Chris Lee & Partners Ltd

Market News 27 November 2017

I continue to be a fan of the NZ Shareholders Association.

The effort they put in for the benefit of small shareholders is commendable.

Their membership numbers, and discretionary proxy votes, are rising, which is good because this helps to increase their influence with companies’ boards.

Focussing retail investor responses via a single, respected, channel delivers a better chance of gaining the ear of a board’s chairperson.

In between negotiations with companies the NZSA holds regular meetings, typically with good quality presenters, and for the benefit of members outside the main centres they often publish some of these sessions (video) on the NZSA website.

Yes, this is a plug to encourage investors to join, but I do so because it represents very good value for money. (I am a member)

Here is the link to their website: https://www.nzshareholders.co.nz/

Consider becoming a member, then participate in the information available and pass your proxy votes to the NZSA and help lift the influence of small shareholders in NZ.

Investment Opinion

Speculation – is the most difficult form of investment because it places your emotions under the greatest stress at decision time.

The greater the involvement of emotion within the investment process the harder it is to make a decision, and the greater the likelihood of error.

If you had asked me whether or not to ‘invest’ in Bitcoin a few years ago I probably would have said no, I certainly would have said no to most of you.

On reflection there aren’t many more dramatic increases in price (value is still debated) than Bitcoin, especially in recent years.

Would my conclusion (‘No’) be considered wrong in light of today’s information?

Only by Harry T. Hindsight. (you’re safe I checked the database – Ed)

The most obvious emotion when looking forward and contemplating a speculative investment is greed, with the occasional cold shiver of fear as a counter-balance, usually with less mass.

The four emotions that are witnessed after the event, looking backward, are one of envy (if you missed out), elation (if you had a win) and relief (if you avoided a failure) or despair (if you lost a lot of money). It is very rare to end up neutral when looking back on a speculative investment.

You’ll observe that the success/failure ratio is 50:50 and these odds are good enough for most risk takers, who typically search for a much higher probability of success.

My observation of speculators is that they start with an unwarranted 70-80% confidence that ‘greed’ will be rewarded, consigning ‘fear’ to the corner as a minor possibility. Yet it should be very clear that the more speculative the investment the more accurate my 50:50 forecast will be about the outcome and thus the chance of failure is much higher than the fear quotient would imply.

While I am on statistics, rather than whether you should or shouldn’t speculate, you have probably calculated by now that if my generous odds of 50% success are correct, you need at least two out of three speculative investments to succeed, and to do so quickly and very well in terms of performance scale.

If you invest three lots of $100 and one fails, you need the other two lots of $100 to double in value over five years to achieve the equivalent of return of about 6.00% after tax (the equivalent of Spark’s dividend) on your original $300.

In the current optimistic market place, I expect you could describe to me a few investments that have doubled in value, but even if we ignore the surrounding failures the current market environment is not normal.

So, should you, or should you not speculate?

The answer, unsurprisingly relates to your ability to accept investment risk, specifically, your ability to lose money without disrupting your lifestyle or longer-term financial objectives.

Yes, financial risk is about measuring the loss of real money, not one’s emotional state or conclusions about helmet use and orange vests.

Often the financial advice community will believe that the young can afford to speculate because they have more years to recover from the losses they will incur.

The wealthy can also speculate because a proportion of their savings can underwrite their recurring spending requirements and the balance of their savings can support some modest amount of speculative investment.

Between the lines you can extract one piece of Grandma’s evergreen financial advice; only speculate with money you can afford to lose.

There’s probably a yellow ‘Investment Advice For Dummies’ book (Googled, yes, – Ed) but if you listen to your Grandmother you can save the money on the book and the courier charges.

If you can sell time, or present spare cash, to the process then the answer to your first question (can I afford to speculate) is yes.

Will you or won’t you speculate is a personal question.

The answer to the third question is much, much, harder; ‘what shall I speculate on?’.

Clients who ask us for a financial advice service are very welcome to ask for our input, which we will provide, but the response will be necessarily more conditional than other more predictable forms of investment.

Fliway – This company may hold a record for shortest time on the stock exchange for a major business, or maybe it was the most unusual pathway to a trade sale for a business (via temporary NZX Listing).

The business was offered to the wider market, via NZX listing, on 6 March 2015 at $1.20 per share.

The FLI share price then struggled for a while, spending brief periods below $1.00 but never returning to its Initial Public Offer (IPO) price of $1.20, until now when it is under takeover offer.

Yang Kee Logistics Pte Limited has made a takeover offer for 100% of FLI at a price of $1.22.

Korda Mentha valued FLI shares at between $1.04 - $1.24 logically describing the $1.22 offer as being near the top end of the range.

All of this serves to confirm for me that the original IPO listing was good exit timing by the once privately held business.

EROAD – Eroad’s (ERD) latest announcement, being appointed to assist with ‘the first multi-state truck pilot to explore the feasibility of a Mileage-Based User Fee (MBUF) along the United States’ eastern seaboard’ is exciting news for the company.

The trend in the US by transport regulators away from fuel taxes and toward weight and mileage taxes is a move toward the technology that ERD can offer to the trucking industry.

Being selected to participate in the study is a significant sign of respect for ERD’s product and service offering and builds on the story that ERD may yet become another exciting international success for a NZ based technology business (Xero being the major one).

They release their latest results to the NZX tomorrow and as a shareholder I look forward to seeing the progress update. The current track seems to be justifying the original $3.00 IPO share price.

As a digression from this ERD compliment I am reminded of the FMA assessment of trading by ‘the broker’ that I referred to last week.

ERD share price opened higher on Thursday 23 November than it closed on Wednesday 22 November. Bidders then stepped in front of each other to set new high bids without being able to buy any shares (there were no sellers at times).

One bidder for 20,000 shares at $2.96 moved his/her bid to $3.00, but later cancelled the bid. Was this person manipulating the market or probing for the next price that the market wished to deal at?

A few deals occurred at $3.00 but this was followed by a deal at $3.05, was the buyer at $3.05 manipulating the market?

The next market pricing was buyers at $3.01 (including the person who I think was the large bidder at $3.00 previously) and the best seller was now set at $3.20.

The next order placed was to buy at $3.02, still in search of a market…. Or manipulation?

The next deal done was at $3.10, but the very next bid was at $3.11 and then 5,000 shares were immediately dealt at $3.20.

The next best bid was $3.12, followed by $3.13, then $3.15, without additional trades happening on the market.

What is the fair market price at this juncture?

You get my point.

My wife would scold me and allege that I am teasing the FMA but that is not my objective, in practice I am displaying how difficult it is for the FMA, or most observers, to conclude they were misled by changing prices in market securities.

Now, if someone arranged a deal in ERD at $3.50 whilst the above was happening on the market, questions should indeed be asked.

ERD shareholders should be pleased, regardless of the zig-zag movement of the share price last Thursday.

Post Script: ERD shares closed today (Thursday 23 November) at $3.35 (high at $3.43)

Mislead? – I don’t wish to make light of market manipulation, however, coincidentally I read a story that had a funny side.

A Dutch government bond trader was recently convicted for market manipulation, artificially influencing prices and misleading counterparties.

