Market News 26 September 2016

The US Business Roundtable, representing ‘millions, billions and trillions’ of employees and investments (thrust chest out – Ed), has criticised the European Union over its tax ruling relating to Apple and Ireland and demanded a retraction.

These various senior US executives and board members don’t get it, clearly.

Their financial behaviour is offensive to the majority, including their consumers.

In my opinion the EU can swat the corporate threats aside with a single response; ‘do your worst’.

‘We don’t collect any tax from you yet you need our consumers. We would prefer a level playing field without you, thanks very much’.

Investment Opinion

Liquidity Event – Friday week ago NZ Oil & Gas dressed up their ‘sell’ plea to NZO shareholders as a tender opportunity at a premium price relative to market when in my view it is the initiators responsibility to set a firm price and take their chances on market reaction.

NZO wishes to use cash to buyback a total of 64 million shares and it was becoming frustrated at not being able to buy enough shares on market and decided upon this latest strategy to stir up some selling.

I must preface the next opinion with the statement that what I know about the oil industry is limited to the location of the fuel cap on my car, but, I have always struggled to see a competitive advantage for NZO. The large write-offs from their investment in Cue Energy, which also went wandering around the world, confirm for me that it is easy to buy assets poorly and it is difficult to explore more successfully than the world’s biggest oil explorers.

Maybe NZO realises this as they now prefer to spend surplus cash buying back their own shares, gradually compressing the residual value of NZO into less and less hands?

The market now knows that NZO sees financial progress, without the addition of a single barrel of oil, from buying its own shares at 55 cents, and truth be told probably at some share price above this too. Remember, this is defined by the company’s directors as a better risk adjusted (more certain) reward for NZO than putting a drill in the ground.

All investors make decisions based on different motivations but upon hearing about the tender I wouldn’t have been surprised if the market had moved to 55 cents bid and nobody participated in the ‘tender’. Why wouldn’t it? We know that NZO is a near certain underwriter of 40-50 million shares at that price (today’s conditions).

In the end NZO was able to purchase 16.74 million shares at 55 cents each. They won’t consider this a success no matter what headlines you read.

I looked at the NZO share register and can immediately see why NZO are being more than a tad optimistic in their plea for a liquidity event (sell) from shareholders; NZO needs almost 70% of all shareholders with 100,000 shares or less to sell to the company to reach 64 million shares.

Shareholders with larger volumes will be very closely advised on NZO’s current financial state. Control of the company (53%) rests with 23 sharholders and it is extremely unlikely that these investors sold any shares in the ‘tender’.

The Net Tangible Assets for NZO are reported as being 56 cents per share, rising a little as a result of the buyback at a lower price, so trying to generate a ‘liquidity event’ at a discount and thus not paying for that liquidity means the directors should be unsurprised that the buyback has been unsuccessful in proportion to the strategy launched a year ago.

NZO will need to make a stronger bid if they wish to make a serious dent in the balance of their buyback programme.

This liquidity seeking story has set off another ramble that has been bouncing around in the vacuum of my head; the increase of trading by computer algorithm will reduce real market liquidity.

To avoid rambling I’ll simple state that liquidity in markets is getting worse because risk takers do not feel they are being sufficiently well rewarded by continuously buying and selling securities in the market place.

In the biggest markets computer algorithms are using speed to front run humans and thus try to extract guaranteed profits from other market participants. If the computers extract a profit but adopt no risk then value has been removed from all other market participants.

In smaller markets like NZ the large aggressive international traders are pushing market pricing around in a scale that is disturbing to smaller local investors and traders.

Using just one example, the move for Auckland Airport’s share price up to a high of $7.73 before collapsing down $1.00 to $6.74 in a single week, following a year where profits increased, is an example of a market with little depth (poor liquidity) when international traders (or computer based trading instructions) said ‘sell’.

The lack of depth in our market made it impossible for NZ Oil & Gas to achieve its objective so it tried to shake the tree and plead for more supply.

Investors should take a great deal of care to ensure they own the securities they want in the proportions they want and thus avoid any undesirable pressure to buy or sell at a distressed time when liquidity will undoubtedly be poor.

Non Bank Deposit Takers – The new Financial Markets Conduct Act in concert with the Non Bank Depositors Act has formed the metaphorical two edges of a dominant sword which has delivered significant change to the Non Bank Deposit Taker (NBDT) market.

One change I like, which is the re-definition of Redeemable Preference Shares as debt where once (for many years) they were defined under the Securities Act as equity, used to prop up credit ratings and equity capital measurement whilst clearly behaving like debt (fixed rate, non-voting investments).

I have become unenthusiastic about debt securities masquerading as equity simply to satisfy, or defeat, any inappropriate regulations from the central bank or definitions from credit rating agencies.

I don’t mind the use of ‘Preferred Equity’, such as Perpetual Preference Shares, which do not have the same voting rights as ordinary shares but offer attractive fixed rate returns.  I would prefer that such securities be issued by the entity that issued the ordinary shares upon which dividends cannot be paid until obligations on all prior ranking securities are paid in full.

However, the letter that got me thinking about this matter disclosed that one of New Zealand’s best performing finance companies, Instant Finance, will no longer seek investment from the public.

Instant Finance began in business 45 years ago and I wouldn’t mind guessing that they have been profitable every year since 1971 and they were well supported by their owners through the Global Financial Crisis to continue in business to this day.

A combination of this business quality attracting sharply priced lending facilities from the major banks plus the much larger expense of being a Non Bank Deposit Taker (offering a prospectus to the public) has resulted in Instant Finance no longer seeking funding from the public.

The last security to be repaid will be Instant Finance’s Redeemable Preference Shares this December.

Instant Finance explained that they were disappointed to be repaying investors who were eager to stay with the company but they explained that the gap was too wide and it no longer made commercial sense to offer investments directly to the public.

It stands to reason then that the interest rates offered by the best NBDT in NZ will be lower than they should be (risk adjusted) to offset the higher regulatory expenses incurred by them. To some extent I think we see this in the interest rates offered by UDC and Fisher & Paykel Finance.

As Wholesale investors the banks can lend money to these finance companies without the need for a prospectus, should they wish to do so, and this is what Westpac is doing for Instant Finance.

The new owners of F&P Finance will no doubt see that wholesale funding is cheaper than retail funding, unless they drop their retail deposit rates to sit alongside those set by bank deposits, which they have done, near enough.

UDC’s interest rates are also set essentially at the same rate as the major banks.

It is entirely possible that F&P Finance and UDC may at some point go the way of Instant Finance and stop accepting retail deposits.

Wouldn’t it be ironic if the current regulatory framework removed the best Non Bank Deposit Takers from the market and left the rest?

Disclosure: I was an investor in Instant Finance Redeemable Preference Shares and I’ll be sad to see  this extra risk for extra return product removed from my portfolio.

Investment News

Japan – The Bank of Japan (BOJ) may be reaching frustration point at its inability to stir the consumers and business people into life. They have run out of new ideas and are simply extrapolating and trying to re-sharpen the current tools.

Eventually they are going to run out of blade to sharpen.

