Taking Stock 23 June 2022

THE creaking and groaning of the NZ health sector has for some time been audible – maybe decades – but the noise is getting louder, as the listed company Arvida is now warning.

Our health system relies heavily on the private sector to provide geriatric care services.

The public sector abandoned such care decades ago. It can deal with injuries or events like cancer.

The public sector cannot deal with the needs of people who through sickness or attrition have become dependent on daily care.

Ryman, Summerset, Oceania, and Arvida are public-listed companies that built models that provided access to care, by offering property (villas, care rooms), at a price that effectively covers most of the cost of care.

In the better retirement villages wonderful care facilities cater for the chapter of life when high-cost care is required, often by just one of the retired couples who might have lived in the village together, for as long as they could each be independent.

For many years the threat casting dark shadows over this model has been the practice of successive governments of grossly underpaying for the cost of the care.

Governments, and health boards, have demanded the right to place people with licensed care providers, with the obligations to pay the costs.

But the Crown decides what the cost should be, and has long under-subsidised the cost of nursing, by nearly $20,000 per nurse.

Guess what?

There is a shortage of New Zealand nurses, there are inexplicable limits applied to overseas nurses wanting to work and live in NZ, so naturally all nurses have the choice of earning $20,000 more by working in hospitals or in the public sector, or earning $20,000 less by working in the aged care sector.

Last week this issue blew up.

Arvida’s Strathallan Village in Timaru advised care residents that this apparently powerful, profitable, public company could not recruit nurses for the village, and would be closing its care facility, transferring the ailing residents to another village.

That means care patients will be moving, probably to Christchurch.

This is hardly joyous news for the couples, where one partner has lived in a villa, self-sufficiently, while the other lived in the care facility, across the road.

If this closure was by a tiny Mum-and-Dad owned facility, with an overdraft, a mortgage, and a few oily rags to squeeze to supply the old lamp used to see in the dark, then few would be alarmed.

But a company that makes tens of millions of dollars profit, has access to capital markets, and dozens of villages around the country, should be able to provide whatever funds are necessary to staff its various villages.

Obviously Arvida will have tried to solve the problem.

Presumably, no amount of money can solve it.

Where does such a desperate shortage of nursing leave New Zealand?

What will such a shortage do to the whole retirement village model?

Will the rules change, so homecare people without nursing qualifications are forced to operate without nursing supervision?

Will our immigration people sharpen their thinking, and allow nurses from overseas to have a fast passage to citizenship?

Will the Crown immediately wipe out the cost of training nurses and revert to free education, with a bonded period at the end of training?

Will our education system be dramatically overhauled, focusing on the link between education and vocation, with curriculum changes that will address those whose careers might be in forklift-driving, truck-driving, operating a bus, working in trades, or in the horticulture, silviculture, aquaculture, agriculture, or viticulture sectors, or in nursing? Will this change provide the pathway to the goal of getting teenagers to attend school regularly?

Will our schools focus on reading, writing, arithmetic, and subjects relevant to vocation?

Or will this problem magically disappear? Or lead to ever more central government blundering into a sector that bears the cost of dreadful public sector interference and ignorance.

The health sector is in disarray. Hospitals cannot cope. That problem is already countrywide.

Are we watching the beginning of huge changes for the aged care sector?

Investors should form their judgements when they review their exposure to the sector.

Arvida’s grim news in Timaru is unlikely to be caused by management or governance failure. The change being faced may thus be secular, not cyclical.

 _ _ _ _ _ _ _ _ _ _ _ _

ALSO under a media spotlight has been the construction sector, and in particular the conflating problems of gib board shortages and property development distress.

Even in provinces like Southland, construction firms are falling into the hands of liquidators. Heaven knows how busy these ticket-clippers will be in Auckland.

There are many causes of the distress, most notably a shortage of labour, massive supply chain problems, and highly questionable costs of regulation and compliance.

The shortage of gib board is high on the list of problems.

More than 90% of plaster board in NZ is supplied by Fletcher Building.

Fletchers export gib board, must have supply contracts with their biggest NZ clients, and have long planned to expand production to enable them to exploit the margins created by excessive sustainable demand over supply.

There is nothing in the above sentence that is surprising or unreasonable.

If criticism is to be aimed the critics would surely argue that potential competing importers have missed a golden opportunity, or that other suppliers should have seen the available margins and attacked Fletcher’s market share years ago.