The thing I found funny was that this trader learned the behaviour of the ‘robots’ in the market (computers programmed with algorithms to trade against the markets) and then started to trade against them, catching them out and profiting from his actions.

If your counterparty is not a natural person can you be accused of misleading?

Robots aren’t led, so in theory they cannot be misled.

There’s something more than a little satisfying about a human profiting from a robot’s weaknesses.

Tax – I don’t think NZ needs another Tax Working Group, having completed a thorough review as recently as 2010. However, given that we are being forced into another review I was pleased to see Sir Michael Cullen appointed as its Chairperson.

After reading the announcement, Sir Michael’s presence was the limit of my pleasure.

Sadly, Grant Robertson has announced Terms of Reference that are so specific that it will make Sir Michael’s job very frustrating.

For example, the TWG are not to look at GST increases, and not on overseas sales, but will be allowed to address whether or not to follow Australia’s error and exclude some items from GST (sop to NZ First).

Another example, personal income tax rates are out of scope, but please look into the impact of changing workplace on personal taxes (just don’t respond with a strategy – Ed).

And another complicator, ‘what role tax can play in delivering environment benefits’ (sop to the Greens).

The glimmer of hope that relates to our audience is approval to look into tax rates applied to savings and investment.

I hope Sir Michael starts by using the TWG 2010 report as a foundation to build from, and simplify his review as much as possible amongst the messy Terms of Reference he’s been handed.

Investment News

Germany – In New Zealand we have been quietly observing the early progress of our latest government, pondering whether three parties coalescing can be stable and effective.

In Germany we are learning that asking four parties to coalesce is too many, even under the impressive guiding hand of Angela Merkel.

Merkel has gone to the figurehead President and explained she has been unable to form a majority government after the Free Democrats walked out of the negotiations.

The President’s first response was understandably; ‘try again’.

Angela Merkel has held out an olive branch to the previous coalition partner (Social Democrats) but they have stuck to their refusal to enter these negotiations.

It’s all part of the protracted negotiations that we were warned would take months and unlikely be resolved until 2018, even if this became a new election being called by the President if he needed to tell the people the 2017 voting delivered an unworkable outcome.

Germany has been such a successful business centric economy that I expect their businesses will push on regardless of this temporary delay to new governance and thus I do not expect significant disruption for the German economy, or wider Europe.

US Tax – The US share market is getting more excited by the day about the potential for Trump’s proposed tax cuts, but a commentator worthy of respect has a different view on the merit, or lack thereof, for the tax cuts:

This the same 'voodoo economics' that we heard repeatedly in the 1980s, and I guess the Congress is counting on the fact that we're all suffering from amnesia, said Stephen Roach, senior fellow at Yale's Jackson Institute of Global Affairs.

He goes on to say:

Now, the Republicans of course say this is a self-financing tax cut ... They've told us this repeatedly over the past 25 to 30 years. It's never worked out that way.

Roach is supported by the fact that US debts continued to rise and have now breached US$20 Trillion.

Low interest rates seem to have sponsored increased use of debt, and Stephen Roach seems to be reminding politicians that if you cut their taxes and increase their net cash position they may increase debt use even further.

At some point this ‘rising debt’ dance must end, and it won’t be with a hug and a kiss.

Ever The Optimist – Air NZ is partnering with a Swiss business called Winding Tree to investigate the potential for BlockChain use in its booking and payment environment.

Other airlines are quoted as participating also and they report the potential for reduced intermediary costs within the travel booking industry and potential efficiencies for security, baggage tracking and loyalty programmes.

BlockChain programming is, as we have said previously, going to become a tidal shift in efficiency for many businesses. It’s nice to see ‘our’ airline moving early on the journey (pun intended).

Actually, whilst on the subject of BlockChain, I think it needs to be looked at very closely for online voting. Counting took too long in NZ general election and is taking even longer (1 month) for a corporate vote (Procter & Gamble’s Annual Meeting).

ETO II – Log prices are again touching record prices as Chinese and domestic demand increase.

This is good news for one of the most patient investment communities.

Investment Opportunities

Property For Industry – This deal closed last week.

Thank you to all who participated in this investment through Chris Lee & Partners.

If you missed out on the issue but wish to invest in these bonds, we are happy to help arrange transactions from the secondary market.

Precinct Properties – this deal also closed successfully last week.

Again thank you if you participated and the secondary market is available to those who wish to invest but missed out on the new issue.

Christchurch City Holdings –offer of new senior bonds, maturing in 5 years (6 December 2022) happens this week.

CCHL has a strong ‘A+’ credit rating and an easy to understand business, which one can review on the company website: https://www.cchl.co.nz/

Because of the strength of the borrower the probable yield on these bonds will be around 3.50%.

The bonds will be issued ‘fast’, by contract note, with clients paying brokerage.

If you wish to purchase these bonds, please contact us to request a firm allocation no later than 5pm tomorrow.

Investore Property Ltd (IPL) – announced in a recent report to the NZX that it is considering issuing a new bond, probably early in 2018 (our guess).

We have a mail list for this potential offer, which all investors are welcome to join (please contact us to arrange).

Sky City Casino – announced its intentions to issue a new bond during 2018.

We have a mail list which people are welcome to join if they wish to hear more when the proposed offer actually reaches the market.

Vodafone – has also announced its intention to list Vodafone NZ on the NZX, possibly in the early part of 2018.

We have a mail list for investors wishing to hear more about this proposed offer, when it finally reaches the market.

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 Auckland on Thursday 30 November.

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

 

 

Michael Warrington

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Market News 20 November 2017

Here is an item on perspective for you;

At its recent high price, the value of all Bitcoin was 1.4x greater than the value of all ASX listed commercial and industrial property investments.

Which would you rather own?

Investment Opinion

Over Regulation? – The European Union has taken several beatings in recent years as various countries and sub-regions ranted about their preference to be independent from the union (EU) and, with more than a little bias, declare that they would be better off alone.

The EU Council and European Central Bank (ECB) will thus be relieved by a development occurring in the well performed North of Europe (Scandinavia), where one of the largest banks (Nordea) is contemplating a move from Sweden to Finland.

Sweden is a member of the EU, but importantly for this story, is not a member of the Eurozone (i.e. common currency) and thus continues to operate its own currency (Krona) and coordinate its own central banking regulations.

It is this latter point that sparked Nordea’s proposed move.

The Swedish government has increased by 40% its ‘special bank tax’ gathered ostensibly for funding to shield the country from a future financial crisis.

Nordea’s reaction was a proposal to move its head office from Stockholm to Helsinki and to thus fall under the banking regulation of the ECB, clearly responding that the Swedish banking regulations are now too expensive, and are perhaps less likely to be as effective as the ECB in the event of the next financial crisis.

This should be a big shot in the arm for the initiators and current supporters of the benefits provided by the European Union and a wakeup call for Sweden, and many other regulators who often over-reach.

It might also be the truth, for European banking, that a problem shared is a problem halved and that the Swedish ‘go it alone’ (within the same economic area) could be considered as over-regulation and over-insurance all in one regulatory decision.

