial advice from the wide variety of skilled and Authorised Financial Advisers available to them?

(Maybe you just wanted to poke the bear with a stick – Ed)

Maybe, but I am also on the record as saying publicly that now is not the time to make investment decisions without financial advice.

Digital Payment – The potential for this form of payment is accelerating.

Ronald McDonald has agreed to trial the use of the Digital Yuan for payment in its restaurants located in China, initially in the cities being trialed by the Chinese government.

This will surely expand widely across China, once sanctioned by the Peoples Bank of China and the all-knowing President.

If that works, why wouldn't McDonalds then test offering Digital Yuan as one of several payment options at its outlets in Hong Kong, New Zealand ….. Japan….. US?

I think the Reserve Bank of NZ should already for forming a plan for exchanging Chinese Digital Yuan for NZ dollars (hopefully followed by a NZ Digital Dollar scheme) because it may not be long before customers buying A2 Milk in China will ask to settle in Chinese Digital Yuan (they may be instructed to – Ed).

After a slow start, riddled with angst relating to privately launched digital payment methods, it would seem that central bank issued digital currencies are rapidly becoming 'a thing'.

They stand the potential to achieve an unintended benefit too; the centralization of Anti Money Laundering obligations by making such payment methods inoperable unless AML compliant.

Once this payment method becomes attractive enough, or is forced upon you if you live in China, then attaching 'AML compliance' to one's digital currency account could be used to satisfy other counterparties such as brokers, lawyers, real estate agents etc.

We could all move forward from today's cumbersome AML process that is a drag on productivity; something (the drag) we could do without right now.

We don't expect to be receiving Digital Yuan in our trust account for a while yet but look forward to the day when NZ operates a digital currency unit.

Get out of the way – There was a great, but simple, story last week reinforcing my view that the government must now get out of the way and let businesses find new settings for success. 

There will be thousands of these stories:

A barber in Christchurch opened for business at 12:01am on Thursday 14 May (2 minutes late for Level 2).

I'll guess that this barber has a large enough team that they negotiated rolling shifts over 24-hour periods until the clients tell them they can return to normal settings.

This plan satisfies all involved: customer, employee, banker, government (safety measures) and quite possibly the owner (financially). 

The government should focus on a plan that frees up opportunity for business (productivity) and then return to coordinating its preferred settings for tax collection, spending, health processes, education effectiveness, national savings rates, the environment etc.

Covid19 is a health management calling, not an invitation to become more involved in managing others' lives or businesses.

It's time for the government to stop pretending they can finance everything, protect everyone and micromanage all; remember their job is to govern, not manage.

Well done to that barber and all other businesses who grab the bull by the horns and get on with it.

WEL Networks – Less than two years ago when borrowing some money via a new bond issue WEL presented themselves to us as a 'multi-utility infrastructure provider', seeking 'diversity in its portfolio'.

A long-term investor in long-life assets.

Today they have sold the Ultra-Fast Fibre business.

WEL has unquestionably extracted very good returns from their investment (almost 300%), but this sale is not the headline I expected from them after the presentations that supported their recent bond issue.

Maybe they could also have offered to list the business on the NZX for wider investment in infrastructure by the NZ public?

C'est la vie.

Tax – Saudi Arabia has opened the bidding with tax increases by trebling its equivalent of GST (now set to 15%).

They had only introduced it at 5%, presumably with a long-term plan of increasing it to between 10% and 20%, but with oil down to US$20 and Covid19 upon them semantics were swept aside.

Next up?

EVER THE OPTIMIST

The government appears to have latched on to the idea I read somewhere for using the Student Loan infrastructure within their Covid19 response.

The loans to Small to Medium Enterprises being administered by IRD, up and running within two weeks (applause), is surely a 'SAVE AS and RENAME' moment.

Well done.

Not that one likes new taxes but maybe the government can now evolve the Working For Families infrastructure to keep net taxes down for low income families as they increase top line tax ratios within the economy.

ETO II

After weeks of 'silence' it is great to hear jet planes flying above our home again.

Investment Opportunities

New Capital Raising Offers

The portion of the Z Energy placement offered to the wider market last week came and went in less than 6 hours. This is what we mean by fast moving. 

