Chris Lee & Partners Ltd

Johnny Lee writes:

As our reporting season rumbles on, equity markets both here and abroad continue to fluctuate as the world considers its next step.

The New Zealand market is down 8% for the year, largely on the back of a pull-back in the share price of Contact Energy and Meridian Energy – both of which surged in the final week of 2020 following buying pressure from overseas funds.

Listed Property Trusts, including the likes of Argosy and Precinct, have also had softer share prices.

With long-term underlying interest swap rates rising in the last month, those with long lease terms will become comparatively less attractive if interest rates were to rise. The Reserve Bank Monetary Policy Statement yesterday highlighted that the Reserve Bank is in no rush to lift interest rates in response to short-term inflationary signals. All policy settings (including the OCR) were maintained at prior levels. The Committee believes that the recent uplift in inflation was being supported by temporary factors, and will not adjust settings until inflation is reported consistently around the 2% target. This appeared to catch the market traders off-guard. Clearly, the Committee is taking a long-term stance.

While there have been some laggards on the exchange, some sectors have rebounded significantly.

The banking and retailing sectors have both started strongly, coming off a low base to lead our market. Heartland, ANZ and Westpac have seen double digit gains, while the likes of The Warehouse, Briscoes and Hallensteins have rallied after the big declines seen last March.

Nevertheless, the New Zealand market now lags its international peers. Underlying results reported by the companies on our exchange are more positive, most focusing on reducing debt, controlling costs and managing cashflow. These steps increase resilience, providing flexibility in a world where economies can be shut down by Government decree.

Those reporting this week include Heartland Bank, Spark, Summerset and A2 Milk.

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Heartland Bank saw another jump in net profit, as the company announced a 4 cents per share dividend and forecasted a record profit for the full year result in six months time.

For long standing shareholders, the announcement was reminiscent of the pre-COVID era and illustrated further steps being taken to focus the company towards areas where it sees itself having a competitive advantage and greater margins.

Rural and Livestock lending both fell, while Reverse Mortgage and Motor lending continued to surge. Australian Reverse Mortgage lending continues to be a key driver of long-term growth. Pleasingly, market share is still growing in this space. Home Loan lending looks set for impressive growth in the coming 12 months, after a slow period during COVID.

The return to stronger dividends will be welcomed by shareholders. Despite its record profits, the company has been constrained following restrictions set by the Reserve Bank during the height of the pandemic. If dividends were to return to historical pay out levels (the dividend in 2019 was 10 cents per share and growing each year) then the current share price would offer a compelling yield.

Readers may recall that in the height of the pandemic panic, the CEO of the company was among those buying, when the price was less than half of what it is today. His confidence in the company has been rewarded, as has those who followed his lead.

Heartland remains one of the year’s best share price performers, alongside the two Australian banks. Its pathway forward, strategically, has not changed - using digitalisation to control costs and target new markets, while expanding its Australian offerings for older customers, as they transition from employment to retirement, and eventually to aged care.

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Spark shareholders will be satisfied with its result, with dividends stable as the core business (mobile and broadband services) remained flat.

With population growth from migration remaining low (COVID related) and higher-margin roaming mobile data use falling (also COVID related), overall revenue fell, although a decline in expenses helped offset this.

Early concerns about the slow payment from COVID-affected customers have been put to bed, with bad debts lower than expected. A modest increase in net debt is likely to unwind over the second half of the year.

Spark’s expansion into streaming of live sport remains a curious one. Broadcasting rights is a business fraught with risk – where competition for rights often leads to ballooning costs, which inevitably find their way into customers monthly invoices. Sky TV shareholders will be keenly aware of how valuable these broadcasting rights are – but the value is ultimately irrelevant if they cannot be profitably utilised. Sky TV’s warning that its sports offering would need to increase in cost again highlights these risks.

Spark also made progress towards offering a digital health platform and launched a water metering platform. Ultimately, these areas represent strategic goals and pathways to long-term growth and are not yet relevant to the company’s bottom line, which will remain anchored by the performance of its Mobile, Broadband and Cloud offerings.

Spark’s dividend yield, in excess of 7% gross, has made it a staple in income investor’s portfolios. With its share price remaining remarkably steady over the last 18 months, the half year update contained no surprises and illustrated its value to those seeking reliable dividend paying shares.

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For shareholders of Summerset, the result will depend on your perspective.

Underlying profit, which fuels dividends, fell 7% due to costs associated with the COVID pandemic. Without this $9.2 million dollar expense, underlying profit would have risen slightly.

The dividend did fall, from 7.7 cents per share to 7 cents per share. The annual dividend fell from 14.1 cents last year to 13 cents this year.

However, headline net profit, with includes non-cash items such as property revaluations, rose significantly. Summerset’s assets, including its land bank, continue to increase in value as the overall property market reaches for the stratosphere.

Assuming the vaccine rollout is successful (and the vaccine has the desired effect) then next year should see Summerset continue on its path of profit growth and dividend growth. The fear of house price depreciation has not yet been justified, and the twenty-three sites currently in the development pipeline promise significant growth for shareholders. Two of these sites are in Victoria, Australia, as Summerset joins Ryman in seeking to expand its model outside these shores.

Summerset’s share price rose after the announcement, approaching fresh highs.

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A2 Milk’s dream run on our exchange took a stumble following the release of its half year update, with the impact of COVID continuing to hurt sales from within China. The share price slumped after the announcement.

A2 Milk relies heavily on Daigou exporting – or the purchase of goods abroad by Chinese nationals who return with the goods for sale within China – to drive sales, particularly from Australia. COVID continues to impact this distribution channel.

The company forecasted this result in December last year, but the short-term outlook provided this morning, for the full year result due in August this year, was towards the bottom end of the range previously given. It also, perhaps optimistically, assumes that the Daigou channel will see ‘’significant improvement’’ over the final quarter.

For longer term investors, the strategic update is worth reading. The company sees potential for growth in the ‘’offline retail channels’’ in China, in-roads are being made within the US, an agreement is in place for distribution within Canada, and the company maintains a large cash pile on hand for investment.

The pandemic continues to cause havoc for businesses around the world, but for A2 Milk, it has highlighted a significant vulnerability on a particular part of its distribution network. The company will be hoping for continued success from the vaccine rollout, while working to improve resiliency to future disruptions.

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Chris Lee writes:

Intuitively, most of us recognize that democracy is a poor system by which to choose our governors. Moving to a better system is a problem.

No one has found a consistently better system, though Singapore might argue that benevolent dictatorships, such as it had when under Lee Kwan Yew in earlier decades, produce much more strategic leadership and greatly improved living standards.