It is another example of unintended consequences from over-regulation.

The Swedish central bank will not have expected their new policy to prompt the departure of a bank from their economy.

This provides me with a neat segue into my comment last week for extending my conversation with you about market liquidity in NZ, which is slowly suffering a decline and seems likely to decline further based on the current market settings, plus the Reserve Bank of New Zealand’s intended regulatory changes.

I have, a couple of times, touched on the RBNZ’s current review of acceptable capital on a bank balance sheet. Their intention of simplifying and strengthening bank capital seems desirable at first glance, but just as the central bank of Sweden is finding the NZ strategy for bank capital will have unintended consequences.

Stronger bank capital settings in NZ will increase the cost of that capital for banks and when combined with solvency regulations (Core Funding rules and 32 day cash liquidity measures) the NZ banks are reducing their participation (willingness to lend and trade) in credit markets (trading in bonds issued by companies, a.k.a. debt capital markets).

In Sweden’s case the reaction to the higher tax for financial distress insurance was stark, a major bank intends to leave town.

Here in NZ the regulatory evolution will be harder to see for investors, no bank will leave NZ, but progressively lower participation in debt capital markets (DCM) by the banks, the foundation of our financial system, will be a widely felt negative consequence.

Last week I referred to regulated disclosure also having some potential to be bad for financial markets.

This sounds counter-intuitive, and I agree that usually disclosure (sunlight) typically improves decision making, however, a related article from the US discussed that trading in some complex financial instruments was declining (falling liquidity) and the reason given was that the traders being referred to are now instructed to disclose all profit margins on their risk taking.

The traders seem to be concluding that full disclosure and the subsequent decline in profit margin meant that return for the risk was no longer sufficient, so they withdrew from the service.

The demand for the service still existed but the supply of the service was withdrawn based on a regulated obligation to disclose profit margins.

Profit disclosure is something that most businesses in an economy are not required to do; competition and negotiation should be sufficient for appropriate price setting.

Is this another example of over-regulation, like Sweden, and increasingly being witnessed in NZ?

Remember last week that I referred to NZ’s Kiwisaver regulation that insists that savers be able to change managers at short notice and the consequential behaviour of the fund managers (short term, very liquid, investment behaviour).

The US example wasn’t a complaint about service, market liquidity or financial stability, just a regulatory opinion about profit margins.

You might recall my view that one of the RBNZ misguided drivers for the strategic change to acceptable capital securities for banks was the accusation that current Tier 1 and Tier 2 subordinated bank securities had been mis-sold to the public (retail investors).

The RBNZ is not a regulator for the financial advice community, or for the pricing of risk versus reward in NZ. Referring to this sector in their report about reasons for changes to bank capital was an error.

Frankly this clearly discloses that the RBNZ is willing to over-regulate because they reached into another regulators space (FMA).

Will the RBNZ regulatory actions have unintended consequences and further increase the cost of banking, and credit and thus reduce financial market liquidity? (I say ‘actions’ because the ‘wide public consultation’ is simply meeting a political obligation, not a search for intelligence).

It seems to me, and to those who I recently discussed the subject with, that the RBNZ intentions to tighten capital regulations, along with the current Kiwisaver settings (including heavy use of default funds), will indeed have a negative impact on the liquidity of financial market assets in NZ.

This argument might seem a bit ‘up there somewhere’ from your perspective but it is important for the effectiveness of our market, that you are able to buy assets easily and occasionally sell assets if you wish to do so.

While you can let others worry about this subject, reading last week’s Market News item again would provide a useful reminder for ways to keep your own liquidity levels up, so as not to be impacted by the negative market outcomes of the pending actions of our central bank.

Debt – Given that there is wide agreement debt use is excessive globally, I propose that the governments of the world agree to only allow partial tax deduction for the costs of debt used in commerce.

Maybe in NZ the IRD could seek ways to apply a domestic rule a little like the ‘Thin Capitalisation’ rules that determine how much debt an international owner can place within a NZ subsidiary business (to reduce the negative impact on NZ tax base).

The Thin Capitalisation debt limit is 60% debt on the balance sheet.

Why not use this same ratio for acceptable tax deduction on NZ residents’ investments too?

Investment News

WBC! – I had just finished my thoughts above and concluded that it represented sufficient words for this week’s message when across my desk came another item from the Reserve Bank of NZ, only this one was hugely more serious and immediate.

Sadly, it reinforces the RBNZ preference for tighter regulation!

The RBNZ has found that Westpac Bank in NZ was operating with some internal risk assessment models that had not been approved by the central bank, as they are required to be.

‘Financial Risk’; it sits at the core of the RBNZ’s obligations to ensure financial stability in NZ and Westpac decided, at some point, to analyse its risks in the way that it preferred, not a method approved by the central bank.

This is a remarkable error by the bank’s management and local board. It seems highly unlikely that the Australian CEO and board would have been unaware of the situation too.

If awareness did not reach the top of the bank a few people from near the top may go missing shortly.

You don’t need to take any notice of my opinion about how serious this error of judgment was, just look at the penalty that has been put in place, alongside the public dressing down:

Westpac Bank in NZ must now operate with 2.00% more equity on its balance sheet than its competitors and must resolve the situation to RBNZ acceptance within the next 18 months.

A few years ago, the RBNZ had pressed for standard risk measurement across all banks but the big banks pushed back, seeking in-house specific models. The banks got their wish, but this failure by Westpac gives huge impetus to the central bank for a return to its preference for all banking to use the same risk models for risk measurement.

We side with the RBNZ in this regard. Kevin Gloag has often written about the inconsistencies around the world regarding how bank risk and capital are measured, resulting in scenarios where two different banks with very different risks can claim to have the same robust equity capital ratios.

In this case the RBNZ has said they do not believe Westpac was trying to manipulate better equity capital ratios (even though the bank quickly raised USD$1.25 billion of new capital) but the tone of the statement made clear their displeasure with the situation. Westpac’s misbehaviour is all the more surprising as it is the Crown’s choice, as the banker for our public sector.

I have recently been discussing the impact of ever-increasing regulatory capital demands on bank lending, market participation and costs for borrowers. These problems become worse now for Westpac; doubly so because the same capital expenses are not currently being felt by their competitors.

Ouch.

Investors with WBC should not view this situation with any concern because the central bank’s penalty compulsorily increases minimum equity on WBC’s balance sheet, which reduces the bank’s risk profile.

FMA over regulation? – Finding examples of over-regulation is becoming easier with each passing month.

Following the latest report from the Financial Markets Authority I suspect there will be more than a handful of people accusing them of either over regulating, or over-reaching under their regulations.

The FMA decided to investigate a broker (out of fairness I have elected not to name them) after learning of their involvement in trading in some shares that related to the recent conviction of Mark Warminger for ‘false or misleading’ transactions on the share market.

The report makes it clear the FMA would like to have pursued the same sort of charges against the broker; however, importantly they did not do so.

The FMA explains that they also asked the NZX to pursue the broker with a referral to the Markets Disciplinary Tribunal, as an alternative to court action. The NZX, no doubt, reviewed the situation carefully but concluded not to make the referral.