ZEL shareholders will get a second chance to buy additional shares this week.

The only chance of you being involved in such offers is to join our 'Investment Opportunities' email group and to be able to monitor your email during the day.

We expect more businesses to approach the market over the coming months seeking investors willing to buy new shares and perhaps new bond offers.

As you are seeing, these offers are fast moving, booked by contract note and incur brokerage costs.

If you are not already on the INVESTMENT OPPORTUNITIES list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment, we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite 'Yes' and an 'Amount'.

We will explain other details within each broadcast.

Thank you.

TRAVEL 

The Level 2 setting under the government's Covid19 planning enables us to return to our offices.

Please do not visit the offices without calling to make an appointment.

We will maintain a visitor register for the purposes of assisting the Ministry of Health with any tracking and tracing subsequently required.

We will greet people with smiles, but not the old method of handshakes and hugs.

Serving customer needs by phone and email has been very effective so we would encourage this as your primary method for communicating with us.

Our impression is that you have all done very well managing your investment portfolios during the past two months. Keep up the elevated level of alertness for a while longer yet and please get in touch where you think we can assist.

Thank you.

Welcome back

Mike Warrington 

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Market News 11 May 2020

L+47

If you were the financial controller of McDonalds or KFC you might ask – 'what lockdown'?

Apparently, they have sold more food in the first week of Level 3 than they missed out on throughout the four weeks of Level 4.

Wow.

Regarding how to direct government generosity;

Is it too simplistic for me to suggest than rather than hunting for evermore ways to give away money the government should be offering fixed term employment contracts to the unemployed and handing them a 'broom'(metaphor)?

Maybe we shouldn't focus on a Covid19 vaccine as the end game here, maybe NZ should build a new 'infectious diseases' hospital to focus on this particular type of health risk, just as we have Starship for the children.

Post Script: That nice doctor who returned from Hong Kong with SARS experience suggested the same thing (build a specialist hospital) which made me feel a little more intelligent.

INVESTMENT OPINION

Savings Up– Prior to approved treatments (more beyond Remdesivir) and vaccines it seems likely that we will stay home more often, shop online if easy (some is not) and save more money.

This final point is not good for those employed in sectors that relied on us spending our discretionary income but it is good news if you were holistically concerned about our ever increasing scale of private debt.

This behavior (stay home and save money) is apparently being seen in China where they are a full cycle ahead of most others; they have restrained the first outbreak and are navigating a second period hoping not to lose control of future contagion.

Future contagion is inevitable, so managing the speed is the important factor.

Judging by the 'dob them in' reports NZ has plenty of people getting straight back to the routines they prefer but these are still modest numbers. The majority will present a mixture of self-preservation, respect for new rules and care for others.

Most will also recognise the importance of the squirrel analogy of storing acorns (savings buffer) because 'winter is coming'.

I don't mean this to simply be a Game of Thrones play on words because winter is no longer coming; it is here, and a huge proportion of our population have been caught out without any acorns in the midst of the Covid19 disruption to employment.

Paradoxically the government forced us all to gather acorns when they instructed us to stay home for a month and simultaneously tried to protect our incomes.

My bank account has been drifting up because I could not spend any money beyond essentials and home consumption (Power, food, communications etc).

Making up theoretical community numbers for an illustration, if I was forced to save say 40% of my income during Level 4 this savings rate will only fall slowly under Level 3 settings, maybe to 30%.

Level 2 will see me saving less again as I am provided with access to more consumption choices but a dose of self-preservation means I'll avoid 'hugging strangers' so visits to certain locations are still out; maybe I am saving 20%?

How long am I in Level 2 and saving 20%, some of which previously landed in the till of small business?

Once we reach Level 1 will my savings drop back to 10%?

How free will my choices be and thus what additional money can I add to the economy?

I cannot see my savings ratio dropping back to being 'Kiwisaver plus mortgage repayments' until 2021.

If you imagine the shape of the 'triangle' that I just drew you can see how much money I have saved and how little was received by so many service sector businesses in our economy.

Level 4 – 4 weeks;

Level 3 – 2 weeks;

Level 2 – 12 weeks;

Level 1 – 12 weeks.