Here, whether it is choosing Governments, councils or business governors, by accepting democracy we have had to accept bleak mediocrity and avert our eyes from levels of corruption or interference, from those who fund the campaigns to win office.

As an obvious example, we could look at how the National Party, under its president Peter Goodfellow and its telegenic leader John Key, have embraced Chinese funders and, in some cases, other self-focused funders. Naturally, anyone offering money wants, at the very least, the right to propose changes.

Anyone reading the book written by a New Zealand journalist “In the Jaws of the Dragon” would have been mortified by the accusations made, and by the evidence of political cooperation with stronger- foreign powers.

As Wellington and Dunedin have long discovered, councils are also elected after fund raising, raising doubts about the promises made, to attract election funds.

In my own home town Kapiti has previously had a mayor, a man of miserably low social and business skills, funded by private sector interests, who wanted land re-zoning to facilitate their developments. The re-zoning process became rather less formal than might have been the case previously.

Film production genius Peter Jackson openly funded a campaign to elect Wellington’s current hapless mayor, and in Dunedin the ‘’Tartan Mafia’’ has had a strong hand in ‘’guiding’’ Dunedin’s decision-making for decades.

Those who aspire to political appointments rely heavily on raising money to support their need to be noticed at a higher level, where the advertising and personal promotion budgets are substantial.

Whether or not the biggest budgets always achieve electorate success is unknown to me, but there is no doubt face and name recognition dictates the votes of people who cheerfully admit they ‘’have not got a clue’’ but want to exercise their democratic right to vote.

Of course list-created politicians have much less promotional costs, their targets being the party leaders, who influence the composition of the list, there being no need to interact with the public.

It is not hard to recall ‘’list’’ politicians who would never have been successful at the polls.

From all this, companies and investors have much to learn.

Investors cannot prevent distinctly ‘’average’’ people from being appointed by Governments or companies to position requiring a vote, explaining some of the appalling choice on many public boards, including the old Securities Commission, and any number of district health boards.

Investors have the right to be heard when there are votes on directors or on corporate matters, or when an election is required.

And so they should! They share the ownership of the company.

Last week in Taking Stock I recalled how insurance mutuals were long dominated by dopes, able to gather up votes from policy-holders, irrespective of their often invisible governance skills or suitability for the task.

This was also true of corporates where even the likes of Brierley Investments would bring in improbable people, its directors knowing those dopes would not disturb the status quo.

One company chairman of a rotten company in the 1980s told me how he paid $50,000 in cash, under the table, to lure in a prominent, but useless, national figure, because ‘’the institutions wanted a high profile, independent chairman’’.

The company, unsurprisingly, had a very short life on the NZX.

Regularly retired politicians, with zero useful knowledge, were and are appointed.

Well, all this can change and small investors can be part of that change.

Thanks to wily, eccentric Auckland accountant Bruce Sheppard, the New Zealand Shareholders Association was formed. It has now matured and has the potential to be an effective guard dog for investors.

Sheppard raised the early, necessary public attention by clowning, donning costumes and skylarking at annual meetings, while raising serious issues.

He was the only person willing to state unequivocally that the Hanover directors were misleading investors, and aggressively identified two of them, Eric Watson and Mark Hotchins, as ‘’enemies’ of the investors.

He conducted many campaigns, sometimes successfully, and from all the publicity gained the momentum that enabled the NZSA to become a large credible organization and a handbrake on public company excesses.

Sheppard has continued his campaign of doing ‘’God’s work’’ by becoming a director and shareholder of LPF, by far the country’s most effective litigation funder, specializing in holding public company directors to account. He joins an impressive board of directors in this role.

Meanwhile, the NZSA has matured into an organisation with a wide range of activities:

It attends annual meetings and uses knowledge and research to question directors and guide the shareholders.

It accepts proxies from any retail investor, voting on behalf of those who might not have the knowledge to vote, or the ability to attend these meetings.

It arranges regular meetings around the country for its members, inviting useful speakers, often the chief executives of public companies.

It arranges member-only visits to companies, where a bus-load of members will be treated to a full company presentation.

Michael Warrington has long been an NZSA member and talks highly of the value of membership. He also encourages all investors, who do not habitually vote on company matters, to award the NZSA their proxies.

The NZSA, and the litigation funder LPF, helped by the courts are the best ‘’friends’’ that investors can access, along with a Financial Markets Authority with at least some incisors, unlike the gummy Securities Commission.

Those organisations are doing what the under-powered Ministry of Business Innovation and Employment, and its struggling offshoots like the Companies Office, do not do; that is offsetting the still fragile work of auditors and directors, who assert that they work to uphold good standards.

Perhaps it is a shame that there is so little monitoring of the behaviour of politicians and local councils, the Auditor-General not having the resources to oversee the often dreadful processes and decision-making that characterize councils. Perhaps councils can rarely attract effective people with experience and useful knowledge.

The NZSA will itself need to be careful that its governance attracts people with pure motives, presumably beginning with the desire to use specialist knowledge, developed networks, and genuine experience to advance the interests of retail investors.

They, no more than companies, councils or government, will not want people grasping for their moment of fame, their two minutes on the telly, and their monthly emoluments.

The NZSA should be competent and thus able to sift out any board applicants who lack knowledge, relevant experience or lack the ethic of wanting to help others.

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TRAVEL

Edward Lee will be in Auckland (Remuera) 11 March Auckland (CBD) 12 March, Nelson 14 April (PM only) and Blenheim 15 April.

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

Johnny will be in Christchurch on 11 March.

Chris Lee

Managing Director

Chris Lee & Partners Limited

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Taking Stock 18 February, 2021

WHEN it comes to observing commercial and financial skill, I doubt many would have high expectations of finding evidence of such qualities in our political leaders.

For at least decades New Zealand has not had a leader skilled and experienced in business leadership, though the former Air New Zealand chief executive, Christopher Luxon, may one day have the opportunity to display his wares.

Nor does the public sector have a great record in analysing and advising. It seems to have some good people, but rarely do they reach the highest positions.

So it was a pleasant surprise to hear last week that our politicians and their advisers had made an excellent decision, voluntarily settling the kiwifruit industry claim, based on the acknowledged negligence of the Ministry of Primary Industry (MPI) during the Key government's wasted years.

MPI had a duty of care to oversee the licence to import pollen to enable the kiwifruit growers to offset a shortage.

The courts have accepted that MPI did not exercise care, allowing toxic pollen from Asia to destroy vines, leading to the incineration of a billion dollars, just as Key's government had allowed with South Canterbury Finance (SCF).

Eventually the kiwifruit growers appointed LPF, a litigation funder, to fight the Crown in pursuit of compensation for this acknowledged negligence.

In the High Court, the Crown lost, and faced an award that might have been for hundreds of millions.