With them (FMA) having insufficient grounds to take a court case and a secondary reviewer (NZX) finding insufficient grounds to refer the matter to the Markets Disciplinary Tribunal it seems that there was no further case to hear.

However, rather than accepting this scenario of possible, or probable, innocence the FMA has concluded otherwise and elected to publish their report on the matter, which quite clearly discloses the FMA view about the guilt of the broker. It has been done under the label of ‘best meeting our regulatory objectives’.

This does not look like natural justice to me.

I have a very good understanding of how market traders operate, and I acknowledge that globally traders are being prosecuted for various misdemeanours, however, in this case I have a lot of sympathy for the broker’s short response – ‘we understand what the FMA has written but we disagree with their conclusions’.

The FMA understands the cost of going to court, they paid a large cost to pursue the Warminger case. When the regulator is the one making allegations, I don’t think cost should come into it; enforcing the law and setting standards is too important.

This was our view when we asked the FMA to take a court case against various parties involved in the South Canterbury Finance perpetual preference shares, where there was clear evidence of law breaking, but they decided against doing so on commercial grounds (benefits outweighed by costs).

So, to not take a case against the broker above implies to me they had insufficient evidence to prosecute a case (labelled as ‘litigation risk’ in their report) and they recognised the high costs (‘significant cost, time and resources required in pursuing litigation would outweigh the potential benefits’).

The NZX response should have helped with the FMA understanding of the situation.

After not being able to bring a court case, or a referral to the Markets Disciplinary Tribunal the FMA has responded by publishing their opinion so that it will reach Financial Market Participants (like me) and have us all understand the chain rattling (regulatory objectives of expecting high standards of behaviour in the market).

Well, sorry Mr Everett, in this case you have undermined those high standards yourself by deciding to install another form of prosecution and public judgment because you didn’t like the outcome from the processes available to you.

Then or Now? – The Bank of England increased the UK cash rate (to 0.50%) last week, this first hike in a decade, following the global trend for trying to tighten monetary policy, at a snail’s pace.

This news isn’t a revelation.

What caught my attention was the governors of the BoE who voted against the rate hike, preferring to wait for current evidence that inflation and wage rises are happening.

Even though their job is to look forward and adjust monetary policy in response to probabilities these dissenting voters want to make decisions based on current, and frankly historical, data.

This thinking by some central bank governors is contrary to regulatory expectations of businesses under IFRS accounting standards where one must take the future value of assets and liabilities and determine a fair value as at today, recognising there are risks in the future value assessments.

So, one regulatory office demands forward looking whilst another (more influential) regulator is happy to look at its toes.

This weak approach by some of the BoE governors is replicated at other central banks around the world and perhaps can be considered as acknowledgement about how poor their forecasting has been in the past.

White House methods – It shouldn’t be a surprise that the Trump administration would manage employment with ‘interview by Twitter’ as the process.

The White House has leaked a thought: ‘shall we appoint respected fund manager Mohammed El-Erian to be vice chair to the US Federal Reserve?’

They are clearly seeking market feedback, even though they didn’t offer response buttons ‘GREEN’ for ‘it will make America great again’ and RED for ‘hide that idea in the redacted JFK files’.

Good Economics – Germany, the main engine in Europe, has reported its best economic performance since 2011 with third quarter GDP up +0.8% (3.25 annual equivalent).

True to form the increase was driven by investment and exports and not increases in domestic consumption. It would be nice to see more of these drivers in the NZ economy.

Usefully, the economic performance by the rest of Europe was reported as improving and with less variance between the weakest and strongest performers than was seen in the past.

According to the European Commission the region will grow at its fastest rate for the past decade.

I see a recent NAB survey is also reporting that business conditions in Australia are the best they have been for two decades, which seems a big call to make given how well they performed over the past 15 years.

This is very helpful news, from two locations, to counter-balance the risks of any economic underperformance elsewhere in the world.

Ever The Optimist – Icebreaker’s own success has a direct trickle down benefit to the NZ Merino industry.

The Merino industry’s most recent fixed supply agreement was reported as being $45 million for 5 years to an Italian luxury fabric manufacturer; Icebreaker’s latest agreement is for $100 million over 10 years.

That’s pretty good supply and price certainty for the Merino farming industry.

ETO II – Orcon is moving its call centre back to New Zealand from Manilla.

This seems to prove that Orcon recognises good service is better for revenue than Manilla was for reduced expenses.

ETO III – Rocket Labs have installed their next rocket on the launch pad on the Mahia Peninsula and are readying its payload and monitoring conditions for a pre-Xmas launch date.

Investment Opportunities

Property For Industry – new offer of 7-year senior secured bonds last week was significantly oversubscribed.

The bonds will be listed on the NZX (PFI010).

The yield was set at 4.59%, a competitive return. Interest will be paid quarterly on a useful sequence of (February, May, August and November).

The offer closes this week (24 November) so we would prefer that all applications were in with us by tomorrow (22 November).

Scanned and emailed application forms are encouraged these days, even if you ask for assistance from family, friends or the likes of Warehouse Stationary services. NZ Post deliveries are no longer reliable in tight time frames such as this.

Precinct Properties – new senior secured bond (7 years at 4.42% p.a.) was completed last Friday (bidding and allocation by contract note).

Investors who joined our list by last Thursday requesting participation should have received a contract note from us confirming an allocation and asking for payment.

Any investor who missed out should contact us urgently. Trading in these bonds begin on the NZX next week.

Christchurch City Holdings – has confirmed its offer of new senior bonds, maturing in 5 years (6 December 2022).

CCHL has a strong ‘A+’ credit rating and an easy to understand business, which one can review on the company website: https://www.cchl.co.nz/

Because of the strength of the borrower the probable yield on these bonds will be around 3.50% - 3.65%.

The bonds will be issued ‘fast’, by contract note, with clients paying brokerage.

If you wish to purchase these bonds please contact us to request a firm allocation no later than 5pm on 27 November.

Investore Property Ltd (IPL) – announced in a recent report to the NZX that it is considering issuing a new bond, probably early in 2018 (our guess).

We have a mail list for this potential offer, which all investors are welcome to join (please contact us to arrange).

Sky City Casino – announced its intentions to issue a new bond during 2018.

We have a mail list which people are welcome to join if they wish to hear more when the proposed offer actually reaches the market.

Vodafone – has also announced its intention to list Vodafone NZ on the NZX, possibly in the early part of 2018.

We have a mail list for investors wishing to hear more about this proposed offer, when it finally reaches the market.

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 Auckland on Thursday 30 November.

Kevin will be in Ashburton on November 23 and then in Christchurch on November 29.

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

 

 

Michael Warrington

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Market News 13 November 2017

Xero’s success in capturing a large market share in the United Kingdom may soon make them better informed about the impacts of Brexit (current and potential) than Prime Minister Theresa May.

Maybe this will lead to lucrative consulting fees for Xero, from the Brexit negotiation team?

Investment Opinion

Market Liquidity – I recently enjoyed the company of several experienced and influential market practitioners and the conversation centred on the decline in market liquidity; being the ability for one to sell an asset whenever they choose.