That takes us to Christmas 2020.

Maybe by then we have retrained our population on what it takes to self-manage for minimising the speed of contagion (current and future).

There are some exciting developments emerging with the use of technology that we all carry around to assist in future. This is yet another tick for the benefits of continuous improvement in technology and communications.

You may remember I once suggested that governments of the world may be using this particular pandemic as a good opportunity to test processes and be very ready if a more lethal threat to health emerged.

I hope so, otherwise the price paid would have been too high.

The approximate area under my 'triangle of saving' above is 11.15% annualised, or 16.72% for the eight months between April and December.

Regardless of how accurate my estimates are you can see the scale of the impact on retail and service sector businesses from an employed person. For the unemployed the impact is worse.

The paradox of these savings is that they will contribute to reducing one of our previously burgeoning problems; rising private debt levels.

Turners Auctions confirmed this was happening in a recent video conference call. People with less opportunity to apply discretionary spending were meeting, or exceeding, debt repayment obligations. Further, because they were at home it was easier for lenders to contact borrowers and have good conversations about their plans.

Is it a vain hope for me to suggest that people use April and May as opportunities to repay Credit Card balances, cut them up, apply for a Debit Card and in future only spend discretionary money that is yours?

It makes for a painful reset, of what I hope is only 12 months, but it would indeed create a more robust financial footing into the future.

It shouldn't take too long for investors to differentiate between businesses receiving essential and discretionary spending.

Post Script: Related to my previous notes about large foreign businesses with equity swooping in to buy other good business brands, and an example of disagreeing with my hope that use of credit will decline:

Chinese gaming and social media business (!) Tencent Holdings purchased a 5% shareholding in Australian layby financier 'Afterpay Ltd' during March and April.

Central Bank Symphony – is falling out of tune.

Maybe it's because coordination is now being done by ZOOM and not after first class travel and meetings behind closed doors, but the once well orchestrated approach of central banks globally is showing signs of a 'disruptive influence in the force'.

Yoda would sense it too.

All central banks again leapt in with interest rate cuts, vast increases to overnight lending for market liquidity and then direct ownership of assets (bonds predominantly).

However, the German courts have placed a spanner on the conveyer belt and it's moving towards the gear box; they have criticized the European Central Bank bond buying as partly violating the German constitution.

The ruling relates to purchases made prior to Covid19.

If the ECB cannot provide an explanation that the actions were 'valid and proportionate' the German Bundesbank will be obliged to withdraw from its part in the buyback programme. Given that they are the largest member (financially) this would be a serious problem for the crisis fighting strategy and presumably the future of the European Union.

The UK chose to exit the EU. It wouldn't be a very dignified stance for the Germans to remove their central bank from certain ECB policy actions.

It again raises the question of whether the EU can ever reach a point of centralised law, fiscal policy and tax policy to support the current attempts at centralised debt management and monetary policy.

The fiscally prudent detest the concept of financing the fiscally imprudent.

The German court may be correct in principle about the excess but are they swimming vainly against the tide or is this a damaging first crack in the foundations?

It certainly makes Europe less appealing from an investment perspective.

Cruise Companies – Look as if they'll become a study in receivership, loss crystallisation, new capital raised and renewed business formation.

Many other businesses will follow the same path, especially those that are dependent on free movement of consumers globally.

Cruise lines are making announcements about imminent failure ('going concern warnings'). They will not enjoy an increase in customer travel in time to rescue them from debt obligations, but cruising will return.

The time frame between the two is too wide.

Lenders will discover how much money they are about to lose.

Old owners are about to learn how much value they are about to lose (near enough to 100%).

New investors with new capital will need to be found (plus old shareholders with real wealth) to takeover the assets and be capable of funding the maintenance of the assets (ships) until cruising returns as a business.

These developing stories will be good studies into risk for investors:

Stuff can go wrong, even if it is hard to see on the horizon;

Suitable rewards need to exist for accruing equity (not just access to additional debt) to cope with the damage that will occur from time to time.

Social Credit Nonsense – Several people asked for our thoughts on the (crazy) advertisements being placed by the Social Credit folk promoting the use of more 'free money' by simply printing it and spreading widely.