Crtitics of the central bank interference model will be unsurprised.

In the case of Japan, printing money won’t help an economy suffering under the weight of a rapidly ageing and declining population.

For the record, the BOJ confirmed that it will maintain negative interest rates, it will buy an even broader range of company shares and Exchange Traded Funds (which buy shares!) and it will now buy or sell any JGB (Japanese Government Bond) to manipulate the yield curve (interest rate) outcome that it desires. The BOJ already owns 33% of all Japanese government bonds.

Yes, you read that correctly; ‘we will manipulate the pricing of the entire government bond yield curve’.

Japan thus has no free market pricing of its government bond interest rates. If you trade in JGB’s it is a simple coin flip against the intentions or preferences of the central bank. (remember the adage’never bet against the central bank’). There is no market place for these bonds, just the pricing desires of the BOJ.

Until today the JGB market was manipulated by the BOJ but from today it is rigged.

The JGB sounds a little like our governor Graeme Wheeler last year; ‘it’s all about the currency and needing it lower’.

Nonsense. No economy is a one trick pony of global currency arbitrage.

NZ businesses have proved that by refocussing products and improving efficiency it can find ways to be profitable regardless of our strong currency. NZ exporters are looking impressive yet the NZ Trade Weighted Index (currency basket weighted relative to trade) at 0.7700 sits not far from its all time high (0.8300 ish) and is currently higher than 17 of the past 20 years.

I read the BOJ update shortly after driving home listening to the radio story about Westpac bank closing 19 branches. Now I am wondering if there is a connection.

Does this extremely low interest rate environment increase the chance of lower interest rate profit margins between bank borrowing and lending? (aka net interest margin) Flat yield curves and negative interest rates have begun to make it very difficult for banks to make margins in the traditional sense.

We don’t have negative interest rates in NZ but we do have falling nominal interest rates, we do have an expectation of low interest rates for a long period of time delivering flat yield curves (same rate for a long period) so banks can’t gain additional return from time. Conversely we have some upward pressure on bank deposit rates.

It points to lower profit margins for banks.

Banks will react to this by reducing costs and introducing ‘fair and reasonable’ fees (see Commerce Commission versus Sportzone & Motor Trade Finance) to lift its revenue that is not dependent on nominal interest rate settings.

Some of the branches closed by Westpac have another option reasonably close by (Waikanae relative to Paraparaumu, especially with the new Expressway opening at Christmas). Other towns should now be thinking of other business opportunities to assist the public with their banking when they are unable or unwilling to use their own computers and smart phones. I am comfortable with their choice but these people now need to seek out new service options.

The Financial Services Union is unsurprisingly waving the sabre at Westpac bank but the union might as well hop on a plane to Japan and protest outside the Bank of Japan, being the first stop on the way to Greece, Italy and Spain etc (I think I’ll join the union – Ed).

When I started writing this paragraph about the BOJ actions, other than market rigging, I planned to say ‘nothing’s changed’, but maybe it has, Westpac has closed 19 bank branches.

Meanwhile in NZ – The Reserve Bank of NZ left the Official Cash Rate unchanged at 2.00% and variously discussed economic and financial activity that most observers are aware of.

Mr Wheeler also made the same mistake my children make when he stated: ‘A decline in the exchange rate is needed’. Wanted is the verb he should have used.

A proportion of our market would like to see a 0.25% OCR cut in November, as I suspect Mr Wheeler would prefer, with the balance arguing December makes the most sense, save for one outlier who suggests the economy is too strong for OCR cuts.

And then in the US – US Federal Reserve chairperson, Janet Yellen, continues to ‘Tell’ but not ‘Show’. She must have attended a different type of primary school than I did.

Under the ‘show me’ category, the Fed did not change the US Fed Funds (overnight) rate.

Under the ‘tell me’ category, Yellen would like me to tremble in my boots and be ready for a December 2016 rate hike.

Rate hikes at +0.25% once per year are not disturbing. If that is the plan, so be it. If the Fed does not hike in December then all of the governors should be put out to pasture.

US Employment – Last week I observed a US employment story that presented some optimistic data and I wanted to believe it was credible evidence of economic and widespread improvement in the US.

Sadly, my slight cynicism about how one presents statistics has been confirmed by our entire list of clients in the US who pounced on the item and directed me to the truth and political nonsense in the lead up to the Presidential election!

Uber critic and one time Director of the Office of Management and Budget under President Ronald Reagan, David Stockman, criticised the Census Office data including this succinct quote:

‘if the median fulltime worker weighted for the male/female mix gained only 2.01% in after-inflation wages in 2015 there is flat-out no way that the median household could have gained 5.2%’.

Lies, damned lies and statistics.

UK Inflation – The Bank of England proposes that the UK government remove the 1 Pence from circulation (legal tender) in much the same way as NZ and Australia have done.

It is entirely logical to remove currency that becomes near useless after decades of accumulated inflation.

Ironically I read an argument against doing the same in the US because ‘removing the 1 cent piece would create inflation’ (presumably through retailers increasing prices into the 5 cent blocks).

Aren’t the governments of the world fighting to fuel a little inflation?

Our economy didn’t stop, nor falter, when we removed our 1 cent piece (plenty of charities benefited though as they became a drop off option for the coin).

I’ll be interested to read what the UK government decides.

Theresa May is setting a good early standard in her role as Prime Minister so I’ll predict the 1 Pence is removed from circulation.

Consumerism – Pleas to New Zealanders to save money seem to have been set aside judging by the profit reports from several retailers.

Briscoe’s and Kathmandu reported higher profits driven by wider profit margins (price intolerance by consumers).

This is good for investors in such businesses, but not so good from a wider economic perspective.

Ever The Optimist – I don’t like to make comments that imply NZ is all about dairy, because it is not, we are seeing so many other export success stories, but it is a pleasure when one sees the fallen child stand up again.

So we should enjoy Rabobank’s recent survey result disclosing a nine year high for dairy farmer confidence (67% of 450 farmers surveyed are optimistic) and Fonterra’s latest increase to forecast 2017 pay-out  to $5.25 per kilogram of milk solids (Hat Tip to ASB Bank who have been steadfast in forecasting a rise toward $6 in the face of gloom elsewhere).

The Fonterra dividend, paid on top of the milk pay-out, should bring total payments up to $5.75 - $5.85 which should ensure profitability for all, except those who should probably get advice or depart the industry.

Investment Opportunities

Trustpower (TPW) – The TPW documents have been released and all investors can now take action.

Trustpower’s recently approved demerger means that they are making changes to all of their bonds.

****If you own any Trustpower bond you will be required to take action (very wise to do so)****

Here is a cheat sheet (the pdf offer documents are available on the Current Investments page of our website and have been mailed to you by TPW):

TPW090 maturing 15 Dec 2016 – can be rolled in to the new TPW150 maturing 15 Dec 2022 (or repaid on 13 October if you do nothing and want your money bank.

New investors can also invest in the new TPW150 bond offer.

TPW100 maturing 15 Dec 2017 paying 7.10% - can be exchanged into the new TPW130 with the same interest rate and maturity date. You must complete an Exchange form.