Last week Fletchers Chairman, Bruce Hassall and Chief Executive, Ross Taylor, displayed admirable courtesy by meeting with a relatively minor, attention-seeking, shareholder (Simplicity) and the NZX Shareholders Association to explain why Fletchers cannot meet the surging domestic demand.

These visitors may also have demanded to know why it is getting colder in winter.

The Fletcher response was so obvious that one had to wonder what it was that Simplicity and the NZSA expected from the meeting.

Fletcher is not the regulator of plaster board.

Its only obligation is to make a safe product as profitably as possible, in as large a quantity as it can.

It has no obligation to meet changing domestic demand, let alone the demand of a very small user of plaster board, like Simplicity Living, a new division of a tiny index-based KiwiSaver fund.

There is nothing to prevent domestic competition or importers from providing supplies, and presumably providing alternatives at lower margins, if supply exceeds demand. Fletchers, quite rightly, does its best to be the dominant supplier.

For the NZSA this argument seemed like silly grandstanding, exploiting a topical issue, bringing attention to its very worthy aspiration of representing investors.

It was grandstanding as no investor in Fletchers would dislike the contribution that the sale of gib board is making to Fletcher’s revenues, profits, or dividends. The NZSA is disingenuous in saying its members were demanding the NZSA become embroiled in this spat. I do not expect the NZSA to be disingenuous.

Simplicity has a track record of grandstanding, exploiting young media people who listen to the loudest belch in church. The wiser people in the media assess the issue before granting space to the belchers. Competent members of the media, like peahens, know the difference between an old crow and preening peacock.

As a Fletcher shareholder, Simplicity had forfeited any credibility to use its one percent of Fletcher shares as a bargaining tool, when it constructed its low-cost, index-based model. It neither has a mandate to select the companies in which it invests, nor any skillset to judge company performance.

Index funds are usually denied the right to exclude stocks, except in pre-defined areas. Simplicity will buy and hold Fletcher shares unless it somehow alters its promise to new investors. Its threat to sell out is a little hollow, for many reasons.

Its mandate is to select index funds. And not pretend its opinions are even remotely relevant, let alone newsworthy.

The construction sector is in disarray, as NZ seeks to build far more spec houses, perhaps too late, given the change in immigration and the rising cost of mortgage debt.

Indeed you could argue that Fletchers has been protecting the shareholders by scaling its business to sustainable levels.

Fletchers, under Hugh Fletcher and Ralph Norris/Mark Adamson was an easy target for critics, none of those people earning any admiration for their leadership or governance. They cost their shareholders huge sums, Adamson being a particularly poor choice, as a chief executive.

But Fletchers’ exploitation of its dominant position in gib board hardly leaves the company vulnerable to criticism, except from people perhaps motivated by their own agenda.

I admired the courtesy of Hassall and Taylor in tolerating what looked like childish grandstanding, using the media to focus on a meeting that Fletchers had no obligation to attend.

Footnote

 

A media-announced letter, subsequent to the pointless meeting, advised that Simplicity and the NZSA were calling for Hassall’s and Taylor’s resignation and labelled Fletcher’s response as arrogant.

One wonders through what lens a darkly-coloured pot is dazzled by its own reflection from a more silver-coloured kettle.

Do Simplicity and the NZSA really believe that the media is the right channel through which to call for change? Really? They should read Successful Strategies for Adults, 101.

Is this not just an extension of look-at-me behaviour, perhaps confirming that tiny fund managers carry no gravitas with heavyweight corporates?

The Fletcher financial update this week, confirming rising profits and volumes, was what shareholders would be seeking.

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THE brittle state of global markets was evident for all to see in 2021, and earlier, inflation being an obvious outcome of the funny money printed, and the new debt incurred, as politicians sought to sidestep the inevitable financial, social and political costs of the pandemic.

Yet as recently as seven months ago trading banks were opining that inflation was but a cloud passing by in a stiff westerly, rather than a bank of clouds disguising a long line of imminent storms. It would be transitory, they forecast. Here today, gone tomorrow. Even in November last year the banks were forecasting very modest rises in interest rates.

Barely 15 months ago, the Reserve Bank and our public sector-trained Finance Minister (Robertson) were contemplating negative interest rates, so unconcerned were they about the inflation they were brewing.

Recall that collectively the trading banks spent hundreds of millions at that time creating software that would accommodate negative interest rates, a concept that now seems absurd.