It is madness, and as Dr Bryce Wilkinson explains, is delivered by snake oil salesmen.

To learn more, explained by an expert (Bryce) here is the link to download his report on the subject: 

https://nzinitiative.org.nz/reports-and-media/reports/research-note-4/

Ask yourself, if everyone in your household loses their jobs can you 'create your own money' and head out to make payments without consequence?

Tiwai – I see Transpower is relaxed about Rio Tinto staying in Tiwai for a while longer yet.

Contact Energy (CEN) and Meridian Energy (MEL) agreed to pay a little money towards adding high voltage potential across from Roxburgh (Clutha Scheme) to Benmore (Waitaki Scheme) so Manapouri generation can reach the rest of the country.

Benmore is one of the main 'zero loss' hubs in our national grid.

CEN and MEL asked Transpower to increase its funding for the project to accelerate it, but they declined saying that a 2022+ timeline was soon enough.

Maybe 'Shovel Ready Shane' could be drawn in?

Long time readers will know that I think the expansion of the grid to redistribute Manapouri capacity North is great news for NZ regardless of the precise timing; It improves 'our' negotiating stance and ultimately, I'll be very happy with Rio out and NZ in for hydro electricity use.

Post Script: Jolly Transpower has decided to seek feedback about whether upgrading the South Island network is a good idea or not. 

Seriously?! 

You are the grid owner and operator. You know exactly what is required. You know a single corporate has threatened the balance between our generation and distribution.

Solve the problem; remove the threat. (CEO for a day? - Ed)

Fractional Share Investing – Buying and selling less than one share is becoming a thing.

Is it a good development, which involves removing restrictions from the wider population, or as I think, is it passing risk into corners of the community where it doesn’t belong?

Digital Currency – China has introduced its central bank controlled (everything is centrally controlled – Ed) digital currency and is testing its use in four cities.

It is linked directly to the Yuan which has government backing, which is the logical way forward for such digital currencies.

It's also entirely logical that a regime seeking excessive control over its population will be the first to use a digital currency, functionally, but once it settles in across China her trading partners (such as NZ) will be very wise to develop settlement links to the new payment method.

The transactional efficiencies will be obvious both for traders and travelers.

If you happen to have a crisp Yuan note from a recent holiday you might do well to frame it and hang it on the wall, retained for future scarcity value.

Maybe the future of only using digital currency for settlement will reduce our obligations under Anti Money Laundering laws because they'll all be captured by the banking framework?

LFGA – financial pressure arrives so the Local Government Funding Agency eases covenants?!?

This is not how lending works. 

When incomes recede you tighten your belt, you don't maintain spending with more debt.

Leave the aggressive debt funded support to central government.

Council's need to cut costs, remove non-essential spending and sell portions of lazy assets.

I don't pay my rates for the council to be an investor on my behalf.

In a Wellington context our city would be better positioned if WCC sold the likes of its airport stake and improved our entire water network (in and out). 

Then maybe repair social assets like the library.

EVER THE OPTIMIST

The government is to ease the burden imposed by the Resource Management Act and enable development with less of the nonsensical resistors experienced during the past 30 years.

Well done David Parker.

ETO II

As many others cancel, suspend or defer dividends the food industry is still paying.

As the harvesting season continues Scales has announced an unchanged Final dividend at 9.5 cents (fully imputed).

Picking apples, paying staff, paying tax and paying dividends.

Well done.

ETO III

Another food story.

Lower water temperature in the Marlborough Sounds over the past year has improved survival ratios for NZ King Salmon, which, Covid19 aside, improves revenue prospects.

Unexpected climate change outcome?

ETO IV

And another…. The meat industry reports that it exceeded $1 billion of monthly exports for the first time in April, whilst locked down.

Suppliers and logistics businesses should be very proud of this achievement.

SERIOUSLY?

Our government, the regulator, has decided that at this time it does not need to respect the Regulatory Impact Analysis usually required of them.

They probably received this idea from Vladimir Putin and it can't end well.

Investment Opportunities

Secondary Bonds

Yields on bonds from the secondary market have declined as investor confidence grew, and because we all realised inflation was not coming back to threaten interest rate increases.