The Crown somehow persuaded the Court of Appeal to overturn the High Court, which ruled that the Crown could behave as carelessly and stupidly as it liked, without being financially accountable.

LPF took the case to the Supreme Court, which has recently ruled that it would re-hear the case, to form a view at the highest level on Crown accountability.

At this new hearing, potentially the Crown could have been cleared of any liability, effectively confirming that government departments could behave with impunity (effectively with full immunity), or it could have found that the Crown was liable for a sum similar to what it destroyed with South Canterbury Finance.

The risk to the Crown was therefore immense.

So the best legal minds recommended to the public sector and to the government that, before any further expensive hearing, the Crown should settle, minimising legal costs and legal risk (of losing) by arguing that LPF and the kiwifruit growers could also minimise cost and risk of losing, and agree to a voluntary settlement.

To the government's great credit, it agreed to pay $40 million, effectively covering the plaintiff's costs, and putting perhaps $35 million into the compensation pot, enabling LPF to receive a modest return for its work, and the kiwifruit orchardists to each receive perhaps $60,000, on average.

Just as importantly, the orchardists had an implicit apology.

The Crown would be relieved that the court had no chance to establish a new precedent.

I will never understand why Key, English, Joyce, Ardern and Robertson failed to see that a similar concession to the SCF investors might have enabled them to display business sense, morality, and conscience. Ignominy is an awful legacy.

At least this time, some politicians have found a solution that avoids ignominy.

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THE year of 2021 may well be a test for many investors, with low-risk investors offered no returns, and medium-risk investors collecting dividends but risking capital losses.

Thanks to the modern practices of index funds, one set of investors received an early season bonus, available with very little risk.

This was courtesy of those new Exchange Traded Funds (ETFs) that signal their buying intentions at prices impervious to a value test.

Meridian Energy shares were chased up to $9.40, Contact Energy shares surpassing $10 before two ETFs had bought the volume of shares they had committed to buy at any price, no matter how improbably high.

Many canny investors sold, and now buy them back at a time when the ETFs are selling the same shares. ETF investors ought to record this uncommercial outcome.

An investor who sold Meridian at $9.00 (plus), and repurchased at $5.50, has greatly increased his or her income.

Selling 10,000 shares at $9.00 at a time when the dividend was, say, 20 cents, netted, say, $90,000.

The investor then spends the $90,000 a few weeks later, bringing in 16,000 of the same shares, which are still paying 20 cents per share. The dividend return was $2,000. It will now be $3,200.

Those who invest for dividends rarely receive signals of such opportunities, and never receive them from fund managers who apply thought to the process.

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MISERY is still being heaped on those clinging to the AMP shares they were given in 1998.

The American group considering a generous takeover has turned its back on the idea.

Looking back, AMP, of course, was a carelessly governed insurance and savings giant in the days of cooperatives, its shares not listed but effectively held on behalf of all the various policy holders, few of whom had any interest in the people managing the insurance funds.

The governors were not selected by knowledgeable investors, but by insurance policy holders, who had the power to vote, but without real information and often with little nous, rarely produced skilled directors. Many were socially pleasant but lacked acumen and energy.

Internal perks were revoltingly generous, directors enjoyed the pheasant and port luncheons, awful errors resulting in huge losses were hidden behind a slush fund described as a ''provision'', and policy holders could rarely understand the ''bonuses'' and ''returns'' that accrued to their policies.

In the 1980s and 90s I regularly clashed with the governors and executives of the likes of AMP, National Mutual, Tower, and the National Provident Fund.

I do not recall meeting a single director whose business skills were apparent, though no doubt there were such people.

In 1998 all AMP policy holders were given listed shares during the demutualisation process. Thereafter it was possible to assess their business models and investment successes and failures. Failures outweighed successes by a double figure factor.

AMP and National Mutual had hidden their failures, incinerating hundreds of millions, or billions in the case of AMP, and had proven to have mixed skills in investing, regularly being fooled, as was the case when NML bought nearly 20% of TV3, writing off this inane investment selection within a few years.

AXA from France bought NML, then AMP bought AXA, paying sums far greater than has ever been justified, further incinerating other people's money.

NML had bought Spicers, an ugly self-focused, George Kerr investment-selling creation, for far more than $200 million, only to discover Spicers' real value was barely a tenth of the figure Kerr succeeded in draining out of NML.

Last month we had AMP, shares once selling (in 1998) at $36.00, subject to a conditional takeover offer at a twentieth of that figure.

And even that figure, on inspection, has proven to be too high.

That bid has been withdrawn.

The shares today sell at $1.40.

What an appalling destruction of investor money, coming at the same time as some other fund managers display nimbleness, investment skills, and attract the talent that AMP, NML etc. could never identify, hire or retain.

To think that Ron Brierley once thought Tower Corp was a company worth more than $5 per share and tried very hard to stop its plan to demutualise by offering such a price. Brierley, we now know, had many parts to him, but a Warren Buffet lookalike was not a realistic image.

Tower has split off various companies, some of which, like Australian Wealth Management, were themselves dreadfully ''unlucky'' in their investment decisions, inappropriate people flushing away millions of other people's money with as little care as Tower had shown under its series of bumbling executives.

The Tower share price today is around 70 cents, holding on to life, tenuously.

The only demutualisation that worked splendidly was Colonial Mutual's. Its shares were distributed to policy holders at a price around $7, from memory, and are now ten times that figure.

CML policy holders received shares in CBA Bank.

Of course, CBA has become a banking behemoth, despised for its poor leadership and behaviour during the early 2000s, but now recovering from the battering it took when it was exposed for its cheating by the Australian enquiry into banking and insurance.

We must also acknowledge that lousy legacies are not the sole preserve of shallow politicians.

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Johnny Lee writes:

REPORTING season continues, with Contact Energy, EBOS Group, Fletcher Building, and NZX Limited among the early reporters.  Hallenstein Glassons has also provided an update.

Contact Energy reported an increase in profit, a minor change to its dividend policy, but most notably a large capital raising to support the Tauhara development.

Profit was up 32%, but of most interest was the intense competition for the retail base, and the divergent paths experienced by the larger players in relation to the smaller competitors.

Genesis, Contact, Mercury, Meridian and Trustpower are considered ''Tier 1'' and have broadly experienced a reduction in customer numbers. Readers will recall that Trustpower is actively considering a sale of its retail offering, an opportunity Contact has expressed some interest in. Trustpower would welcome the competition for its asset.

''Tier 2'' includes the likes of Electric Kiwi, Flick and Vocus, all of which are experiencing considerable growth in this space.  The separation of generation and retailing appears to be well underway.