Yet, the best of our leaders in our productive sector instinctively knew that inflation, fuelled by labour shortages, was an inevitable outcome. They were right.

In this environment one wonders how differently a trained, skilled, minister and cabinet might have responded to the fund managers who were pushing the Crown to capture more investor money with which to feed asset prices (and fund manager fees). Those self-focussed people wanted Kiwisaver default funds to move to a higher fee-earning fund comprising share investments.

Self-interest played no role in this lobbying. Of course it did not.

The result could not have been worse for investors, but better for fund managers.

In February this year, those who manage default KiwiSaver funds were permitted, indeed required, by new regulations to shift default funds out of cash and bonds and into equity funds.

In practice that meant that the market, forewarned of a bond sell-off, and a subsequent forced charge into equities, was able to game the software driven index funds, granted a KiwiSaver default fund licence. The timing of this initiative was as dreadful, as the concept.

Liquidity in bond markets had been terrible for two years.

Even a subdued imagination would have pondered by how much the default managers would be gamed at the expense, of course, of the hapless investors. Active fund managers adore shooting any sitting ducks. Recall how Synlait shares hit $14 four years ago, or how Meridian and Contact Energy reached towards $10, as index funds were gamed.

Since February this year equity markets have been in free-fall, down by 20% or more. The secondary market in bonds remains illiquid. KiwiSaver customers bear the cost.

Those fund managers who encouraged these changes, from low-risk to high-risk KiwiSaver settings, and those politicians who legislated the changes, might have moved on, humming the refrain that all things will again, one day, be bright and beautiful, and anyway, who wants to be a millionaire.

Well may they hum.

Not so impressed are KiwiSavers who now apply to extract cash to buy a house.

My opinion, loudly expressed but unsurprisingly ignored, was that the fund managers in charge of default funds should have been instructed to keep communicating with the investors who refused to select a fund manager or a type of fund. The savers needed to make their own decision. Default funds were for some a legitimate decision. A blanket instruction ignored every rule that wise financial advisers regards as unbreakable. Advice must be tailored to each individual.

Instead, the cabinet, to my knowledge comprising not a single person with even a hint of investment knowledge, succumbed to fund manager pressure and made the decision for each and every investor in a default fund.

Those who were in default funds will be reviewing statements in July showing unnecessary and painful losses. They have every right to be unimpressed.

Indeed, one wonders how many, observing such losses, will continue to invest at all.

Of course their most logical response would be:

1.Stay put, praying that market changes are cyclical, not secular, meaning time might restore values one day or

2. Instruct their fund manager to switch the investor’s funds into a cash fund. Either response is logical, depending on each individual.

Of course, self-focused fund managers and ignorant commentators will urge investors to believe that falling values are very temporary. They display their own naivety.

Secular change is not impossible. Even cyclical changes may affect prices for many years.

Will tomorrow look like 2019? Many will hope so. I am not convinced.

Whatever, the decision, urged on by fund managers, was at very least poorly timed and arguably led to an unwise political burst of pandering to fund managers, already, amply rewarded.

 _ _ _ _ _ _ _ _ _ _ _ _

The ANZ has announced the intention to offer a subordinated perpetual preference share, with an interest rate for six years that is likely to be more than seven percent.

The new perpetual will have a call (repayment) option after six years.

Generally banks repay on call dates if the instrument loses its equity credit, valuable to meet capital requirements and to impress credit rating authorities.

There are not yet enough details available to know that this instrument will replicate those of the past. Of course the Reserve Bank has previously acted, in times of distress, to defer the right of banks to exercise their call option.

Investors interested in this issue should notify our office now.

Expressing an interest, defining a possible amount, and providing a CSN is NOT a commitment to invest in this offer.

Travel

Chris will be in Christchurch on Tuesday and Wednesday July 5 (pm) and 6 (am) at the Airport Gateway and welcomes requests for appointments.

He plans a trip to Auckland in July, dates to be confirmed.

 

Michael plans to visit Auckland on 30 June, Tauranga on 11 July and Hamilton on 12 July.

Please contact our office if you would like an appointment.

Chris Lee


Taking Stock 16 June 2022

When earlier this month an ERoad Director spent half a million dollars buying more shares in this company, the issues he raised were worthy of discussion.

Any director worth his pay should have a better understanding of the company's prospects than any investor.