A decline in liquidity equates precisely to a decline in market effectiveness and for some this is reaching a point of concern in the NZ bond market at present.

An ineffective market isn’t good for the economy.

A market with good liquidity does not pre-determine that the seller will enjoy a good price for an asset sale, but it is preferable that a price is made available, and a transaction can be arranged.

Market failure occurs when a seller cannot find a person willing to make a price to buy the item involved. A ‘market’ is, after all, a place where people ‘gather’ for the purchase or sale of items and a transaction cannot proceed without both sides present and in agreement.

One of the contributing concerns with respect to declining liquidity was a retreat from market participation by some banks, especially transactions in bonds of weaker credit (weaker borrowers, subordinated bonds).

The Reserve Bank of NZ is in the midst of a review of what constitutes bank capital, preferring to tighten the rules of acceptable capital, and while their proposals are well intentioned with respect to financial stability of banks, the proposals may have unintended consequences for market-wide financial stability.

A market without meaningful depth of liquidity can very quickly become unstable when put under intense stress.

It would be unsurprising to me if the RBNZ also tightened the Risk Weightings and thus equity demands that it applies to lending (lending on a housing mortgages is lower risk than lending on a car loan). This would further reduce bank participation in parts of financial markets.

There is a lot of water to pass under the bridge for the RBNZ regulatory review but it got me thinking about possible strategies for improving market liquidity.

If the banks may not buy assets when the market needs them who will?

Where is the investable money?

I think the answer lies with Kiwisaver, the fastest growing savings channel for NZ financial markets, which is thus capable of delivering the largest volume of new buyers to the market place, and is quickly becoming ever more capable.

A question from the back of the room – ‘Kiwisaver has been operating for 10 years and growing constantly, why is market liquidity getting worse in response?’

Good question. (Patsy – Ed)

The total Kiwisaver balance is now approximately $35 billion, which you may recall is the same size as ACC and NZ Super (The Cullen Fund).

Kiwisaver will quickly march ahead and become the largest ‘fund’ (albeit diversely controlled) having expanded by $6.60 billion last year alone. In less than a decade Kiwisaver could conceivably be bigger than the balance sheets of all NZ banks except ANZ (with its $150 billion assets). Kiwisaver would pass ANZ five years later.

So, why wouldn’t Kiwisaver be an excellent source of liquidity for financial assets?

The irony is that the answer lies in the desire of government to see competitive tension between Kiwisaver fund managers; in other words Kiwisaver users are able to switch manager at one day’s notice.

The government, and perhaps the Financial Markets Authority, may think this should deliver competitive tension around fees and performance but it also ensures that fund managers will hold only very liquid assets so they can be sold if a withdrawal from the fund is instructed.

Capital users seek long-term investment support through equity (forever) and debt (1 – 10 year terms), and typically long term investing delivers better returns, however, you can see that this creates an uncomfortable disconnect between the potential short-term behaviour of Kiwisaver investors and the long term needs of those using the savings.

This is the equivalent of borrowing short (a Kiwisaver investor who can withdraw at a days notice, to join another manager) and lending long (owning long term assets, as one should in a retirement fund), a mismatch that any banker will counsel against.

Statistically a fund manager can rely on a large proportion of their Kiwisaver investors staying invested with them long term, but legally they are required to be positioned to return any investor’s funds in days (other than under some force majeure event that is likely described deep in the trust deed).

It is worth noting though that the number of investors who transferred between funds last year was 172,000 people! (7% of the pool)

The average residual duration of Kiwisaver investment is very long with 75% of contributors having 15 years or more until retirement so longer term investment commitments are a logical behaviour for these investors.

For the benefit of both Kiwisaver investor returns and capital market liquidity we need to find ways to have Kiwisaver investors commit to longer terms with a single fund manager.

In my other role as ‘President For a Day’ I contemplated ways to achieve this and came up with a couple of ideas for the FMA to roll out:

#1. Allow Kiwisaver investors to split their allocations across multiple fund managers;

#2. Allow term commitment agreements; and

#3. Allow performance fees.

My #1 should be easily achieved given the central administration via Inland Revenue (and the use of BlockChain programming – Ed).

Why shouldn’t I be able to place my lower risk fixed interest asset allocation in the fund with the lowest base fees and my property and shares investing with one or two more actively managed funds?

My #2 should be easily achievable. If my Kiwisaver asked me to consider a term agreement appointing them as fund manager I’d consider it.

My #3 In return for my longer term commitment to a single fund manager (my #2) I would expect a sharply discounted base fee, however, a fund manager worth his/her salt (no pun intended) should be allowed to then ask for some level of outperformance fee.

The FMA is beating a drum about Kiwisaver fees being too high, a generalisation that I agree with, but maybe the way forward isn’t to poke fund managers in the eye, maybe its better to offer them a chance to earn those higher fees by displaying higher returns to investors from longer term relationships?

It costs me nothing to ‘sell’ time to my Kiwisaver manager but both the fund manager and I may gain something. I’ve got 14 years that they are welcome to if they wish to negotiate with me.

SIDE BAR - I think I have already told you that I asked my (unnamed) Kiwisaver manager to negotiate fees on my large holding but they refused.

If I signed up to a longer term commitment, which might have exit clauses based on sequential underperformance, my Kiwisaver manager could then use my funds to buy good assets at discounted or distressed prices when the opportunities present themselves (aka to provide liquidity to the market place) without fearing my departure from their fund before they could easily sell those new investments.

I started this mind spill by explaining that a few of us were becoming concerned about a decline in market liquidity.

The conversation also traversed the rise in use of Exchange Traded Funds (ETFs) (a virtuous cycle for the fund manager) and the risk that a market distress event might lead to a ‘hard to stop’ decline in the value of the market (and ETF) as investors exit for liquidity (a vicious cycle for investors).

You can avoid much of this problem, or any market liquidity problem, within your own investment policy and liquidity behaviour.

If you always hold an emergency fund in a truly ‘At Call’ fund (call account, Bonus Bonds etc), and you hold sufficient cash in the bank for immediate use, and you have fixed interest investments maturing in a sequence of years ahead of you, you should never be pressured to sell an asset during times of distress.

Your strong personal liquidity will reduce unwanted supply from the market at the worst time for selling assets.

In summary, our market liquidity is weakening and bank participation may yet decline further based on regulatory changes. In response you need to retain good personal levels of liquidity and the FMA needs to help develop longer-term agreements between Kiwisavers and active fund mangers.

I have hung on to your attention long enough for this subject, but next week I think I’ll touch on another threat to market liquidity – disclosure.

RBNZ new agreement – The new government intends to alter the Policy Target Agreement for the central bank during 2018 with a defined preference for the following:

Widen the objectives of the Bank to ensure that monetary policy decisionmakers

give due consideration to maximising employment alongside price

stability in implementing monetary policy; and

Institute a committee-based decision-making model for monetary policy

matters to replace the Governor as single decision maker.

The proposal to make decisions based on a committee structure, rather than the governor alone, is semantic and will make no difference to the message delivery or financial outcomes.