Contact Energy's dividend policy has changed.  The company will now target a pay-out ratio of 80 to 100% of average cash flow from the preceding four years – with a split of 40% of the total dividend in a March payment with the balance paid in December.  Previously, this was paid in September.

This is likely to mean a smaller dividend in the short term, moving from 39 to 35 cents per share. Longer term, the company will aim to grow this figure – growth which will be fuelled by projects like the Tauhara development, near Taupo.  Contact is also exploring a battery development in the North Island, as well as soliciting a new customer to replace the Tiwai Smelter demand in 2024, with specific mention made of a hydrogen-based chemical producer. (Contact is a minor provider at Tiwai.)

The Tauhara geothermal development is to enter its construction phase, with electricity production expected by mid-2023. The build will support the local construction sector, reduce carbon emissions, and is expected to produce power at a cost of $15 per megawatt hour. Readers who have a calculator and a recent energy bill can work out the margins available.

To fund this development, Contact will raise $400 million capital from its shareholders, with $325 already raised at $7 a share from its institutional shareholders.  The balance of $75 million will be raised from retail shareholders, with discretion available if the company wishes to raise more.  Retail shareholders will pay either the same price, or a lower one if the price drops between now and 5 March.  Investors are permitted to bid for up to $50,000 worth of stock.

Investors should consider this offer carefully.  The offer is open for about two weeks – giving time for investors to arrange their affairs – and one imagines it will meet strong demand from investors.  The short-term dividend yield of 5% will be enough to entice some investment.

Perhaps the recent buyers of Contact shares at $11 a share may take the opportunity to average down their Contact Energy purchase cost.

EBOS Group also reported, with revenues, profits and dividends all rising.  Dividends have now doubled in the past seven years, with strong tailwinds heading into the next year.  The share price touched new record highs following the announcement.

Both healthcare and animal care grew, with the animal care division growing over 25%.

During the half-year period, EBOS made two strategic acquisitions in Australia – a veterinary distribution business, and another medical devices business, this one with a focus on aesthetic procedures.

The company cites demographic factors as the biggest driver of the growth in the animal care sector. Ageing populations tend to lead to greater numbers of single person households, while increasing numbers of younger couples are electing to delay or have fewer children.  Pet ownership, already a multi-billion dollar market, is rising in Australasia, and EBOS Group expects these trends to translate to greater sales and greater margins.

Hallenstein Glasson provided a small update to the market, with a 13% increase in sales and profits expected to see a similar increase when the company reports in late March.  Repeated lockdowns from across the ditch are having an impact on distribution, but the online channel is continuing to grow.  The share price rose after the announcement. Its key director and shareholder, Tim Glasson, is very obviously an astute retailer.

Fletcher Building has started to reap some benefits from its long-term plan. Dividends have returned, margins are increasing, and debt is falling. The share price did not materially change.

The result was anchored by a stable performance from the New Zealand residential construction sector, which now makes up about a third of Fletcher's revenue.  Its infrastructure arm sees potential growth coming from both roading and water.  If the recent announcements regarding rates increases from Wellington City Council and Tauranga City Council are anything to go by, Fletchers should be busy for the foreseeable future with infrastructure projects.

Fletchers continues to reduce debt, focus on higher margin activities, maximising cashflows while older legacy projects reach their conclusion.  The company's stated outlook expects these trends to continue, through the next six months.

NZX Limited saw a 20% increase to its net profit, as the company experienced growth across almost every metric it measures.  The company share price rose slightly after the announcement.

Its Smartshares product continues to grow in popularity, with new offerings, targeting under-represented sectors, proving to be well-received.  The addition of the BOT and LIV funds in 2019, targeting the robotics and healthcare sector, has contributed to this.

Personnel costs rose significantly, as well as increased resources towards its IT infrastructure.  These costs are intended to reduce risks, such as those we saw in August of last year, and accelerate growth across the business.  With sustained increases in profitability, the company can look to increase dividends, which have remained static for some years.

The NZX's short-term focus now shifts to increasing the number of new listings on our exchange.  With Third Age Health now listed, and My Food Bag's imminent arrival, one hopes this sets the tone for a busy year for the company, the next announcement likely to be of a float of a car financing company.

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MY Food Bag (MFB), the meal-kit delivery service co-founded by Nadia Lim, is expediting its listing to our exchange, with the offer opening from tomorrow and closing a week later.

Most New Zealanders will be familiar with the product and the business model.  At the risk of oversimplifying, the business involves creating food recipes, buying ingredients, then distributing those ingredients in boxes to a few hundred thousand people around the country to cook from the comfort of their own homes.  These meal boxes vary in cost but are generally between $100 and $200, equating to $10 - $20 a plate.

MFB's Private Equity majority owner, Waterman Capital, is cashing up most of its holding in an IPO valuing the company at about $450 million dollars - similar in size to say, Hallenstein Glasson.

The company saw revenue of $153 million last year, and is forecasting this to rise to $189 million, mostly through organic growth of its product.  The company hopes to pay a dividend of 7 cents per share in 2022, with an intention to grow this dividend alongside any profit growth.

The opportunities for growth are obvious.  So are the risks.

The meal-kit market is growing worldwide - a trend accelerated by the pandemic and subsequent lockdowns.  There is an increasing willingness for people, particularly families, to ''outsource'' meal planning due to time constraints.  This has been balanced by an increasing focus on the nutritional content of food.  These two factors have opened a gap in the market for meal-kit providers.

MFB enjoys strong brand recognition and trust across its products.  It is almost entirely based within New Zealand and enjoys high levels of loyalty from its customer base.  The company also has ambitions to develop new product ranges.

These growth ambitions are one of the risks investors should consider.

The growth strategy is broken up into two distinct areas – labelled ''Horizon One'' and ''Horizon Two''.

Horizon One relates to sales growth and expanding existing offerings.  The company hopes to use its database of consumer data and preferences to tailor its offerings further, with new products targeting smaller, more specific needs.

Horizon Two is more ambitious.  The company is exploring entering the online-grocery market, offering products such as household cleaning products and pet food.  MFB is also exploring targeting specific markets, such as aged care facilities, for its pre-made meal offering.

Another key risk to consider is competition.

My Food Bag's main competitor is HelloFresh, a German company with extremely deep pockets and a very strong global presence.  The largest meal-kit provider in the world, HelloFresh has demonstrated a willingness to endure long periods of loss-making in order to capture market share, as well as growing by acquisition – finding dominant competitors in existing markets and simply buying them.

MFB makes no secret of HelloFresh's competitiveness, but believes the growth in the sector is sufficient for both to co-exist.

One final key risk that is worth highlighting is reputational damage.  Businesses like these, especially those handling something as core to our existence as food, rely heavily on the perception that hygiene and safety standards are at the highest possible level.  The company will have strict measures and a culture focused on maintaining such a standard.