TPW110 maturing 15 Sep 2019 paying 6.75% - can be exchanged into the new TPW160 with the same interest rate and maturity date. You must complete an Exchange form.

TPW120 maturing 15 Dec 2021 paying 5.63% - can be exchanged into the new TPW140 with the same interest rate and maturity date. You must complete an Exchange form.

If TPW does not hear from its bond holders it will repay the bonds (all series) on 13 October.

Clients do not pay brokerage costs, however, TPW has generously offered to pay a range of brokerages on all of the above activity so involving us in your actions will be appreciated (please handwrite ‘Chris Lee & Partners’ in the Broker Field).

New Investors – contact us if you wish to invest in the new six year TPW150 bond which set its interest rate at 4.01% and is open now.

Old TPW investors – wait for your personalised offer document, complete the Exchange Form at the rear of the document and return to us, urgently (short time line – closed on 12 October).

If you are currently, or wish to be, a bond investor with TPW please act now.

King Salmon Ltd – King Salmon’s share offer has been formalised and the share price has been set at $1.12.

We have received a small allocation. It has been offered to those on our list.

Interested investors are welcome to join our waiting list, in case some additional allocation can be sourced.

The offer closes on 14 October.

Z Energy – will also soon offer a new bond to replace the bond maturing on 15 October 2016 (ZEL010).

There are no details at this stage but you can be sure it will be a longer-term bond (5 years or longer) and that the yield offered should reach, or slightly exceed 4.00%.

We have started a contact list for this offer which investors are welcome to join.

Quantum – The Wellington Company plans to offer another property for sale via a syndicated structure.

Details are yet to be confirmed but its imminence has resulted in us opening a contact list for potential investors to join.

Travel

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington - by appointment please.

Kevin will be in Christchurch on Friday 30 September but is now fully booked.

Investors wishing to make an appointment are welcome to contact us.

Michael Warrington


Market News 19 September 2016

I think our current economic disorder is about to find order and the world’s economic messages will become much clearer.

The London School of Economics (LSE) has appointed a woman to the top job (Dame Minouche Shafik has resigned from her role as Deputy Governor of the Bank of England to accept the new role).

I may not know much, but one thing I do know is that our household is in much better shape with a woman in charge and there is seldom scope for misunderstanding the messages.

One of the recent messages that I over-heard (to our 22 year old son) went something like: ‘Well those are my rules and if you don’t like them feel free to emigrate’.

I was about to advise our son that changes in Europe would limit his options but North Africa has space when I received my own instructions to deliver our other children to evening activities, smartly.

All very clear and orderly.

Investment Opinion

Scared Yet II – Thursday 8 September saw the Dow Jones Industrial index (DJIA) at 18,477 after drifting lower throughout August. By close of business on Friday 9 September it had fallen to 18,088.

The market tried to regain its footing on Monday 12 September but by Friday last the DJIA was 18,123 so it has closed the week as uncertain as it started.

To sound a little balanced I should record that the DJIA started 2016 at about 17,600 so markets remain higher still for the year (regardless of your preference – Ed).

Alongside this new decline in share market pricing, which I view as a healthy development, long term US interest rates rose from 1.56% to 1.75% delivering a simultaneous decline in bond pricing.

With central banks buying all the bonds demand has pressed interest rates lower (reducing the real yields available between inflation and nominal interest rates) and the low interest rates have become quite attractive for borrowers, but what happens to those interest rates if politicians give up on living within our means and increase the amount of money being borrowed?

What happened to the principle of repaying ones debts?

Globally governments need to achieve fiscal surpluses, as we frequently do in NZ, to be able to repay some accumulated debt and thus relieve the many central banks from their position as financier of last resort (buying all bonds and sometimes shares as in Japan).

As far as I can tell none of the governments I am thinking of are within a bull’s roar of a fiscal surplus (US, Japan, Europe, Britain) so what happens next if those governments’ double down (like Colonel Sanders? – Ed) and increase their spending?

What if the EU agrees to a ‘borrow and spend’ strategy to satisfy and pacify those who would otherwise follow the UK out of the European Union?

The EU leadership surely must want to push back at the various fringe political movements that are currently conspiring to dethrone their ideals. Putting up the borders and spending more money seems a likely strategy response.

Keep an eye out for centrally guaranteed bonds one day being issued by the EU, a strategy that the strongest nations were steadfastly against in the past (pre migration tension and BREXIT). If the EU crosses this Rubicon you’ll know that the EU is indeed doubling down and quadrupling current spending (up from the current half throttle of austerity).

Was BREXIT the straw that broke the North African camel’s back as it migrated to Europe and threw the cat amongst the pigeons (in Trafalgar Square)?

Meanwhile on the other side of the Atlantic Ocean both Trump and Clinton are populist Presidential candidates, what if they revert to borrowing more and increasing US spending?

If central bank policies are failing to deliver more economic activity (business risk taking) then increased fiscal spending is the only other option to help push an economy. Improved employment and a little inflation from increased government spending will not be criticised by any politician.

Fundamentally these ‘borrow more to spend more’ strategies must also mean that tax rates increase and ‘Irish Apple’ tax sandwiches must be taken off the regulatory menu, otherwise central banks will own most of their economies bonds and when debt defaults finally occur it will be tax payers footing that bill (loss).

Long term interest rate movements (upward) would uncover this political development for us long before the politicians acknowledge their new strategies.

Central banks can keep the overnight cash rates low but they cannot control longer term rates unless they buy all bonds and then become the 100% owner of the bond market, which would confirm the reality of the problem. No bond market would then exist!

Locally, investors have understandably found it difficult to get excited about buying long term bonds that offer returns that are much the same as returns available on short term deposits. Once investors no longer fear falling interest rates their reasons to buy long term bonds begin to dry up.

Self-managed fixed interest investors in NZ have little to worry about because the average duration (mix of maturity dates) in their portfolios is very short and thus not heavily exposed to the impact of rising interest rates. 

The shorter the average term of a portfolio the faster it can be reinvested and thus benefit from rising interest rates, when such a move occurs.

Most investors have been nibbling away at the recently issued bonds maturing between 2022-2024 but these investments are only a small fraction of portfolios and frankly, all that have been purchased at yields of 4.00% p.a. or higher remain logical parts of a diverse fixed interest portfolio, yielding +2.50% real returns over our current inflation rate and 2.00% over long term forecast inflation (10 year expectations).

Those who obtain their fixed interest allocation via managed funds though would not enjoy any ongoing rise in long term interest rates. Managed funds revalue the portfolios daily and the reported performance is robust (high) in times of declining market yields (due to capitalising future cash flows in today’s valuation), which investors have enjoyed for many years, but the opposite is true when interest rates rise.

Managed funds typically match the indices they track and in turn those indices reflect market averages which have longer durations (maturities) than are held by people managing their own investments.

Rising long term interest rates, when this happens, will result in greater lost value for managed funds than self-managed portfolios as a result of the duration differences (assumes no defaults).

Long term interest rates have not yet entered a rising trend, they remain volatile within a declining trend, but there is a growing selection of signals that suggest we should think twice before acting once with respect to long term fixed interest investments.