Current and past governors will all have sought input from their own internal committees prior to announcing decisions that the governor was comfortable being independently responsible for.

Who is allowed to be appointed to the ‘new’ committee will be the only point of interest and will introduce debate about the appropriateness of the non RBNZ persons.

Personally, I disagree with the introduction of a link between monetary policy and employment outcomes.

The price of money and the stability of the financial system are not employment levers; businesses making profits drive employment (and taxpayer funded organisations! – Ed).

Introducing employment statistics into the debate will cloud the committee’s discussions and ability to reach clear conclusions.

Under the ‘old’ method of assessing monetary policy and financial stability NZ currently enjoys very low unemployment and extraordinarily high employment (participation).

Why mess with a good thing?

I’d rather the Minister of Finance focussed on strategies that are not working well, for which there is a long list, but I’ll throw in one – land based tax collection on unproductive property, such as residential property (other than one’s home).

Investment News

RBNZ – The latest Monetary Policy Statement (available on the Reserve Bank website) left the Official Cash Rate unchanged at 1.75% and alerted us, again, not to expect any change in the foreseeable future (call that 12 months).

Although, the market did spot a subtle (+0.15%) increase to the forecast OCR track by early 2019.

Interestingly there was no reference in the summary statement to the potential impact of new government policy but there was one to the less relevant share market pricing (high).

Given the imminent change in governor and the 2018 change that the government plans for the Policy Targets Agreement, and the effectiveness of our macro-prudential policies, ‘no change’ is the starting expectation for monetary policy (OCR) during the next 12 months.

Personally, I share the view being expressed by the BNZ that inflation risks are more apparent than the market is willing to price in, so a steeper yield curve is possible whilst the NZ central bank anchors the OCR at 1.75% and the US central bank quietly attempts to exit bond ownership.

XERO - has announced that it will delist from the NZX and use the ASX as its sole exchange for share trading.

This feels like a terrible decision from a NZ domiciled company and is more than a little disrespectful to Xero’s earliest supporters (NZ investors) from a time when the start-up company had less choice about who would support them.

Xero’s board justify the decision as being the best way to support market liquidity and access to future capital for the business’s growth, but it will be a huge disappointment to the NZX and NZ domiciled shareholders.

Other than transaction expenses paid by shareholders in NZ (profit for arbitrage traders between the two current markets – ASX and NZX) I am not clear why a dual listing strategy wasn’t maintained.

In fact foreign exchange expenses will now replace the historical arbitrage expenses between the two markets, and FX fees will be worse for NZ’s smaller investors, as will the expense of converting future dividends paid in Australian dollars, once they begin.

This situation is a reminder about how successful Xero is becoming, the scale of capital it will require and how small the NZ market is relative to this business’s potential, but it remains a surprisingly ungrateful decision all the same.

Heartland Bank - announced a rights issue (1:15 at $1.70 per share) to raise an additional $59 million of core equity to support the rapid growth the bank is experiencing (+16% year on year).

This situation continues to confirm the successful growth strategies HBL is managing toward, something HBL shareholders should be pleased to see.

HBL shareholders will be approached soon with documentation to participate in this discounted rights offer.

Ever The Optimist – The government has so much cash, currently, that the Treasury (NZ Debt Management Office) has been able to cancel a proposed offer of government bonds.

Mind you, given the spending intentions being announced by the new government it is likely that this cash will be used, and Treasury will return to the bond market in early 2018. (unless the Paradise Papers reveal more tax to gather – Ed)

Investment Opportunities

Property For Industry – has launched its offer of new 7 year senior secured bonds to the public. The bonds will be listed on the NZX (PFI010).

The yield was set at 4.59%, which we consider to be competitive. Interest will be paid quarterly on a useful sequence of (February, May, August and November).

The minimum investment is $5,000 (The offer document is available on the Current Investments page of our website).

The offer is open now and closes on 24 November, being a relatively short time frame.

If you were on our PFI seeking to invest you should have now heard from us regarding an allocation. The issue was heavily scaled so we cannot accept any new requests for allocations.

If you are investing (with a firm allocation) please act now by delivering your application form.

Scanned and emailed application forms are encouraged these days, even if you ask for assistance from family, friends or the likes of Warehouse Stationary services. NZ Post deliveries are no longer reliable in tight time frames such as this.

Precinct Properties (PCT) – has announced a new bond that is very similar to that being offered by Property For Industry, namely senior bonds secured by property, maturing in 7 years.

The Terms Sheet is now available on the Current Investments page of our website.

PCT has announced a minimum interest rate of 4.40% p.a. (actual rate is set this Friday 17 November) when we bid for firm allocations. Interest is paid semi-annually.

Investors wishing to participate in this offer must contact us now (no later than 5pm Thursday 16 November), describing the amount they wish to invest.

This offer will be booked by contract note, with NIL brokerage charges. (PCT is paying the brokerage).

Christchurch City Holdings – has confirmed their intention to issue two tranches of NZX listed bonds to the public; hopefully one tranche so then another by 2019.

We still expect this first bond tranche to occur prior to Christmas 2017.

CCHL has a strong ‘A+’ credit rating and an easy to understand business, which one can review on the company’s website: https://www.cchl.co.nz/

We have a CCH bond list which anyone can join as we await more information.

Trustpower – announced repayment of their bond in December in preference for bank funding on this occasion.

Sky City Casino – announced its intentions to issue a new bond during 2018.

We have started a mail list which people are welcome to join if they wish to hear more when the proposed offer actually reaches the market.

In the interim it is easy to study SKC via their website and continuous disclosure obligations as an NZX listed entity.

Vodafone – has also announced its intention to list Vodafone NZ on the NZX.

The latest headlines imply this might be a deal for 2018.

We have a mail list for investors wishing to hear more about this proposed offer, when it finally reaches the market.

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 the Wairarapa on Monday November 20 and in Auckland on Thursday 30 November.

Chris will be in Christchurch on November 21 and 22, at the Airport Gateway Lodge, Roydvale Ave.

Kevin will be in Ashburton on November 23 and then in Christchurch on November 29.

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

 

 

Michael Warrington

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Market News 6 November 2017

Here’s a disappointing statistic;

A UK survey has found that over half of the people surveyed, including 81% of those between 18-24 years of age, did not know what the term ‘interest rate’ meant.

I guess one mitigating factor is that one cannot really earn any interest in the UK at present (0% offered from most banks) so there is no need to understand the term, especially when you are young and have no savings, let alone a deposit for a house.

However, interest rates have such a core influence on all other financial decisions I would have hoped for more recognition than was discovered.

Politicians would be wise to reflect on this data, both for the impact it has on short term voter thinking and for the need to improve the public’s understanding of why it makes some of its financial decisions.

Investment Opinion

Bitcoin – The price of one Bitcoin passed above US$7,000 last Friday, touching a high of $7,350.

At the start of 2017 the price was US$998. In January 2016 the price was US$434.

Does this phenomenon tell about a rise in crime or the growth rate of tulips?

Mortgages – I read an interesting article in the UK, linked to the prospect that the Bank of England would increase the British overnight interest rate soon (if was increased by +0.25% last week).