We have bid for an allocation of shares for our clients, and expect an active secondary market once the stock lists on 5March.  Clients wishing to discuss this opportunity are welcome to contact us.

TRAVEL 

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

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

Kevin will be in Christchurch on Monday 1 March.

Chris will not be travelling in March, while he endures medical interference, unrelated to his zero appetite for My Food Bag recipes.

Please contact our office for an appointment.

Chris Lee

Managing Director

Chris Lee & Partners Ltd

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Taking Stock 11 February 2021

I GUESS the Wellington retailer David Jones can blame my sister, but I knew it was doomed to fail years ago.

The clarity came in part through a birthday gift from a sister, a delightful book recording the pithy sayings of great British and Irish writers.

It was Oscar Wilde who wrote of a portly man, perhaps someone of my own rotundity, that ''he was a large man, not so much dressed, as upholstered''.

I had recalled this line four years ago, when a David Jones employee had despatched me down the road to a competitor, with the gentle words that David Jones did not cater for larger people.

I had gone into the shop on a cold Wellington southerly to buy a 3X merino/possum jersey, for which one pays a few hundred dollars.

David Jones sent me to a competitor where I bought the said clothing. It had no interest in selling high margin goods to large people.

I reasoned that if a new retailer (to New Zealand) was going to exclude all those who needed sizes above large, it had no show of surviving, revealing, as it was, an ignorance about the range of sizes one would find in any New Zealand city. It might have had a look at the size of people in any Koru lounge to work out what range of sizes it needed to cater for consumers who were not price sensitive.

David Jones' problems were much worse than just that.

Its Wellington building was a mis-fit, well located but poorly designed for a modern department store, with far too many dark areas, and too many small compartments.

Its computer systems for stock control were dreadful, little better than manual stock counts, not integrated adequately with daily sales.

Its staffing was inadequate, staff training ill-suited to a high-margin operation. Its specialty café sold sausage rolls and lamingtons, and its product range had a me-too appearance.

It soon lost its quite brilliant CEO-elect, a young lady whose personal efforts had been the sole reason the store ever opened. She had put in a superhuman effort to prepare the new business for opening day.

She had observed the gap between the sausage and the sizzle and headed off to a new career, correctly assessing that David Jones had insufficient competitive advantage, and was seeking to make high margins without first establishing a legend that justified the margin.

Kirkcaldie and Stains, my mother's favourite shop from which she often bought hats, had degraded over the years into a poorly-governed, poorly-managed anachronism, unable to make a quid from retailing, another me-too department store, ill-adjusted to the new world in which most women go out to work, rather than take Devonshire teas while meeting friends, as my mother might have done in the 1960s.

AMP astutely quit the building for a little over $50 million, selling to a leveraged private buyer, one of those rare times when an unwieldly institution like AMP read the market correctly and left the problem for a private company to solve.

Perhaps the building is destined to offer social housing or be used as a quarantine centre, though others think it would make a good library, and still others think it could be what they describe as ''an old people's home''.

The message I want to convey is that retail property today faces a greater number of challenges than before, and that competitive advantage is essential to large retail. (Farmers seems to understand this.)

Because the world prints free money the David Jones building will have risen sharply in value – a return not entirely related to risk – which should enable it to receive the modernisation and renovations that make it useable, perhaps as a shopping mall, though that, too, may struggle if Wellington City Council continue to reduce car parking.

If it were to convert to apartments, or to social housing (with the government as the tenant), I would be unsurprised. Ian Cassels of The Wellington Company might buy it for a medley of songs and re-purpose it.

Perhaps it might be a quarantine centre though the Golden Mile would be a luxurious location for such a building.

Investors in property trusts will be watching the evolution of central city buildings with interest.

As retailers escape to cheaper land, and demand for office accommodation evolves, the most frequent conversion will be to inner-city apartments and, possibly, social housing.

David Jones may become the high-profile catalyst for change.

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COVID'S evil trickiness has accelerated the rate of change and provided fuel for those who profit from disrupting those business models that drip with avoirdupois, or are governed by ancient reptiles.

One obvious example is the corporate trust model, which has two ugly features that need to be ended.

Its percentage-based cost for overseeing and attesting to the portfolios of managed funds is a nonsense. It survives because in effect the people whose savings are in the managed fund are paying the charges and to them the charges are invisible. It is a rort.

Attesting to the veracity of a bond portfolio is definitely not worth the millions that are charged, based on the size of the fund.

Equally, the percentage charge for executing an estate simply incinerates money for the beneficiaries, a charge made even more treacherous by the multi-dipping that occurs when trust companies seek to administer estates and trusts, as well as execute estates. Trust companies are appalling fund managers. They either double intermediate or perform the task with little skill.

This model is now under attack as smart lawyers have set out to standardise the process of documenting wills, trusts and even property transactions, finally acknowledging that the value-add never justified the $200-500 hourly rates charged for basic clerical work.

Banks and law firms are galloping towards cost cutting in this area, hinting at a day when trust companies, like telegram deliverers or town criers, cease to exist.

I met recently with the architect of one of these disrupters and was interested to learn of the activities of other people cleverly using technology to outwit the old system, by bringing together legal solutions and people who were not tech-savvy.

For example, there is now a service called ''Do Not Pay'', which will use the law to have parking tickets cancelled. You hand over your ticket, pay a small percentage of the fine to the disruptor, and he uses grey areas of law to persuade the council to waive the fine.

A similar service is offered to air travellers in places like western Europe, where airlines are required to reimburse with 100 euros any traveller whose flight is delayed for more than 60 minutes.

Most travellers wearily accept delays and do not ask for monetary compensation.

For a share of the 100 euros, travellers can simply provide details to the service, which arranges for the compensation, minus a fee, to be direct credited to the traveller.

Another service obtains compensation for any person whose personal information has been hacked because of institutional failures. Institutions will compensate set amounts rather than litigate the issue.

The service provider clips the tickets, succeeding because it knows the price a hacked organisation will pay, rather than fight the claim.

To me, this all reverts to value-add.

At best, trust companies offer mediocrity at unnecessarily, indeed unjustifiable, high cost.

The staff are not well paid. The industry does not attract excellence. The owners of these semi-social services are naturally seeking high returns.

The value-add is tiny, but the charges imply value-add and excellence that does not exist.

Readers may recall examples I have quoted regarding Perpetual Guardian, the poorest of the trust companies in my opinion, both in terms of value-add and quality of decision-making.

I continue to urge people needing to prepare a will, set up a trust, arrange a power of attorney, execute a will or administer a trust, to talk to any reasonable lawyer before signing up to a trust company.

If there is no option but to use a trust company, never agree to the standard charges. Negotiate. And demand a clause that enables you or the beneficiaries to fire the trust company, at any time.