When I first joined Chris in 2008 there were compelling signals that encouraged us to urge investors to buy ‘Strong, Long and Liquid’ fixed interest investments. For the first time in eight years I am beginning to ponder the merit of calling for ‘Strong, not-so-long, and mostly Liquid’.

Investment News

Spectacular Fail – The Bank of England has added bonds issued by Apple Inc. to the list that qualify for its new economic stimulus bond-buying scheme.

Which Muppet approved this?

In fact I am being unfair to the intelligence of the Muppets’.

Apple is one of many businesses using international law to pay almost no corporate tax so why on earth would any government agree to provide financing to such a business, especially under emergency provisions and thus extremely low interest rates?!

The opposite should be happening. Any business that does not pay a tax rate within an acceptable range of the defined corporate tax rate should be disqualified from participation in all central bank activity (buying or secured lending).

BoE governor Carney can expect a swift clip around the ear from Miss Piggy.

Europe’s Bad Loans - The European Central Bank published new proposals on Monday aimed at forcing Eurozone banks to deal with a mountain of bad debt in its latest effort to tackle a EUR900 billion problem.

The only problem is that use of the term ‘forcing’ was followed up by ‘non-binding’ but ‘by golly we’ll expect you to explain if you do not comply’.

The ECB spoke of the usual method for handling bad debts; ‘establish separate units to better manage bad loans, and set clear one-year and three-year targets for winding up loans’.

Although there is a risk that given Europe’s many languages some of the Southern States might translate this instruction as ‘put the bad loans in a file drawer in a different building and pretend they do not exist, for now’.

Greece is reported as having 45% of its loans as bad debts. Cyprus is 47%. They are at risk of needing a file drawer, or second building, larger than the current building that they plan to operate the ‘good bank’ from.

The ECB might get this plan through, allowing banks to not hold equity against these bad loans if they agreed to the following:

Write off an amount now that does not send Tier 1 bank equity below regulatory minimums;

Agree to a mix of reduced dividends and further tolerable write-offs over the next three years;

The hope that the mix of write offs and loan recoveries goes very close to 100 cents in the dollar. (Impossible for some like Greece, Cyprus, Italy).

Mind you, if one does not set challenging goals one will surely achieve less.

NZSA – Three cheers for the NZ Shareholders Association.

The NZSA was successful, for the first time, in influencing the unseating of a person standing for a board of directors; Darren Robinson of Rakon. The NZSA was justifiably very critical of Rakon’s performance.

With this victory the NZSA has continued a great distance along its growth path, acting in the interest of small shareholders, and should be applauded for the success.

The best way you can appluad them is to go to their website and subscribe as a member. http://www.nzshareholders.co.nz/

Membership is inexpensive and it is clearly becoming more and more effective for its members, New Zealand’s smaller shareholders.

It is hard to generate a majority of voters in the negative, opposing board motions (no pun intended), so to achieve such an outcome is always a credit to those driving the voting behaviour.

Voting Robinson off the Rakon board of directors is not up there with BREXIT in terms of influence but it is a credit to the NZSA that they co-ordinated this outcome and it is statement about the scale of ‘failure to perform’ and ‘failure to represent shareholders’ by Robinson.

This outcome would not have happened without the NZSA influence.

We encourage investors to always exercise their voting rights, at each opportunity, and if reluctant to allocate the time to vote then please allocate them to a proxy, such as the NZSA whose interests are aligned with most small shareholders.

US Improvement – The share market may not be feeling the optimism right now but the 2015 report from the US Census Bureau confirms that financial conditions are improving for the wider population.

They reported:

‘median household income surged 5.2 percent last year to $56,500, the highest since 2007, in large part due to solid employment gains’ (largest jump since 1968 when data capture started);

‘the number of people living in poverty fell 3.5 million to 43.1 million (13.5% of population, down from 14.8%)’; and

‘The number of residents without health insurance dropped to 29 million last year from 33 million in 2014. Nearly 91 percent of people in the United States had health coverage, up from 89.6 percent the previous year’.

We have all learned that statistics can be sliced, diced and painted in many colours but this data is credible evidence of an improving trend being felt reasonably widely across the population.

If the data had been presented by a female economist it would probably have been even more compelling.

Hooray for the banks? - Ratings agency Fitch has affirmed the credit ratings of New Zealand's four major banks and noted they are making more money on their lending than banks in most other countries around the world. (emphasis mine)

I nearly placed this news item under ‘ETO’ (below) but concluded some of you would not view as optimistic news.

It is better banking news than Italians’ are reading at present.

Ever The Optimist – Tourism, both inbound and local, continues to set ever higher records and is undoubtedly part of the fuel for the higher GDP numbers being reported.

 

In the middle of our winter (July) NZ received 237,000 overseas visitors and the annual number at that point was 3,340,000.

Apparently these 237,000 overseas guests spent 561,000 ‘guest nights’ in Auckland which probably confirms most fly in through this ‘hub’ (or the traffic was so thick they couldn’t get out on the first day – Ed).

Regardless of the way analysts try to slice and dice this data they could only draw very good economic outcomes.

ETO II – NZ’s second quarter GDP (Q2 2016) was +0.90% bringing the annual figure to a very impressive +3.60%.

Some analysts had begun to talk about a quarterly number as high as +1.20% but frankly anything North of 3.00% annual growth is wonderful to see, especially in a world where most countries are below 2.00%.

Investment Opportunities

Trustpower – First up, best dressed. Trustpower is next to the deal table.

Trustpower’s recently approved demerger means they are making changes to all of their bonds.

Yes, all of them so slow down for a moment and read this closely.

****If you own any Trustpower bond you will be required to take action (very wise to do so)****

Here is a cheat sheet (the pdf offer documents will soon be available on the Current Investments page of our website and have been mailed to you by TPW):

TPW090 maturing 15 Dec 2016 – can be rolled in to the new TPW150 maturing 15 Dec 2022 (or repaid on 13 October if you do nothing and want your money bank. New investors can also invest in the new TPW150 bond offer (we have a contact list that you are welcome to join).

TPW100 maturing 15 Dec 2017 paying 7.10% - can be exchanged into the new TPW130 with the same interest rate and maturity date. You must complete an exchange form.

TPW110 maturing 15 Sep 2019 paying 6.75% - can be exchanged into the new TPW160 with the same interest rate and maturity date. You must complete an exchange form.

TPW120 maturing 15 Dec 2021 paying 5.63% - can be exchanged into the new TPW140 with the same interest rate and maturity date. You must complete an exchange form.

If TPW does not hear from its bond holders it will repay the bonds (all series) on 13 October.

Clients do not pay brokerage costs, however, TPW has generously offered to pay a range of brokerages on all of the above activity so involving us in your actions will be appreciated (please handwrite ‘Chris Lee & Partners’ in the Broker Field).

New Investors – contact us if you wish to invest in the new six year TPW150 bond (yield a little above 4%);

Old TPW investors – wait for your personalised offer document, complete the Exchange Form at the rear of the document and return to us, urgently (short time line – closed on 12 October).