Another paragraph concluded that 42% of British mortgagees have never experienced an interest rate hike.

This seems extra-ordinary and when linked to the statistic from my opening paragraph that 50% of people surveyed didn’t know what the term ‘interest rate’ meant it will be the devil’s job for analysts to predict what will happen within the economy once interest rates begin to rise.

Speaking of mortgages, but closer to home, I noticed recently that TSB Bank offers 10-year fixed rate mortgages at 6.15%. This is an extremely long term for a bank to offer.

Whilst this pricing won’t suit many borrowers, especially those with high levels of equity, those with low equity and modest incomes may appreciate the certainty of a 10-year fixed rate that can be budgeted against.

My initial thought was ‘that is brave’ of the bank to offer such long term fixed rate mortgages given that the public do not place term deposits for this long and the derivatives market in NZ (interest rate swaps) is less active for longer terms making it more difficult to hedge this 10-year interest rate risk.

But then I remembered TSB Group’s purchase of Fisher Funds, a business with a large, and rising, pool of managed funds (especially Kiwisaver), including fixed interest funds that would happily consider some low risk 10-year mortgages with a yield over 6.00%.

Maybe other banks will begin to compete in the 10-year fixed rate mortgage space and seek tie-ups with Kiwisaver fund managers with an obligation to invest for the long term.

If the fund managers believe inflation will truly hold stable at around 2.00% then a real return of 4.00% from low risk assets would be very desirable.

Actually, I’d be pleased if a bank collected up such a pool of mortgages and began to then offer bonds to retail investors secured against such specific mortgages.

In today’s market it shouldn’t be hard to attract demand for a strong 10-year bond like this at say 5.00% leaving a healthy profit margin for the originating bank.

Just thinking. (and speaking prior to thought – Ed)

Returns to Fall – When you follow the money you usually find the truth.

If you can follow the decision makers who steer the money, you’ll get an early view of that truth.

ACC is New Zealand’s equal largest fund manager, alongside the Guardians of NZ Superannuation at $36 billion, and they spoke last week about the probability of lower returns ahead.

Various professional investment managers have addressed the subject of lower returns ahead of us. I think the first one I read was during 2016 from Jeremy Grantham, a hugely respected name in the investment space.

ACC has exceeded the returns of its benchmark for 24 of the past 25 years so they have a right to be respected for their forecasts.

ACC’s past returns were reported as being 10% per annum, yet they are budgeting for future returns of approximately 5%.

With interest rates at such low levels (3-4% in NZ) and the pricing of shares at high levels (compressing the implied profit and dividend ratios) it is easy to conclude that investors must plan for lower returns in coming years.

I hope Nick Bagnall, ACC’s head of investments, won’t mind me borrowing this very useful quote from the article:

‘Equity markets have risen to valuations from which we believe it is unlikely that equities could continue to deliver returns in the next several years that are as strong as investors have experienced in the past eight years,’ ACC said.

‘Nonetheless, ACC continues to hold significant investments in equity markets because low bond yields mean that the alternative of investing in bonds is unappealing and because equity investments may provide diversification against some risks that could affect bond investments.’

It could not be put in more simple terms.

As with many of our newsletter comments we hope ACC’s sage forecasts provoke you to review your portfolio and contemplate the current asset allocation mix and the scale of some specific risks within each.

Market Volatility – Hands up those of you who are lucky enough to own a few A2 Milk (ATM) shares and/or Synlait Milk (SML) shares.

The share prices of these two companies have doubled and doubled again in double quick time (is that like dividing fractions? – Ed)

The sales and profit performance of these two companies is impressive, and exciting from a primary industries export point of view, but, this business reality did not stop a disturbing day on the NZX for both companies last week.

At one point last Wednesday both ATM and SML share prices were 10% lower than the previous day’s close. This is a huge price swing for any company share, let alone from two well-performing companies.

It might be better that most ATM and SML shareholders were not watching.

The strong price rise over recent months hasn’t sparked a lot of enquiry and sometimes I wonder if shareholders have noticed just how significant the single shareholding has become within their portfolios.

I have commented in the past that an investor’s Achilles heel is a difficulty with selling investments; they are reluctant to sell badly performing investments (‘locking in a loss’) and they are reluctant to sell proportions of the well performed investments (‘what if they double again?’).

Volatility is a normal condition for financial markets and as a generalisation market volatility is quite low at present. However, ATM and SML have reminded us of the need to review investment portfolios and part of reviewing introduces the potential for a sell to be a wise action to take.

If you have a good set of investment rules making the decision will be easy and you will not need to worry about ‘what if’ from tomorrow’s market.

Politics – Our new government politicians are quickly falling into the trap of telling me, rather than showing me.

To be fair they want to settle all the question marks as soon as possible to have us develop a confidence in their forthcoming game; a little like boxers after the weigh-in when they describe how a fight will unfold.

Frankly, talk is cheap and financial markets are not going to lower the interest rate and the pricing of the currency just because MP’s tell them to do so.

Let’s wait for the first 100 days to pass, a time frame that they now seem to use to focus their own attention on change, and see how we are positioned by then, based on policy.

‘Dear Jacinda’, I respectfully suggest that you limit your time in front of the microphone.

You do not owe the media, or us, hourly updates no matter what social media would have you believe.

Investment News

Icebreaker – US based company VF Corporation, owner of the North Face brand, has agreed to purchase NZ Merino clothing manufacturer Icebreaker.

The pricing of the privately held company wasn’t disclosed but based on annual sales (86% being overseas) it seems likely to be in hundreds of millions not tens of millions (this was confirmed by their application to the Overseas Investment Commission for approval).

This is a fantastic story and should remind young kiwis, again, that they can start businesses in NZ and succeed on the global stage.

It is also a good investment story for the people (including some familiar names) who agreed to invest equity in the business during its formative years; they are likely to be very pleased with this outcome.

Congratulations Icebreaker, I hope you managed to negotiate a subtle change to the garment labels to display ‘of New Zealand’!

Fed Governor – Donald Trump turned the appointment of the new Chair for the US Federal Reserve Board into his latest game show; it’s a role he is comfortable with.

He used an Instagram video to build the tension.

He must be hugely disappointed that he cannot sell advertising space on his Instagram account.

President Trump has concluded his interview process and appointed Jerome Powell as the next Chairman of the US Federal Reserve Board, America’s central bank.

Trump must have relished the moment that he declared ‘Janet, you’re fired’.

I hope he had the integrity to do so in person and not via Twitter, something I rather doubt Janet Yellen follows (Others broadcast carefully scripted releases in her name as Chair of the US Fed).

I saw a couple of headlines describing the role of US Fed Chair as the most powerful in the world. Given the US Presidents right to hire and fire this person one can see where the ultimate power lies, however, it was only a wordsmith error because the Chair of the US Fed is the most influential person.

President Trump is developing an understanding of what it is to lack influence.

Powell’s early comments would like us to accept that his governance strategy will be very similar to that forecast as required by Janet Yellen. This implies that the President also agrees with the Federal Reserve’s current strategy but clearly, he doesn’t like Janet Yellen!