Bond yields are still above bank deposits (as they should be) but the extra reward is a little lower now.

New Capital Raising Offers

We expect many businesses to approach the market over coming months seeking investors willing to buy new shares and perhaps new bond offers.

Share offers are likely to have appealing discounts to recent trading prices on the NZX. 

These offers will be fast moving and thus may have been and gone by the time you read the next Market News. The days of printed offer documents has surely ended.

We will broadcast news of these offers by email to our INVESTMENT OPPORTUNITIES group.

If you are not already on this list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment, we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite 'Yes' and an 'Amount'.

We will explain other details within each broadcast.

Thank you.

TRAVEL 

We look forward to reading about Level 2 preferences from the Ministry of Health, however, we don't expect to make a significant change to our business operation.

Our ability to serve customers without 'shaking hands' means there is little need for us to be at the frontier of physical engagement.

Serving customer needs by phone and email is effective and is working well.

If you run into an issue with phone connection please follow it up with an email asking one of us to call you back.

If you have found any actions 'impossible' to effect during the lock down we would be pleased to hear about them.

Thank you.

Enjoying getting out to support local businesses.

Mike Warrington 

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Market News 4 May 2020

L+40

Captain Tom (now Colonel) has become a rare Covid19 hero.

'Share prices jump the most for a month since 1974' 

This can't have been a headline you were expecting to see in the midst of Covid19 reality.

It speaks to the absurdly large involvement of government and central bank money in the global economy now, plus the low price of money (0.25%).

It is not a myth or a dream, they really are spending the money.

Maybe the next unexpected irony shall be when the economy is strong enough to support repayment of government finances, yet the share market will fall based on the removal of cash from the system.

You don't need to speculate about the market's next move. Make your decisions based on your own financial needs and investment rules. Get financial advice for the constituents of your portfolio.

Several times we have proposed that you run stress tests on your portfolios contemplating losses of 25% of value. This usually happens over months, not minus 30% in three weeks as we experienced in March.

The month of April delivered a similarly sharp reprieve (increase in value).

Repeating our suggestion of last week, remind yourself how you felt in mid-March, on the valley floor for share prices, as you reflect on the current share market pricing.

INVESTMENT OPINION

Timing – AirBNB missed a trick by being greedy and delaying its share market listing in America.

Now they have been forced to borrow expensive money, inject personal equity and they stand very little show of floating the business any time soon. 

When they do the price multiples for the shares won't be anything like the potential of last year.

Over the next 12 months we'll discover which property investors have been swimming without togs because they tide has surely gone out on the short-term lease market which drove long term rent costs and boosted property pricing.

We'll know soon enough if the massive reduction in AirBNB revenue will flow through to lower house prices. Lower rent seems a certainty in many locations.

Queenstown is often a lead barometer and discounting of rent is underway there.

I have been visiting Queenstown since I was very young (Day 1).

This is the first time ever that Shotover Jet has not been operating. Ngai Tahu has put the boats away in the shed.

It was owned by Trevor Gamble when I first went for a ride and I think the cost was something like $65.

Maybe Shotover Jet could reset the price back to about $65 and see if it brings locals back out?

Once we see the red boats back on the river, we will know some life-blood is returning to Queenstown and the tourism sector more widely.

OIO and government investment – For the majority of my career the perception I had of the Overseas Investment Office was of an overbearing resistor to the efficient operation of capital markets.

Today, I wonder whether Cabinet should refine the OIO analysis filters and boost their staff numbers; maybe even contract in specialists from the NZ Superannuation Fund for decision making to ensure the financial and political settings are appropriate.

Actually, David Parker is near the finish line with a review of foreign investment rules including how far to inject 'national interest' into decision making.

In the middle of March, when share prices plunged to their deepest point, opportunists might have got away with some deeply discounted changes of control.

The OIO could review the political ramifications and try to assess if this takeover dollar stood a realistic chance of allowing the NZ economy to grow by more than having that dollar placed into another investment.

Matt Whineray's team at NZ Superannuation fund could apply a 10-20 year outlook to the financial potential of the business and thus a moderated view about what present value 'should be'.