He would be aware of sales trends, margins, customer retention rates, and input cost rises and would hardly be likely to spend half a million on a hunch.

The news should have given some comfort to ERoad investors, though in the current global share market quagmire, he must have pondered whether his half million would buy even more shares if he were patient. There is no bottom in a bear market.

Yet directors spending real personal money sends a signal of confidence.

For me it is a far stronger signal than that sent out when a board of directors announces it will spend the shareholders' money on a buy-back of shares.

Share buy-backs might be an indication that the board believes the shares are under-priced but such belief is more convincing if the directors are spending personal money.

Of course there are only small windows of opportunity for directors to trade shares in the company they direct.

Such an opportunity arises when the market is fully informed on all relevant issues and usually occurs after a quarterly, half yearly or annual financial report.

Recently Fonterra's directors disclosed an intention to buy back shares using company money. This was a decision that seemed logical given the fall in share price that followed the news that its dairy farmer suppliers would not have to hold as many Fonterra ''wet'' shares to retain their right to supply milk.

Those who are not dairy farmers but hold the dry shares would be hoping that this share buy-back indicate the board's belief that Fonterra's model is worth backing, simply on normal investment criteria. (Growth prospects, rising dividends etc) The timing might be doubtful, given market direction, but their confidence is notable.

The best example we have of a director standing tall behind his company he directs came in 2020 when Covid was threatening the viability of the retirement village sector, here and everywhere.

Covid posed the risk that large numbers of retirement village/aged care residents would become infected, the potentially fatal disease, as Government officials were predicting, wiping out tens of thousands of residents.

In Britain Covid caused such havoc, but for many months these deaths were not included in Britain's ''Covid'' deaths. Its government excluded those deaths on the spurious basis that it was uncertain whether it was age or Covid that led to death.

Here in NZ, the major retirement villages held emergency board meetings, and held long deep discussions on what would happen to the retirement village model if thousands of residents living together in a large care unit, were to be infected and die. Might the model be destroyed if living together could not be done safely, in a pandemic?

The directors and management implemented expensive programmes to keep Covid out, including the purchase of respiratory equipment, the employment of security guards to keep families of residents locked out, and the use of additional care staff.

The prices of the listed retirement village shares slumped, Ryman falling from $16 to a third of this figure, Summerset falling to $4 (from $9) and Oceania Healthcare falling from $1.00 to 37 cents.

Investors were looking for leadership and evidence that the whole model could survive.

One director (of Oceania) stood tall, acknowledging the threat, expressing belief that the remedy was working and announcing his intention to buy one million shares to demonstrate his belief.

Before he implemented his plan (two days after he signalled his intention) the market responded, the share price leaping by a third but he took the honourable action, bought one million shares on market, and watched as public confidence recovered, the share price recovering to a level that reflected the company's future successes.

His example was admirable, the more so in that he signalled his commitment before buying, ensuring that potential sellers knew of his plan.

The best people behave like that. That director is indeed one of our very best.

Of course, those with long memories will recall the wild, crazed behaviour of earlier decades when directors somehow were not jailed for misleading markets, cynically exploiting retail investors, often making false ''buy'' announcements, often trying to deceive investors, one nice fellow selling his shares days before his company went into receivership.

Thank goodness we now have transparency on these matters, and have far fewer charlatans attempting to manipulate markets. The 1980s had many examples of corporate larceny.

The ERoad director may not be rewarded immediately as it seems plausible that most share prices will be trapped in the down draught of global and local threats to lifestyle affordability, supply chain problems, imbedded inflation and the nauseating side effects of self-centred politicians.

Yet the ERoad director deserves respect.

Director's spending real money from their own pockets means much more to me, than company buy-backs, Kiwisaver index-related buying, or public grandstanding.

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The rather dismal trend of global equity markets continues to reflect the conflation of a large number of negative influences, probably not seen since the years leading to World War Two. It was this trend that prompted our somewhat solemn seminars in May.

These influences include inflation, consumer spending changes, disrupted supply chains, energy costs, the threat of recession, debt levels, and most of all changes in society and behaviour brought about by inequality, climate change, and the dumbing down , globally, of democracy and the public service sector. Many of these influences were visible to investors in the 1930s. In times of financial stress, people behave badly. Crime rises. Families split up. Company owners can behave like trapped opossums. Stress draws out ugliness.