The trust company sector remains an ugly ulcer on the body of New Zealand that banks, accountants, legislators, politicians and regulators conspire to allow a business model like the trust companies to continue.

Disrupters, I am pleased to say, are hovering around the corner.

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Johnny Lee writes:

The reporting season is in full swing, with many of our publicly listed companies updating the market with their half year results this month. Some will provide an outlook to the six months ahead, while others will err on the side of caution and decline to provide any forecasts.

The likes of Contact Energy, Heartland Group, Fletcher Building, Spark and EBOS are among the February group.

These results are worth scrutiny. A number of companies, especially those who have maintained unusually high levels of cash reserves during the worst of the pandemic, will have greater certainty about their short-term futures, and may have less reason to hold such high reserves. Our retail stocks, such as Briscoes and The Warehouse, have already been distributing special dividends to shareholders as confidence grows in their respective markets, though their supply chains will be vulnerable each time the virus leads to lockdowns.

For some shareholders, it will be an opportunity to check in with their company and ensure the company is still on track and in line with expectations. Those with a focus within our borders will face a different set of challenges than those who trade abroad, as the virus continues to spread in some of the world's largest economies. Data regarding the vaccines' effects on new variants of the virus is still forthcoming, posing more uncertainty.

Early reports from AMP Group and Telstra have shown that the impact from the virus is still flowing through to company balance sheets, although whether this proves the exception or the rule will be revealed shortly.

AMP Group also indicated that the takeover of the company, from US investment manager Ares, has been withdrawn after the firm completed its due diligence. This is a blow for long-term shareholders, who may have hoped such a takeover might put a final pen stroke through their investment. The price tumbled after these announcements.

One aspect of reporting season that is always of interest, to both observers and regulators, is the unusual price movements in the days preceding a scheduled announcement. Some will be speculation, as traders anticipate imminent volatility following an unexpected result. Some may not. One must hope that dissemination of price sensitive data is watertight, the playing field level, and all investors treated equally.

Next week will see the release of results for Sky City, Fletcher Building, EBOS Group and Contact Energy, among others.

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There would be few topics that create as much unease among the financial advisory community as Bitcoin.

Public opinion on Bitcoin varies. Some proponents of cryptocurrency describe it as ''digital gold'' and proclaim it will be ''the future of money'', while some economists describe it as ''the mother of all bubbles''. For now, at least, the economists have been proven wrong.

Bitcoin has become topical in recent days, due in part to the actions of the world's wealthiest man (Elon Musk) and the company he founded, Tesla.

Tesla's decision to invest $1.5 billion US dollars into the surging Cryptocurrency prompted a price spike in the virtual currency, as it moved from $54,000 NZD per ''coin'', to $65,000 overnight. A year ago, it was below $15,000. The total value of all currently existing 18 million coins (more are being created each month) is now close to a trillion New Zealand dollars, several times more than every company listed on our stock exchange - about $200 billion.

Perhaps more importantly, Tesla also indicated it would consider accepting Bitcoin as payment for its electric vehicles. Cynics may wonder whether Musk is becoming a trader of cryptocurrency, rather than a promoter, as prices move.

Part of the price rise can be explained by this perception of increasing legitimacy. Cryptocurrencies have long been the domain of enthusiasts and speculators, who argue that Bitcoins artificial cap of 21 million coins adds a degree of scarcity that promotes an increasing value over time. Detractors point to the fact that the currency does not serve a purpose beyond a store of value, unlike gold or silver, which have specific uses in everyday life.

In other words, the currency only holds value if we ascribe a value to it – similar to fiat currency, but lacking official backing so far. When my two year-old son exchanges his sea-shells from the beach in exchange for my ice-cream, he and I (after vigorous debate) are attributing a value to those two items.

This is to help explain the significance of the world's most valuable carmaker accepting Bitcoin in exchange for real-world, sought after products. If the company continues with this plan, it may help convince those on the fence of its viability as an actual means of exchange – rather than just a store of wealth to one day be sold at a higher price. Or it may help convince people of the eccentricity of the world's wealthiest man. Time will tell.

The remarkable, or perhaps bizarre, rise in value of certain other cryptocurrencies has raised concerns that an obvious bubble is forming. Over 4,000 cryptocurrencies exist – Bitcoin being the largest – but many have experienced sudden increases in value over the course of this year. Some cryptocurrencies, created as a joke between friends, are now ''worth'' billions of dollars, despite the limitless nature of their supply. It is difficult to envision a scenario where these values are maintained in the long-term.

There is no regulator of cryptocurrencies – indeed, this is one of the points that attracts some users to engage with it. Bitcoin has long been the preferred currency of hackers, money launderers and others wishing to maintain anonymity. Readers will recall a period in August of last year, when the NZX experienced significant connectivity issues, as cyber attackers attempted to extort a large sum of Bitcoin in exchange for cessation of their attack.

There is also no specific limit to the number of cryptocurrencies that can exist in the world. In theory, anyone can create a cryptocurrency and allow people to freely, and anonymously, exchange them. Perhaps my son will broaden his target market to include his grandfather, and corner the supply of sea-shells from Paraparaumu Beach.

Very few, if any, financial advisors have the necessary expertise to advise on specific cryptocurrencies. Instead, people often seek advice from social media. One imagines that, if these products become mainstream, the day may come when universities are producing such an advisor. I doubt it.

For now, buyers of these products must accept that there is significant risk associated with buying them. History is full of people buying assets on the assumption that another will pay more for it in the future – and find themselves holding something that is worth less than they put in.

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Most readers would likely never have even heard of GME Resources. Indeed, in all likelihood, you will never read about them again.

GME Resources is a nickel and cobalt explorer in Western Australia. It trades occasionally, at prices ranging from 4 to 6 cents over the last year. Its market cap of about 50 million would not feature in many indices around the world.

Yet last week, its share price broke this range on huge volume, with tens of millions of shares changing hands. Alarm bells at the regulator were set off, prompting a share price enquiry.

The company's response?

''The Company notes recent media reports concerning trading activity in a US listed technology company called GameStop which also has an exchange ticker code 'GME'. ''

The share price fell after the announcement, no doubt baffling those nickel and cobalt enthusiasts with a legitimate interest in the company. A fool and his money are soon parted, as the expression goes, although in this case the saying may be that the uninquisitive and impulsive novice, and his money, will soon be parted.

I hope readers are making decisions based on a more robust investment process than a company's stock code.

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TRAVEL

David Colman will be in New Plymouth on 15 February.

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

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

Johnny Lee will be in Christchurch on 11 March.

Please contact our office for an appointment.