Let’s go. Don’t miss out.

Synlait (SML) – has launched a Rights Issue (2 for 9 at $3.00) to raise approximately $98 million in support of $300 million of new development plans.

Offer documents will be issued based on shares owned on the night of 21 September.

Those wishing to take up their Rights will need to return completed forms with payment to the registry prior to 11 October.

Brokerage will be paid by SML (clients do not pay brokerage) so please handwrite ‘Chris Lee & Partners Ltd’ into the Broker Field before returning to the registry, if taking up your rights.

Clients who seek a financial advice service from us can find advice on this offer under the Private Client page of our website (by David Colman).

Z Energy – will also soon offer a new bond to replace the bond maturing on 15 October 2016 (ZEL010).

There are no details at this stage but you can be sure it will be a longer-term bond (5 years or longer) and that the yield offered should reach, or slightly exceed 4.00%.

We have started a contact list for this offer which investors are welcome to join.

King Salmon Ltd – Aquaculture farmer plans to list on the NZX and ASX when it offers shares to the market.

We have a contact list that investors are welcome to join.

Here is the company’s website if you’d like to get a head start on understanding this business. http://www.kingsalmon.co.nz/

Quantum – The Wellington Company plans to offer another property for sale via a syndicated structure.

Details are yet to be confirmed but its imminence has resulted in us opening a contact list for potential investors to join.

Travel

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington - by appointment please.

Chris will be in Auckland on 10 and 11 October (Albany, Mt Wellington).

Kevin will be available in Christchurch on Friday 30 September.

Investors wishing to make an appointment are welcome to contact us.

Michael Warrington


Market News 15 September 2016

He’s having a laugh.

The retired (2014) President of the European Commission, Manuel Barroso, has accepted a role as Chairman of Goldman Sachs in London with a specialist role of advising on BREXIT.

So, let me see if I get this correct; a gatekeeper and supporter of the European Union turns poacher and BREXIT advocate.

Nice leadership.

Investment Opinion

 

Kevin Gloag on Technology - It has been interesting, and no doubt a little frustrating for some investors, following the progress of the host of tech companies which have listed on the NZX in recent years.

Patience and forgiveness seem to be key attributes for investing in the technology sector and also the ability and willingness to fund the ongoing working capital requirements of the company until it can support itself with its own sales revenue.

Rights issues are common as the tech companies look to fund their growth aspirations through equity placements rather than debt, in reality the latter either too hard to source or too costly, especially for early stage companies with weak cash flow.

I think the fact that the majority of our tech stocks are either trading below their issue price or below their prices of a couple of years ago reflect a number of negative global factors but doesn’t mean that at least some of these companies won’t be very successful and eventually reward their shareholders.

While technology is not my strong point I do know that it is constantly changing and very investment intensive and that investors should be prepared for a slow ride before they venture into this sector with their investment dollars.

And although I think NZ has some very clever Information Technology people, products and companies not all will make it on the big stage so capital loss is a real possibility when investing in this sector.

One thing most of our tech companies do have in common is that they are trying to sell their products into larger global markets to achieve scale.

For many products we simply don’t have enough users in NZ so overseas markets become the focus particularly the US, Australia and Asia.

All eyes are currently on Orion Health, EROADS and Xero, as they attempt to penetrate markets in the US, the world’s largest economy.

Another NZ company trying to sell its wares in the US is Dunedin based cancer diagnostic company Pacific Edge (bio technology). It is one that I have followed for some years given it is ‘local’ to me.

Pacific Edge has developed a range of bladder cancer diagnostic products which have received clinical validation from leading international medical research agencies and endorsed by some of the world’s leading urologists.

Cxbladder has received global recognition as a quick, cost effective, non-invasive and highly accurate bladder cancer detection test and is particularly appealing to US healthcare professionals, patients and insurers.

The non-invasive urine test and follow-ups are several thousand dollars cheaper compared with traditional testing methods and ongoing monitoring.

More than one million Americans will undergo medical investigation this year for potential bladder cancer at an estimated cost of $1 billion. Bladder cancer is one of the most expensive cancers to treat and in the US the total medical cost approaches US$220,000 per patient.

Over the past 3 years Pacific Edge has signed contracts with a number of major US healthcare network providers opening the door for more than 70 million American to access its Cxbladder testing products.

Earlier this year, Pacific Edge signed-up a Federal Supply Schedule agreement with the Veterans Administration in the US which alone will allow 20 million people access to its Cxbladder tests.

The US is the world’s largest healthcare market with healthcare spending representing a staggering 19% of its GDP, and expected to reach 25% of GDP within 10 years.

To support its growth aspirations in the US Pacific Edge built a commercial testing laboratory in Hershey, Pennsylvania and now has a sales force of 18 executives targeting the 19 regions they have identified as their largest potential market.

In 2013 Pacific Edge announced a target of $100 million in gross annualised revenues within 5 years of commercial trading in the US.

Annual turnover of $100 million seemed quite ambitious at the time but the company clearly had market leading technology and was enjoying real momentum, regularly signing up new customers in the US and riding a wave of positive media reports.

Investors liked the story and, combined with a bullish run on tech stocks at that time, they quickly pushed Pacific Edge’s share price from $0.40c to around $1.80, which based on projected revenue figures seemed like a fair and reasonable price.

Unfortunately for Pacific Edge shareholders that good news story regarding the share price has been proved overly optimistic, for now anyway.

For the year ended 31 March 2016 Pacific Edge recorded operating revenue of about $5 million, up from $2 million the previous year, so 3 years into their journey they are still a long way short of their $100 million 5 year target so it is hardly surprising that the company’s share price has been knocked back down to around $0.50c.

When challenged at the company’s recent annual shareholder meeting Pacific Edge CEO David Darling confirmed that the “$100 million turnover target during full year 2018 is still the company’s goal” and according to him “still well within reach.”

At face value it seems like a long shot to me. Zero to $5 million in first three years and then $5 million to $100 million in the next two will require everything to go their way, plus some, in my opinion.

The company has no debt and $24 million in the bank so the road should be clear until 2018 in terms of working capital requirements.

If Pacific Edge doesn’t eventually make the grade you might question whether its board and senior management had the right commercial skills and marketing nouse or maybe urologists and clinicians in the US simply won’t abandon traditional testing methods in favour of the new non-invasive technology.

I know someone who tested for bladder cancer many years ago and the procedure, conducted in theatre at a private hospital, involved a specialist, an anaesthetist and two theatre staff. He described it as a most uncomfortable experience and was expensive.

Presumably Pacific Edge’s non-invasive urine-sample test removes most of this group from the payroll so I hope this is not a reason for the slow uptake in the US, a country that desperately needs to reduce its healthcare spend, let alone provide a better experience for those being tested.

As always time will tell but the clock is ticking for Pacific Edge.

Disclosure: I own a small number of Pacific Edge shares. Writing this item was for the purpose of providing an updated opinion, not to encourage readers to buy or sell securities in Pacific Edge.

Scared Yet? – What is going to scare these markets next?