According to media debate Jerome Powell is the least disruptive choice relative to the current situation. The others had some quite strong views about changing the process.

I look forward to developing a new understanding of how the hugely influential US Federal Reserve will actually operate under its new Chair. For now, we can start from a position of no change.

US Housing – is beginning to dance to the same tune that we have experienced in NZ with sales occurring in very short time frames and prices paid are increasing.

The National Realtors Association reports the shortest time between listing and sale of the median home since records began in 1987, now down to three weeks. The previous low was 4 weeks in late 1999 with the possible coincidence of the peak in share prices of technology stocks.

The statistics also display that a new high percentage (42%) of offers to buy are now at, or above, the asking price for the property.

8,000 data points seems modest from a population of over 300 million, however, it is sufficient to display useful trends.

Judging by the charts displayed it is reasonably clear that the movement of the share market pricing reflects confidence in the housing market. This may be due to the wealth sensation but equally may reflect better employment participation within the better performing businesses seen via the stronger share market.

Maybe, also, the US housing market is finally experiencing some form of shortage of stock, nine years after the excess that was financed by the ‘lend to anybody’ era that led into the Global Financial Crisis of 2008.

In one sense this house price movement gives me comfort.

Long-time readers will recall us saying that we will know financial markets have moved away from the cause of the 2008 crisis once US house prices rise again, above the level of mortgage debt used at the time.

However, in another way it warns me to continue with a position of care about such financial confidence being unsustainable. Again, I am reminded of President Xi’s statement that houses are for living not speculating.

A population will never conquer the pursuit of higher incomes if they invest in scarcity rather than productivity (Dear Jacinda – Ed).

Now that the excessive levels of US housing debt, by ratio at least, appear to have settled down a little let’s focus on economic productivity, so those borrowers stand a chance of actually repaying that debt.

Lower debt to equity ratios satisfy lender anxiety but do not improve the real financial wellbeing of the borrower.

Maybe I’ll write to the National Association of Realtors and ask that they also survey for the percentage of ownership (equity per property) across the US, where higher ownership numbers will confirm a nice mix of higher incomes and lower housing costs.

In my opinion the next financial tension (hopefully not a crisis) will not come from the US residential mortgage sector.

Thus, we ponder where will it come from?

US Tax – This subject is becoming increasingly influential to the expectations of the US economy and share market.

Congress has released its draft law (Bill) and the ‘quick with a headline’ President Trump wants it ‘passed into law by Christmas’.

Good luck with that.

The broad headline details of the tax changes are: fewer tax brackets (4 from 7), reduce the top corporate tax rate (35% – 20%), a one-time repatriation tax of 12% (for all those funds hidden in Ireland), limiting the mortgage deductions and a 10% tax on profits for overseas subsidiaries of US corporations.

If you don’t have the time or interest to read various media summaries you can quickly observe that the unchanged level of the US share market means, they expected such proposals.

The market will have discounted some level of probability that the law will pass. For now we sit on the fence, from where the market will rise or fall based on the bill passing into law, or failing to do so.

That’s quite a collection of US stories for you.

Strategic Finance – The receiver of SFL has announced an imminent payment of approximately one cent in the dollar and the winding up of the SFL receivership process.

This brings repayments to approximately 21 cents in the dollar, disclosing what is already known; that SFL was not governed or managed in the way investors had believed. (a polite description – Ed)

Ever The Optimist – NZ employment continues to be very strong.

The latest data records that unemployment fell to 4.60% (from 4.80%) whilst participation also increased to 71.1% (from 70%), employment surged by 2.2%, hours worked increased by 2.4% and wages rose (+0.4% public, +0.7% private).

What’s not to like about that?

The National Party might be able to claim that one.

Jacinda boldly describes a view that unemployment can and should fall below 4.00% and I hope she is correct and capable of delivering this outcome.

ETO II - Apparently France is ‘running out of butter for croissants’.

This sounds like very good news for Fonterra and its farmers.

It might also mean that a few more farmers are able to spend their rising profits travelling to a small village in France to eat the remaining croissants.

ETO III – Very few people like to read about banks achieving higher profits, however, I place the news about BNZ’s recent profit announcement under ETO because it ensures robust banking strength for our economy and the lower bad debt charges confirm improved economic performance.

Investment Opportunities

Property For Industry – has confirmed that its offer of new senior secured bonds to the public. The bonds will be listed on the NZX (PFI010).

The term of the bonds will be seven years, maturing on 28 November 2024.

The yield will be set on 10 November but will not be lower than 4.55%, which we consider to be competitive. Interest will be paid quarterly on a useful sequence of (February, May, August and November).

The minimum investment is $5,000 (The offer document is available on the Current Investments page of our website).

We have a list and all investors are welcome to join (ideally by 9 November when we request an allocation from PFI).

The offer opens on 13 November and closes on 24 November, being a relatively short time frame.

Scanned and emailed application forms are encouraged these days, even if you ask for assistance from family, friends or the likes of Warehouse Stationary services. NZ Post deliveries are no longer reliable in tight time frames such as this.

If you wish to invest in these bonds please act now.

New Bond – Bond investors should remain alert during November.

As hinted at last week it does seem correct that there will be several investment choices to make.

Hot on the heels of PFI (above) we expect another similar bond to follow.

China Construction Bank– CCB did decide to issue a new bond, and promptly did so last Thursday!

Those people on our Investment Opportunities (all New Issues) email group heard from us with the 24-hour window to participate. Thank you to those who invested.

The new five-year bond (maturing 9 Nov 2022) set a yield of 3.932%.

Any investors wishing to buy this bond from the secondary market are welcome to contact us.

Christchurch City Holdings – has confirmed their intention to issue two tranches of NZX listed bonds to the public; hopefully one tranche so then another by 2019.

CCHL has a strong ‘A+’ credit rating and an easy to understand business, which one can review on the company’s website: https://www.cchl.co.nz/

We have a CCH bond list which anyone can join as we await more information.

Trustpower – we would like to believe that TPW will offer a new bond for investors holding the maturing TPW130 bond (15 December 2017) and for new investors.

I think we will start a list.

Sky City Casino – announced its intentions to issue a new bond during 2018.

I compliment businesses who are beginning to use their annual reporting address as a window for alerting financial markets to longer range plans for bond issuance or capital raising in the months ahead. The more lead time you provide the better prepared the investors can be to meet your requirements.

Given the timing of the announcement we assume this means early in 2018.

We have started a mail list which people are welcome to join if they wish to hear more when the proposed offer actually reaches the market.

In the interim it is easy to study SKC via their website and continuous disclosure obligations as an NZX listed entity.

Vodafone – has also announced its intention to list Vodafone NZ on the NZX.

The latest headlines imply this might be a deal for 2018.

We have a mail list for investors wishing to hear more about this proposed offer, when it finally reaches the market.

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 the Wairarapa on Monday 20 November and in Auckland (Albany) on Thursday 30 November.

Chris will be in Christchurch on November 21 and 22, at the Airport Gateway Lodge, Roydvale Ave.

Kevin will be in Ashburton on November 23 and then in Christchurch on November 29.

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

 

 

Michael Warrington

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