We should be increasingly careful about the control of our essential businesses given the high levels of personal debt in NZ, now joined by increasing debt levels for the government.

I find it hard to believe I am even saying this.

Maybe a better alternative would be to finance NZ Super Fund to become a competitive bidder for ownership of such assets that others seem willing to sell at unusually low prices to help keep politicians hands off the decision process?

Plenty of media articles are lobbying the government to follow Japan and others and begin buying equity in businesses. I really dislike this idea because it confirms a failed economy, however, Matt's team at NZ Super is a different kettle of fish being highly skilled investment analysts and business managers.

In fact, now that my mind is wandering I'd far prefer that the Hon. Grant Robertson (hi again Grant) placed the management of the 'shovel ready investment programme'under a team established by NZ Super and have them focus on inspiring private investment activity.

Matt, and team, could them focus on which of these projects stood the best chance of delivering economic progress and thus returning more than the original dollar of value back to the economy.

Help the economy now, both with employment and necessary projects, and have the capital returned.

I'll bet NZ Super wouldn't proceed with any 'pie in the sky' projects that are $1.00 down and $0.10 returned as I suspect most of Shane Jones' Provincial Growth Fund 'spending' has been. (or, Light Rail in Wellington anybody?).

As I said in Market News a week or so ago, after a short period of providing necessary financial support our government needs to establish a strategy for getting out of the way and letting business drive our next period of economic success.

If any scheme considered meets the definition of 'subsidy' it should be removed from the short list for government investment.

I think the generation reading our newsletters are the precise group with an excellent understanding of how subsidies nearly suffocated New Zealand in the 1970’s until they were painfully removed in the 1980's.

Let's not starve our economy of oxygen again one generation later.

Grant Robertson has wisely tasked banks with arranging bank loans even if he has offered an 80% government protection for the possible scale of future losses. The result is that banks will pursue the most credible risk adjusted lending; spotting businesses with a future.

Next Grant needs to consider how he will engage the business community to pursue economically productive investment (i.e. not lending). If, for example, he provides a proportion of equity, or preferred equity, to a project he could open the gates to many projects that required shared risk or funding to tip the over the start line.

Remember how proposed irrigation schemes didn't start because they required equity from long term players, but managed funds and consumers of the water supply couldn't agree on commitments for such long terms?

Imagine if the government took some equity and perhaps loaned money to bridge the period where confidence was absent?

The long-term financial benefits of irrigation have been calculated every decade by skillful people, yet the data* hasn't resulted in multiple new irrigation schemes around our country. Short term thinking and short-term financial risks are a major part of the problem.

*Example – The North Otago Irrigation Scheme which Chris visited last year, was estimated by BERL Economics to have added 4.9% ($48 million per annum) to the scale of economic activity in the area and employing an additional 274 Full Time Equivalents.

Here's a cheap equity 'hit' you could provide Grant without even sending a cheque – The RMA is the other major problem. 

Do you remember the Auckland Harbour Bridge Act? The one that foolishly guaranteed the removal of tolls. 

Well, maybe Cabinet should begin drafting RMA carve outs for projects that they want to happen fast where the RMA is being misused and creating a drag on our economy – 'Ruataniwha Irrigation Scheme Act' with specifically defined obligations but protection from relentless disproportionate RMA attacks.

Lastly, in return for your legislative and financial support please insist on the public being invited to co-invest (Public Private Partnership after all) and have an NZX listing to support liquidity and future calls for capital.

It all seems so simple from the comfort of a suburban office (what will we ever do once you're gone – Ed).

Low cost debt – Netflix trumpeted its excitement at borrowing money via a bond issue at 3.00% last week.

Yes, I see you shrugging your shoulder wondering why this is big news.

I'd estimate that 25% of our NZX listed companies are already funded at this interest rate level, and lower.

If you read the rest of the story, you'll discover that Netflix required additional support from the European Central Bank so as to reduce their risk far enough to be offered the 3.00% interest rate. (that's cheating – Ed)

I agree. Why does a business with high cash flows, and a high propensity for automation (minimal staff numbers) require a subsidy from taxpayers?

Cash flow – We have all had another reminder about the importance of cash flow to avoid financial suffocation; followed by securing a profit margin to gain a return on capital invested.