For as far as the eye can see markets expect very low interest rates; a low cost of capital, low returns or low opportunity costs, whichever perspective applies to you.

Large upward interest rate movements do not seem likely to be the next threat to our state of comfort in capital markets. Even if the US Federal Reserve does manage to enforce an interest rate increase cycle the rate of change looks likely to be tiny and slow.

Access to cash (be it paper notes, digital bank account balances or Bitcoin!) does not seem to me to be under threat either (unless you seek Euro 500 notes – Ed). Central banks of the world have made it very clear that they will lend whatever money a bank requires against collateral, with some of that collateral being of questionable quality in some countries.

Central banks are also, or have been, buying assets outright (bonds and shares) to inject additional cash balances to the private sector (US, Japan, Europe, UK – roughly half the worlds GDP by measure!).

So cash, or liquidity, for payments shouldn’t be the problem to scare us.

So what will?

Capital Markets are an area of risk and reward tension overlaid by human behaviours; the appearance of near total comfort is cause for concern in itself.

I haven’t written this paragraph to make you worry. If you are investing based on a good investment policy and logical asset selection then changes in market pricing should only have a modest or evolutionary impact on you, not a shocking change.

Perhaps my question about ‘where is the unidentified scary influence’ is irrational, just as I explain to our daughter, who has three torches strategically placed around her room, that the objects and people around her do not change after the lights go out.

She still checks her wardrobe most nights.

I still ask myself, what is going to scare these markets next?

Post Script: On Friday night both the share market and interest rate markets lost a meaningful amount of value and whilst no headline could put its finger on a single cause later commentary wondered if markets had a reached a tipping point in lack of confidence in central banks ability to influence?

Investment News

Co-operative Bank – Credit rating upgrades are unusual in banking at present so Co-Op Bank must be pleased with theirs.

Fitch Ratings has lifted Co-Op Bank’s credit rating from BBB- to BBB.

This may well have been influenced by the recent injection of $15 million Tier II capital, but regardless of that fact depositors in the bank will be pleased with the rising credit strength of the bank.

NZ Shareholders Assoc – The NZSA continues to do very good work for its members and, based on today’s news, for all shareholders.

The NZSA has successfully lobbied the Revenue Minister, Michael Woodhouse, to change tax law so that in future shareholders are not taxed when capital is returned to them; tax is currently levied when a business demerges and returns capital to investors.

This is a clear display of adding value and share investors should, in my view, think very hard about taking up membership with the NZSA to support their efforts, efforts which are more effective for you personally than those of the weakest performers who are governing and managing your money!.

The annual NZSA fees are modest.

A recurring point of concern for small shareholders is the lack of leverage when wishing to debate a matter of corporate governance, executive behaviour or regulatory reform. Voting involvement is poor by NZ investors and I suspect this lack of leverage is part of the reason.

Well, these concerns can now be allayed through membership of the NZSA, who demonstrably work in your best interest with their collective influence, and through your use of online voting which makes the process simple (when offered!).

With their current modest scale the NZSA is already displaying effectiveness, witness the impact they are having on governance matters at Rakon (they would like your proxy votes) and the impact they just displayed on regulatory matters.

The NZSA effectiveness is based in skill but its members (members of the public and corporates) provide them with leverage. The larger their membership base the greater their leverage shall become.

If you are concerned about corporate performance and behaviour, which you should be if you own shares, but felt ineffective on your own why wouldn’t you consider membership of the NZSA?

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

Disclosure - I am a member of the NZSA and shall remain one. I applaud the progress they are making and would like their influence to expand.

Acceptable Fees – The Commerce Commission has done well, via its case against Motor Trade Finance (Sportzone), to make the playing field clear with respect to acceptable fees under the Credit Contracts and Consumer Finance Act. However, what I have been reminded of is how slow (and expensive – Ed) the legal process is.

ComCom began this case in 2006. 10 years, and no doubt some enormous legal bills, later the case is closed, at Supreme Court level.

ComCom summarised for an interview by saying ‘Following Sportzone, it is now beyond doubt that fees under consumer credit contracts cannot be used to recover general business costs or to generate profits’.

There will in future be a ‘close relevance test’ to assess whether fees charged are reasonable for the loan concerned.

The guidelines also say ‘deterrent fees’ aimed at discouraging borrowers from certain conduct are likely to be unreasonable if they exceed the lender's costs.

I hope this ruling sees a reduction in the fees banks charge me for processing (automatically) foreign exchange on a credit card!

I think these FX fees are currently charged as a percentage of my transaction amount and that can’t possibly be correct based on this ComCom ruling because clicking a computer mouse or writing an algorithm to process a foreign exchange transaction on my consumption bears the same commitment from the bank regardless of amount.

I look forward to any discussions about back-dating the MTF judgment findings before lodging my claim with the bank which provides my credit card.

Dorchester – The Dorchester Property Trust, renamed Emerald Gisborne Property Trust (EGPT) near its end, has finally been wound up.

The successful, but often frustrating, moratorium post the failure of Dorchester is finally behind us.

The newly formed and successful finance industry business operates under the Turners Ltd brand and is growing in size and profitability. Those who retained these Turners shares (issued under the moratorium and restructure) have gained some value and may continue to gain value based on the growth intentions of the company.

EGPT will pay out 3.5 cents per unit as a ‘near final’ payment (done on 29 August) and may make a very small further payment if there is a surplus after dealing with residual minor costs expected from the wind up.

Dorchester investors, and thus unit holders should be congratulated for their patience (seven years) but ultimately should be satisfied with the proportion of value returned to them relative to other failed businesses.

Best intentions or profits? - Two conflicting, yet sequential, media items that I read last week:

‘The United States and China each submitted their plans to reduce carbon emissions to the United Nations, officially ratifying an agreement forged last year in Paris meant to curb climate change’.

‘Apache Corp says it has discovered the equivalent of at least two billion barrels of oil in a new west Texas field that has the promise to become one of the biggest energy finds of the past decade’.

It is just more evidence of the ongoing tension between good intentions and commercial pressures.

Ever The Optimist – Dairy pricing increased again at the recent GDT auction (+7.70%) and the recurring change to higher pricing must surely be settling a few farmer nerves, not to mention a few bankers and central bankers.

With milk pricing of $4.75 - $5.00 being discussed the majority of famers must now be either profitable or near breakeven and likely with net positive cash flow. Any further price increases, such as the $6.00 potential forecast by ASB (love the optimism), should see all credible dairy farms back in profit.

I know debt is cheap at present but I do hope the recent volatility in the price of milk has reminded the highly indebted of how uncomfortable that position can be so that they get back on with debt reduction.

I also hope, as readers may have noticed, that dairy farmers have been learning about Milk price derivatives and connecting themselves with a futures broker to make use of this market to add to their price protection (hedging) options.

The NZX investor day report discloses increased used of Dairy Derivatives on the NZX (good) but the data that caught my attention was that the tonnes traded had increased more than the contracts traded (deals done), which implies that some larger dairy players are entering the dairy derivatives market and this is a healthy development for the whole sector.