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Taking Stock 4 February 2021

THE nonsensical behaviour surrounding the US video game retailer GameStop will have caused some hilarity around the world, highlighting, as it does, what happens when greedy people clash with greedy people.

You get an all-destroying bunfight.  Spectators enjoy clowns fighting amongst themselves.

I recall an event, roughly 20 years ago, when a financial market lad lost his high-paying job, so set up a farewell party in some sporting club’s rooms. After some sort of meal, the lads were provided with custard pies and so began a custard pie smearing fracas, no doubt amusing the lads, but not amusing the clubroom cleaners.

Lads will be lads, even if they have been hugely paid to run highly responsible jobs nurturing other people’s money.

In more recent years the behaviour of lads and ladettes in Wall Street has improved marginally, but in many work places there, the language, the behaviour, and the selfish pursuit of bonuses still dominate the hedge funds, investment funds, and broking houses, Goldman Sachs, despite being at the top of the tree, hardly resembling a Christmas angel.

One of the tools of the bonus-chasing lads has been the constant use of the artificial device, shorting the share prices in companies that are out of fashion.

With very few exceptions, one cannot legally ‘’short’’ a share unless one can arrange to borrow the share from another shareholder, for a fee or an interest cost.

Fund managers supplement their incomes, or in some case their returns to investors, by lending shares to those who want to bet that a particular company, whose shares they are borrowing, will endure a falling share price.

So the borrower gets hold of the share, sells it, and then buys it back in weeks or occasionally months, so he can return the same number of shares to the player who lent him the shares, having profited from the company share price collapse.

When this form of speculating works, the profits can be immense.  If the profits are returned to the investors, as should be the case, the fund’s quarterly result might be unexpectedly high, perhaps much higher than the rise in the index.

Bonuses may follow. If the ‘’shorting’’ tactic fails, there may be no bonuses for that quarter (diddums).

The biggest lenders of stock to the shorters are fund managers who are long-term holders of the stock. Quite why they allow the punters (the shorters) to sabotage share prices is beyond the mentality of many investors.

They ask, is the fee or interest worth the damage to the share price?

When the US shorters attacked GameStop they borrowed shares, sold them, and promised to return the scrip at some imminent date.

However many small investors, using social media to give them courage, combined, bought, and kept buying, pushing the share price of a sad, poor-performing company share from a few dollars to a few hundred dollars.

The shorters, hedge fund managers playing with other people’s money, now find that the cost of borrowing stock has risen to at least 100% per annum, and find that they cannot repurchase the stock, except at ludicrous prices, like US$390 a share (which was reached last week).

Remember they had borrowed the stock and sold it, perhaps at US$10.

If they had borrowed a million shares, their loss if they repurchased at US$390 would be US$380 million, plus borrowing costs.  Three million borrowed shares would make the loss a billion (of other people’s money).

No bonuses in that quarter!

But the problem does not stop there.

The retail buyers kept buying right up to US$389 a share.

In New Zealand several thousand newcomers with very shallow pockets were day trading the stock at 3am NZ time, every night for at least a week.

Unbelievably, a company that at most might have a real worth of some part of a billion dollars was priced by the buyers at a company value (market capitalisation) of US$20 billion.

Its shares traded so hectically that daily turnover a week ago was $20 billion, a figure double the daily trading of Amazon shares. (The shares were being bought and on-sold, often within a day.)

Greedy fund managers, greedy hedge funds, greedy/angry retail investors created this nonsense. Perhaps the solution is for GameStop to have a huge rights issue at a price, say, 20% less than the current absurd level. The ‘’shorters’’ might underwrite the issue, so they could return borrowed stock.

Yet shorting shares could be solved by one simple response.

If regulators banned short selling that would fix it.

If regulators refuse to ban the practice, there is still a simple solution.

STOP LENDING SHARES TO SHORT SELLERS.

Johnny Lee will expand further on this topic. His opinion piece is published later in Taking Stock.

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SHAREBROKERS love market instability.

Instability creates price volatility, which eventually exaggerates the opening for buyers and sellers, and creates trading opportunities.

Governments love to see a high velocity of money.

The faster cash is spent, the more GST is payable and the more revenues rise, creating income tax liability.

The US volatility index is close to a 30-year high.

But the velocity of money is close to a 90-year low.

What do these contrasting conditions tell us?

1. That most people are hoarding their cash, fearful of job losses, perhaps struggling to meet debt obligations, like rental payments.

2. That ever smaller numbers of people have so much of the available money that these minorities fight to buy assets (houses, shares, gold, silver, crypto currencies), displaying either extreme optimism or, on bad days, extreme fear, allowing high turnover at prices that are swinging wildly.

Our advice to clients has been constant.  Stay aside from emotion.

Match your appetite for high returns with your willingness to absorb real losses.

Stick to your strategies.

Value the certainty of revenue.

Do not become intoxicated by any extreme successes.

Be aware that no one has foresight into the outcome of a pandemic that has yet to slow down.

The printing of trillions of funny money inflates asset prices.  It also widens the gap between the wealthy and the poor.

Helicoptering free money to all never has been a lasting solution.

Addressing climate change will come with a real cost, today and tomorrow’s tax-payers paying for the short cuts taken in the past.

Advice from knowledgeable, experienced people who put client interests first may have an immense value this year.

Here endeth the sermon.

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Johnny Lee writes:

WITH the investment world enraptured by the unfolding rollercoaster ride that is the GameStop share price, those with only a cursory interest may be wondering what lessons can be learned from this ongoing saga.

To begin, GameStop is a retailer of video games, toys, and other electronic merchandise.  In New Zealand, GameStop would be recognisable by its subsidiary, Electronic Boutique Games, or ‘’EB Games’’.  EB Games has shops throughout the country, including in Coastlands, Paraparaumu.

This is a sector that has had to evolve over the years, due to changing technologies. Much like record stores, bookstores and film hire (such as Blockbuster), video gaming is rapidly moving to online distribution.  Without rent costs, staff costs, distribution costs and retail margins to consider, these are sectors in which online distribution is able to aggressively compete on price while claiming the increased convenience of being available 24 hours a day from the comfort of your home.  As the likes of broadband connectivity improves, there were some that feared for the survival of bricks-and-mortar operations in these areas.

The pandemic, of course, intensified these concerns.  With 330 million Americans being told to avoid public spaces, foot traffic plummeted.  Online consumption grew in its place.  While New Zealand had to endure only a few weeks of lockdown, our friends from across the Pacific Ocean are still enduring thousands of deaths a day.  Being a small, sparsely-populated island in the corner of the world has its advantages.