Last week's story about Fonterra accelerating its payments to milk suppliers (dairy farmers) had me eager to read that they had aggressively shortened their payment cycle from what I thought was 90 days following an obligation.

You may recall that the likes of Fonterra and Fletcher Building widened their payment agreements from 60 to 90 days a few years ago trying to reduce their own funding programmes and thus enhancing their own credit ratings (at the expense of their business partners! – Ed).

Sadly, the Fonterra article described only moving payments from the 20th of the month to the 15th.

This got me thinking (aka Richard Prebble? – Ed). I suppose.

Given the technology involved already, and that which is available, why is the milk supply chain not settled each month, or live as I understand the oil industry is?

A farmer knows the volume produced by 6:00am and knows the volume collected by each truck on a defined schedule. This volume is double checked by Fonterra later that day and processing begins.

Fonterra's own dairy auction facility enhanced global knowledge about the base milk price every month (auction cycle).

Fonterra knows its operating costs and its preferred margin so I cannot find any reason that would get in the way of monthly payments on the 20th of the month following collection of the raw milk from the farm.

I see little, or less, need for Fonterra's annual milk price forecasting. It should no longer be required by farmers given the greater accuracy provided by the expanding dairy price futures market, which provides a farmer with real time ability to lock in pricing for the product he/she is about to produce.

In fact, there's an opportunity for farmers to disrupt Fonterra in the 'ivory tower', ask the NZX to change dairy futures from 'cash settled' to 'physical delivery' and open up the market to others to buy directly from the farmers!

Wait, that undermines the co-operative, which, apparently adds value to the farmer?

Scrap that last idea, Fonterra is not that ambitious, but if they are truly looking forward and trying to improve performance for their farmers they will migrate the exchange of product for payment closer to that operating in the oil industry (under normal conditions!).

Armed with live pricing and monthly cash flow the farmers would have more relaxed relationships with their bankers. 

If Covid19 has just slowed our economy's cash flow down we need to find opportunities like this to speed it back up.

EVER THE OPTIMIST

Statistics NZ reports excellent export data in the midst of Covid19 disruptions:

The value of total goods exports rose $215 million (3.8 percent) from March 2019 to reach $5.8 billion in March 2020. This was a record for any month – the previous high was in May 2019.

SERIOUSLY?

The land of the free and home of the brave clearly doesn't extend to offering the most efficient banking system.

The US offer of US$1200 per adult to assist in the midst of the Covid19 shut down is being delivered by…. Cheque, in the mail.

This is either cynical (delayed cost) or incompetent (or both – Ed).

Seriously II

Australia's electricity grid operator wants the power to remotely switch off or constrain the output of roof-top solar generation.

That’s a great way to discourage self-reliance and the expansion of renewable energy.

Investment Opportunities

Secondary Bonds

Yields on bonds from the secondary market have again lifted to the point of offering returns greater than bank deposits for equivalent terms.

I observe though that many are settling down a bit already.

When you ask us for reinvestment ideas, and fixed interest options happen to be the solution expect to see yields of 3.00%+ in the responses.

New Capital Raising Offers

We expect many businesses to approach the market over coming months seeking investors willing to buy new shares and perhaps new bond offers.

Share offers are likely to have appealing discounts to recent trading prices on the NZX. 

These offers will be fast moving and thus may have been and gone by the time you read the next Market News. The days of printed offer documents has surely ended.

We will broadcast news of these offers by email to our INVESTMENT OPPORTUNITIES group.

If you are not already on this list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment, we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite 'Yes' and an 'Amount'.

We will explain other details within each broadcast.

Thank you.

TRAVEL

We look forward to reading about Level 2 preferences from the Ministry of Health, however, we don't expect to make a significant change to our business operation.

Our ability to serve customers without 'shaking hands' means there is little need for us to be at the frontier of physical engagement.

Serving customer needs by phone and email is effective and is working well.

If you run into an issue with phone connection please follow it up with an email asking one of us to call you back.

If you have found any actions 'impossible' to effect during the lock down we would be pleased to hear about them.

Thank you.

Find reasons to smile.

Mike Warrington 

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