Historically, asset markets facing such challenges seem to have fallen by 40-60%. The current level of falls here is around 20%. The MSCI Index records that this year the technology sector has fallen 24% and the retail sector 27%. Markets are still falling on more days than not.

The somewhat self-centred response of the current funds management sector, supported by some goofs in the media, has been to urge everyone to sit patiently and let time reverse the current trend line.

I advocate that wise investors should review their risk tolerance, review their asset allocation, and then do what is right for them, rather than to get-in-behind-and-do-nothing; essentially, accept growing losses and wait for ''things to come right''. Such blanket advice is unintelligent. Every investor is unique. Advice should be tailored.

The concept of buying in gloom may appeal to those with a healthy appetite for risk, to those operating with other people's money, or to those with decades before retirement. But it is a high-risk mindset that thinks it can pick the turning point in a collapsing market.

The concept of wealth protection may be at the opposite end of that risk scale. For most retired people I much prefer the goal of capital protection, in times such as we have now.

The idea of listening to idiotic sales people on national radio urging all listeners to make-decisions based on the tax laws that favour capital growth investors, is an idea based on public bar yokels. Why are such people not accountable for their self-serving advice?

Investors need to personalise their decisions. Nobody likes the risk of losing more than one can afford. Indeed many people, in bad times, want a stop-loss strategy. My advice is to ignore sales people, especially the cadre of media performers, none of whom seem to have accountability for their strident advice.

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The Taking Stock item last week commenting on the appalling state of State Highway One might just as easily have talked of the broader subject of government and council neglect of the country's infrastructure.

The dangerous state of SH1 on the Desert Road that I identified was simply a visible example evident to all of that failure.

Two retired engineers contacted me, asking me to check out the qualifications and relevant knowledge of those who governed and managed the Crown entity that was in charge of roads in previous decades.

Hint! In previous decades the board and the executive were loaded with experienced engineers and construction people, and the Ministers sometimes were not just goofs with more power than common sense.

Today, barely one engineer or experienced road builder is visible on boards or in the executive team, the Governors now appointed by politicians, dispensing favours.

The modern governance model seems to place diversity and social objectives ahead of engineering and science, in most government entities and underserved respect is paid to the political agenda. Sadly, in many publicly listed companies, there is also insufficient respect paid to science, engineering, knowledge and experience.

The two old timers, like me, were raising the questions about what outcome would be inevitable when we divert the focus away from product/service excellence.

That question is valid for all businesses and resonates with those who, like me, believe the ''must haves'' requires a full quota before we consider the ''nice to haves'', especially when selecting directors and executives. Experience and relevant knowledge are ''must haves''.

The state of SH1 seems to point to the poor understanding of the organisation's primary goal – roads fit for purpose, overseen by knowledgeable, relevant people.

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Johnny Lee writes:

The sharp decline in global asset prices this week has seen a range of responses from investors, as the fight against inflation takes another turn.

This week saw swap rates leap again; timing that is particularly fortuitous for those investors participating in Vector's rollover programme, as the rate for the new bonds came in at 6.23%p.a., higher than expected. 

Vector shares, meanwhile, carry a gross dividend yield closer to 4.5%. Shares would traditionally need to offer a higher long-term return than bonds.

The secondary market for bonds responded, with that market now offering an array of listed bonds at yields above 5% now, and a few exceeding 6%. Even the 30-year Auckland Council Green Bond, one of the longest dated instruments on our debt exchange, is trading above 5%.

Meanwhile, the sharp declines seen in the cryptocurrency market are testing those high risk investors who believe in the product. The emergence of KiwiSaver funds aimed at giving young New Zealanders exposure to cryptocurrency could not have been timed worse, as those investors now settle in for the long haul in the hopes of a price recovery. The growing cohort of public figures declaring cryptocurrencies and NFTs a scam will be worrying to those overexposed to this sector.

And of course the sharemarket drop, while perhaps not as spectacular as the fall in cryptocurrencies, is forcing investors to confront their risk tolerances, as we asked them to do during our seminars in May.

Not every investor responds the same way when markets see a surge in volatility.

Income investors, especially those accustomed to the vagaries of the economic cycle, will be more interested in each company's ability to maintain revenue and dividend streams. Those invested in high quality, essential businesses may even view the price declines as an opportunity to reposition themselves further, although such an investor would be wise to exercise patience amid the gloominess now pervading the market.