Investment Opportunities

 9 New Issues? – Good news. Whilst reading the NZX Investor Day notes Edward spotted a claim that the NZX is expecting nine new debt (bond) issues ‘in the pipeline’.

We know Z Energy is coming. We know Air NZ and Trustpower have maturing bonds (see next item) and seem likely to offer rollover opportunities. There are some bank bonds maturing that may be rolled, but the NZX notes also referred to ‘New Issuers’.

We look forward to discovering who the ‘new’ issuers are and to participating in the good selection that is coming our way.

As we noted late in 2015; the new regulations under the Financial Market Conduct Act have enabled faster, less expensive, issuance of senior bonds and it seems likely that businesses will maintain listed bonds and follow this ‘fast to market’ bond issuance method more often in future than was the case in the past.

Sometimes new regulations prove to simply add resistance to the process, often with questionable gains, but this FMCA debt issuance regulation is demonstrably adding value to the market and thus to investors.

Trustpower – Has announced an intention to issue a new senior bond soon (coming weeks) using the FMCA fast issuance opportunity, but to do so prior to the demerger of their business into two different parts.

We attend a road show presentation this Thursday.

We have started a mail list which investors are welcome to join, especially those people holding the TPW060 maturing (December) Trustpower bond. Holders of TPW060 bonds will be invited to ‘roll’ into this new offer.

Z Energy – is the next ‘cab off the rank’ (immediately behind TPW) with its proposal to offer a new bond (presumably senior again) to replace the bond maturing on 15 October 2016 (ZEL010).

There are no more details at this stage but you can be sure it will be a longer-term bond (5 years or longer) and that the yield offered should now exceed 4.00%.

We have started an email list for this offer which investors are welcome to join.

King Salmon Ltd – Aquaculture farmer plans to list on the NZX and ASX when it offers shares to the market.

Investing in NZ Primary industries has at times been difficult to achieve so it is nice to see additional breadth being listed on the market again.

Since my comments last week I have received some useful feedback from folk who have been involved in this industry (workers, consumers, fishermen!).

These people have helped me to refine a few questions to ask during any roadshow offered by King Salmon Ltd.

Here is the company’s website if you’d like to get a head start on understanding this business.

http://www.kingsalmon.co.nz/

Quantum – The Wellington Company plans to offer another property for sale via a syndicated structure.

Details are yet to be confirmed but its imminence has resulted in us opening a mail list for potential investors to join.

Travel

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington - by appointment please.

Chris will be in Christchurch on 20th (p.m.) and 21st September at The Chateau.

Kevin will be available in Christchurch on Friday 30 September.

Investors wishing to make an appointment are welcome to contact us.

Michael Warrington


Market News 5 September 2016

To the Minister of Finance,

Please transfer some of your budget away from the Civil Aviation Authority and toward a sector that is a bit short of funding, such as health.

CAA should be supportive of this change because they are concerned about public health and safety.

It is very clear that CAA has an excess of resources, humans in this case, and thus savings should be easily found.

My opinion relates to the fact that the CAA are distracted by nonsense and have found time to criticise Air New Zealand’s safety videos believing them to be ineffective.

Well, the first line of defense for Air NZ is that they captured the attention of the CAA staff member. That’s a start. It must have been the chap in the beige suit that I saw staring unwaveringly at the screen last time I flew.

Air NZ safety videos have increased awareness for passengers, not reduced it. They should be praised for the increased cost and effort put into the message delivery, not criticised for it.

The criticism I heard on the radio specifically mentioned the surfing version of the safety video. This must mean that CAA has a committee, trained by Sir Peter Jackson, to assess directorial quality of the project. It can’t be the story, right, because we all know it runs us through the safety matters onboard the aircraft.

Apparently the CAA didn’t like the surfing video. Perhaps the CAA received a call from Occupational Safety and Health folk who highlighted the risk of drowning in the sea?; a risk that doesn’t exist whilst on a plane (a reliable plane – Ed).

OK, I am stretching the bow too far here because I doubt there is much risk of an Orc killing me on a plane either, or being hit by a stray rugby ball and Rhys D’arby isn’t that scary.

I haven’t flown Emirates (yet) but I will guess that they still offer a standard safety message, yet when that airline struck difficulties recently the behaviour by passengers made it pretty clear they had ignored plain safety messages; passengers were more concerned about their possessions, how they looked and filming with cell phones than reacting as instructed to the real risks around them.

Air NZ shareholders may well be pleased if the cost of video production was cut but I doubt they admire the bureaucrat’s message on this occasion.

INVESTMENT OPINION

 

Apple – I am more than a little bit discouraged from buying Apple products after learning that they pay as close to zero tax as one would consider possible ($50 on $1 million of revenue).

The European Union has declared that Apple owes Ireland more than EUR 13 billion in underpaid taxes as a result of the now common corporate transfer of how and where revenues are reported.

The public sees straight through this behaviour but feel disempowered to force change. It is only consumer behaviour that will influence change. Globally governments are proving themselves to be lame ducks with respect to tighter tax regulations.

Most countries seek bi-lateral and multi-lateral trade agreements but they all remain silent on tolerable collective tax behaviours. Tax discounting is part of the trade-war attack arsenal.

In a response that was presumably drafted by John Cleese or Eric Idle, Ireland responded that they did not want to pursue or receive this EU declared tax payment.

Given the financial support provided to Ireland by its EU club members the EU will surely be unimpressed by such a response.

‘Nothing to see here’ says Apple, but we are happy to meet for a tax-deductible lunch in court if you wish?

I do not feel all that clever when I predict that the only increase in ‘collection’ with this story will be fees for lawyers and tax consultants.

The EU must be wondering just how much governance power they actually have when in short order they have experienced the departure of Britain as a member, businesses snub them with respect to tax collection and one of the members (Ireland) reject the EU stance on tax collection.

A recent article relayed by John Mauldin elevates the current Italian election as the most important event for the EU, post BREXIT. The article’s author forecasts that if Italians do not re-elect Matteo Renzi and agree to significant reforms the alternative is probable departure from the EU and that country’s use of the Euro.

If there is a silver lining on this cloud I am not seeing it, for now.

 

Bank Fees – The Queen’s bank, Coutts (a subsidiary of Royal Bank of Scotland) has significantly increased its fees for operating accounts with the bank.

If banks aren’t willing, widely, to charge negative interest rates on savers accounts (a daft and damaging situation in our view) then they will increase fees until the net financial outcome for savers is a financial loss for the year.

Call it what you like but the net impact is what should be measured.

I suspect Her Majesty will not be amused.

The Queen once famously asked ‘if the problems that led to the Global Financial Crisis were so big how did one not see them coming?’.

I’ll wager that Coutts Bank saw their increased fees coming, but it is unlikely they predicted that change for the Queen either.

ELTIPO – This sounds a little Spanish for gratuity and maybe this isn’t far from the truth.

Executive Long Term Incentive Payment Offer.

A client drew my attention to the ELTIPO provided by Genesis Energy (GNE) to its senior executives.

‘Isn’t this just another unnecessary delivery of excessive rewards?’