Technologies have changed.  Twenty years ago, it was considered inconceivable that Joe Bloggs would watch a film, streamed from the internet, on a Friday night with his family.  Internet speeds were hopeless (comparatively), data caps were prohibitive and a simple phone call would knock out the connection to the internet.  Instead, the Bloggs family may instead have ventured to the local Video Ezy, chosen a film from their limited selection, displayed their membership card and perhaps picked up popcorn from the front desk to take home.

Other societal changes have occurred too.  The rise of minimalism has had an impact, forcing people to reconsider their consumption behaviour.  Even in New Zealand, apartment living is increasing in popularity (debatably, by necessity), and new home builds are shrinking in size.  Small homes mean less space for the likes of bookshelves and storage.  Instead, your smartphone is rapidly becoming your library.

It would be unfair to suggest that these sectors have no future at all.  There will likely always be those who prefer a ‘’real’’ book, and the rising interest in vinyl records is direct proof that the market exists.  Readers might be surprised to learn that in the United States, vinyl recordings outsold compact discs in the first half of last year (by revenue) for the first time in over 30 years.

Nevertheless, evolving technology was believed to be a death knell for the likes of GameStop. Indeed, some modern computers and gaming consoles do not even include disc readers – content must be downloaded from an increasingly fast and reliable internet.

So these factors combined drove some to believe that GameStop’s model was irrevocably flawed and destined for failure.  Hedge funds sold the stock short, hoping to make a profit from its descent.

Short selling is a subject of considerable debate.  Some argue that if a willing owner of shares allows these shares to be ‘’lent’’ to another for sale, that this represents an agreement between two parties and should not be prohibited.  Indeed, this type of shorting, often referred to as a ‘’covered short’’ is legal and, according to economic theory, is efficient and ensures the price reflects market sentiment.

Although it may seem counterintuitive, stock lending of this nature can be mutually beneficial.  A borrower of shares can profit from a falling share price in the short-term, while a large Exchange Traded Fund profits from the lending costs, and the hope of long-term gain once short-term downwards pressure has eased.  Managers of these ETFs, of course, have no choice but to hold these shares in line with the index that they follow.  Lending them for selling is simply additional revenue that would otherwise not have been earned.

Short selling, without access to the stock for settlement, is referred to as a ‘’naked short’’ and is illegal in most cases.

A Chartered Financial Analyst from Massachusetts, now something of a hero among pockets of social media, followed the immense scale of this short-selling and began taking the reverse position, positions now worth tens of millions of dollars.

Anonymous social media pundits began acquiring stock, believing the short-sellers would be forced to buy back at the market rate, referred to as a ‘’short squeeze’’.  Those who sell stock short cannot do so indefinitely – eventually, the Piper must be paid and the stock bought back.

During this process, immense strain was placed on various parties, prompting actions of dubious legality, and exposing the cracks in this system.

Brokers began restricting access to their clients.  Popular global trading platform Robinhood, which charges nothing for the buying and selling of shares and instead profits by selling investor trading information, prohibited the buying of the so-called BANG stocks (Blackberry, AMC Theatres, Nokia and GameStop).  Traders could only sell.

Other brokers followed suit.  Stocks rarely increase in price if one can only sell.  The restrictions prompted outrage among investors, who accused brokers of manipulating the market to force the price back down – which it did.  Selling emerged – although some question the motives behind this selling – sending the price from the stratosphere back to the troposphere.  While some still sit on huge profits, others are now sitting on massive paper losses.

Investigations have already begun at the highest level and are certain to be another interesting twist in an already interesting tale.  Nevertheless, the implications of this saga are already wide-reaching.

Firstly, the spotlight has been firmly cast on the behaviour of the short-sellers.  Economic purists would argue that short-selling is a core part of maintaining balance in financial markets, and acts as mitigating force against illogical or inefficient practices.  If a company performs poorly, but shareholders refuse to sell, the share price may misrepresent its value.  Short-sellers, supposedly, help balance this by introducing liquidity and pricing the stock at a value that the market, not just its shareholders, believe it to be worth.

In practice, short-selling can be used to create what is effectively a self-fulfilling prophecy.  By driving down a share price, the short-seller can actually create the outcome – by panicking shareholders or spooking lenders – that they seek.

The world’s wealthiest man, Elon Musk, famously accused short-sellers of trying to manipulate the share price of Tesla.  These short-sellers ended up losing tens of billions of investor money, as Tesla today is one of the world’s largest companies.

Another aspect to consider in the ongoing fallout of this story is the role of retail investors and trading platforms.

Retail investors, often taking financial advice from others on social media, are not a homogenous group that act in concert based on financial fundamentals.  Some of the investors who drove these movements seem to possess very little concern for risk, and even less patience for long-term investments.

With a mailout of additional US Government stimulus expected soon, further fuel will be available to these investors.

Robinhood is also under the microscope for its role.  Robinhood, which was previously looking to list on a stock exchange in an IPO later this year, justified its halting of buy orders as a way to ‘’protect its customers’’.  More likely, capital requirements were stretched to the extreme, and the broker found itself short of liquidity.  The Securities and Exchange Commission is now investigating the situation.

Hedge funds have already begun closing positions, totalling losses in the tens of billions.  Sadly, this is the risk you run when you aggressively short stock – your potential loss is effectively limitless.  Shares do not have a maximum price.  Market data shows that the amount of short selling in GameStop has plunged, as funds bought back stock in the past fortnight.

New Zealanders, or at least those in the vast majority observing from the sidelines, are seeing a

unique situation.  The New Zealand market is unlikely to ever see anything resembling this, due to the relatively simple array of financial products available to investors.

However, this story has not concluded yet, and with the share price still fluctuating wildly, one imagines it will continue to capture media attention for some time to come.

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ARVIDA (retirement village operator) is offering a new 7-year senior bond next week (open 9 Feb, close 12 Feb). The maturity will be 22 February 2028, interest will be paid quarterly (interest rate set next week but will exceed 2%), and the bonds will be listed on the NZX (ARV010).

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

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

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INFRATIL’S six-year bond offer yielding 3.00% remains open to investors. The application form is available on our website.

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TRAVEL

David Colman will be in New Plymouth on 15 February.

Edward Lee will be in Napier on 11 and 12 February and Wellington CBD 19 February. He is just back from visiting Auckland, and will be there again on 11 March (Remuera) and 12 March (City). He will be in Nelson again on 14 April (afternoon only) and in Blenheim on 15 April.

Chris will be in Albany on 9 February and Ellerslie on 10 February. He will be in Christchurch on 16 Feb and 17 February (BOTH FULL).

Michael Warrington will be ‘sailing’ up to Auckland on Thursday 4 March and is gathering appointments for a circuit through Hamilton and Tauranga, probably in the second half of February.

Please contact our office for an appointment.

Chris Lee

Managing Director

Chris Lee & Partners Ltd

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