To paraphrase my response – ‘maybe, but at least in this case the benefit appears to only be an interest free loan saving about $5,000 per annum on each $100,000 investment in Genesis shares. The balance of the risk is real for the executive as an investor (dividend changes, share pricing changes) so the executive, has an incentive to work effectively thus aligning his/her interests with other investors.

The client wasn’t convinced. I wasn’t all that keen to convince him.

The top nine executives of GNE are paid between $400,000 and $1.8 million dollars, before incentives.

Isn’t that enough money to attract talented people?

I certainly think it is.

Are they saving the planet or its people in some way? Improving health, education or national productivity?

That’s not a conclusion I can reach for these people.

If those executives want to earn more from their efforts they should buy shares or options in the company of their employ with their own money and then get on with the job.

Everybody wants the low risk and high reward outcome. This unrealistic desire is understood by investors but the same imbalance is just as true of an employee who would love to be paid enough to buy a house, a bach, a boat and accumulate a large retirement fund from only 5-10 years employment (much less time in many large international businesses).

Low risk and simultaneous high rewards should never exist for employees any more than it does for investors (who employ these people – Ed).

We are often told about the risk of losing the most talented overseas and the inference is that the local businesses would have a vacuum without talent around the executive table and suffer enormously as a result.

I find this conclusion utter nonsense. I have worked with too many talented people across a minute subset of only five different employers to believe we don’t have a depth of talent to populate senior executive roles in NZ.

If highly paid executives in NZ wish to travel internationally (Australia, UK… Middle East) to earn even more money then they should do so and go with our best wishes to make NZ and their families proud as they fill their bank balances. In fact, this would be a good export strategy, assuming they directed their savings home to NZ dollars for retirement lifestyle (remember; house, bach, boat, BMW, surplus cash).

In my experience there are plenty of clever people available to run NZ companies, certainly more than the number of large companies in NZ and I’ll wager a sufficient volume of these people will be pleased to be well paid whilst residing in NZ.

I had an after-thought: Maybe an El Tipo is required to accept employment from a business with a politician, such as Dame Jenny Shipley, on the board?

Post Script: When reviewing the Genesis Energy annual report it was a little deflating to discover that a ‘Short Term Incentive Plan’ also operates.

For balance, Genesis is not alone in this corporate generosity.

Stay Healthy – because it seems to be the only way to avoid or minimise the ongoing price increases in the medical sector. (Who’d have thought, financial advisers giving out health advice – Ed).

The CEO of Mylan Pharmaceuticals is defending a four-fold rise in the price (and six-fold rise in profit margin) of its EpiPen (adrenalin).

Here’s a CEO who no doubt feels she earns her excessive remuneration package and wonders why the trees are moving threateningly toward her when she looks out her window. (she can’t see the wood – Ed).

Interestingly this CEO is the daughter of a senator. What chance do the public have with this level of entwinement between corporate and government.

Mylan Pharmaceuticals are not alone. Irreconcilable price increases in the health sector are commonplace.

Governments react by setting up taxpayer supported medical schemes for those who cannot afford private insurance. Regardless of the scheme the public pays and the medicine providers receive ever-increasing prices for their product.

The only logical response by you and me is to stay healthy and/or invest in medicine producers and service providers.

In a coincidental action that made me smile recently, my eldest son invested in shares of my father’s retirement village. Interestingly this outcome feels better than a steeper tax scale or death duties for redistributing wealth in NZ.

Stay well.

Investment News

US Data – The US had a couple of large economic releases last week that the market was particularly interested in as we approach the US Federal Reserve interest rate review in September; manufacturing and employment.

The first release (manufacturing) was much weaker than forecast coming in at an index measure of 49.4 (where a result below 50.0 implies contraction). The market had been expecting a result between 52 and 53. Last month was 52.6.

Once the parts of the result had been analysed in more detail one analyst gave it a headline of ‘Ugly’.

It was only one month’s data, but it did not support interest rate increases as preferred by the central bank.

The employment data (employment +151,000 for August) seems to be right down the middle of expectations, splitting those who think it is strong enough for the US Federal Reserve to increase their overnight interest rates and those who disagree.

Of value to this brief paragraph is to report that the market pricing does not expect an interest rate increase in September (expectations fell) but December remains a better chance.

The US Fed Funds rate (overnight) is about 0.41% at present (set to be between 0.25% - 0.50%) and the two-year US Treasury note (government borrowing) trades with a yield of 0.75%. This pricing reflects a market that expects one 0.25% rate increase at some point during the next 24 months and might also experience a second increase of 0.25%.

If the market is correct then increasing costs of debt at +0.25% per annum is not something to be concerned about when pricing other investment assets.

Japanese Employment – full employment in Japan results in negative interest rates so I wonder why the US expects it to be different for them?

Last week Japan reported its unemployment rate at a two decade low of 3%.

I am pleased to report that David Colman is currently in Japan on holiday and we are already lobbying him to write about his experience for you when he returns.

Ever The Optimist – The tourism boom led to Air New Zealand paying a $2,500 annual bonus to its entire staff and now Auckland Airport has paid a $1,500 bonus to its staff.

I know there are more people working hard to serve tourists but these two anecdotes are nice to see.

Investment Opportunities

Kiwi Property Group (KPG020) – offer of a new seven-year senior bond at 4.00% per annum is now complete.

Thank you to the many who participated in this bond offer with us.

This bond will be available to purchase on the market soon for any investors who wish to purchase the bond in future.

Spark Bond – Spark also issued $125 million of 10-year senior bonds with an interest rate of 3.94% per annum.

Again, thank you to those who participated in this offer with us.

It too will trade on the market (NZX) for future investors to access.

Z Energy – is next ‘cab off the rank’ with its proposal to offer a new bond (presumably senior again) to replace the bond maturing on 15 October 2016 (ZEL010).

There are no more details at this stage but you can be sure it will be a longer-term bond (5 years or longer) and that the yield offered should reach, or slightly exceed 4.00%.

We have started an email list for this offer which investors are welcome to join.

King Salmon Ltd – Aquaculture farmer plans to list on the NZX and ASX when it offers shares, some old and some new (some borrowed, some blue? – Ed) for sale shortly.

If memory serves me correctly this would be the second time this business has been listed on an exchange having once been listed on the NZX as Regal Salmon.

Investing in NZ Primary industries has at times been difficult to achieve so it is nice to see additional breadth being listed on the market again.

I attended a function recently where the chef was explaining the efficiency of King Salmon Ltd in its ‘feed to growth’ ratio. Perhaps the chef is a current shareholder and is looking forward to the float.

Why else would a chef explain efficient growth rates of salmon farming over quality and taste?

Here is the company’s website if you’d like to get a head start on understanding this business.

http://www.kingsalmon.co.nz/

Quantum – The Wellington Company plans to offer another property for sale via a syndicated structure.

Details are yet to be confirmed but its imminence has resulted in us opening a mail list for potential investors to join.

Travel

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington - by appointment please.

Chris will be in Christchurch on 20th (p.m.) and 21st September at The Chateau.

Kevin will be available in Christchurch on Friday 30 September.

Investors wishing to make an appointment are welcome to contact us.

Michael Warrington


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