Growth investors have a different proposition to consider, especially those new to the market that lack the cushion of years of share price growth. Those with long term investment horizons may choose to look through this period of inflation-based asset devaluation, while those without the benefit of time may choose to re-examine their asset allocation. With bonds returning to the 5% to 6% mark, there has been a noticeable shift amongst investors choosing to pivot back towards bonds.

The developments observed over the course of this month will not have given confidence to many of these groups.

Global inflation data suggests a problem that is escalating in size.

Food prices are rising at a faster pace than anticipated, including staples like grains and rice. Labour costs will adjust, creating an inflationary spiral for Reserve Banks to tackle.

Reserve Banks, globally, appear to have collectively adopted a ''path of least regret'', determining that out of control inflation is our greatest enemy, and losses in economic growth and employment are worth enduring for the sake of taming inflation.

Incidentally, this environment may also serve as a true test of the 2019 changes made by the New Zealand Minister of Finance. Readers will recall that the Reserve Bank adopted a ''dual remit'', forcing the Reserve Bank to consider both price stability and now employment when formulating monetary policy. Critics at the time pointed out that a situation might one day occur when these two objectives directly contradict each other – when the Reserve Bank must decide whether to control inflation at the expense of employment, or vice versa.

Further abroad, inflation is clearly the sole focus. The US Federal Reserve lifted rates overnight by 0.75%, the highest individual leap in 28 years, and is threatening to do the same again next month. It seems improbable that New Zealand will allow itself to fall far behind. 

Meanwhile the war in Ukraine is becoming steadily more entrenched. To compound this, new rhetoric is emerging in regards to Taiwan, as the US and China trade barbs. One hopes that we can resolve our current crises before taking on another.

After a decade of falling interest rates and rising asset prices, Reserve Banks around the world are seeking to unwind this, lifting rates and selling assets that were bought through Quantitative Easing programmes. 

Part of this will be rhetoric - threatening higher rates to spur banks into positioning themselves pre-emptively - taking steam out of the market without the need to follow through. 

But recent actions suggest at least some of these forecast rises are coming to pass, as Reserve Banks become more aggressive in lifting rates, preferring to ''overshoot'' than ''undershoot''.

Investors expecting the phenomenal asset price growth of the 2010s to continue, or even simply stabilise, have been given a further wakeup call this week.

Travel

David Colman will be in New Plymouth on 20 June (very limited times available).

Chris will be in Christchurch on Tuesday and Wednesday July 5 (pm) and 6 (am) at the Airport Gateway and welcomes requests for appointments.


Taking Stock 9 June

Johnny Lee writes:

The sudden volatility of Sky Network Television's share price has seen a number of eyebrows lift over the last few days, as the company looks set to make its next big move.

The share price rose sharply after rumours re-emerged that the company was actively seeking a suitor to acquire some or all of the company. It promptly fell after announcing that in fact the company was looking to itself acquire another company altogether – Mediaworks. Mediaworks is owned by two Private Equity firms, Quadrant and Oaktree Capital.

Mediaworks is perhaps best known as the owner of half the country's commercial radio stations, including the likes of The Edge, The Breeze and Magic. Mediaworks has posted losses for many years now, a trend shared by many advertisers during COVID.

It would be fair to describe the market response to Sky TV's announcement as tepid.

There was a time when Sky TV was considered to be one of New Zealand's best shares - the quintessential blue-chip stock - with growing profits and a captive market, and a company that looked completely immune to disruption. While there were absolutely those who believed that online streaming was the future, the prevailing view was that Sky TV was a core part of New Zealand's consumption habits.

With sports rights secure and the prevalence of digital piracy low, a rugby-mad nation had no alternatives but to pay Sky TV its monthly charge. There was no viable competitor or alternative.

Now, of course, we have the benefit of hindsight. Whether the decline was led by overseas competitors, an increasingly time poor population, an oversaturation of the sport or simply a company disengaged from its customers, the net result was that revenues, profits and dividends fell.

After years of falling subscribers and poor financial results, the company has recapitalised and is apparently ready to be seen as ambitious. The company wants to expand into radio, arguing it will help diversify its revenue streams and grow shareholder value.

Shareholders reacted by selling out, although part of this would have been due to the expectation of different news – a possible takeover of the company.

I would argue that CEO Sophie Mulaney has earned the right to argue her case, and skeptics should delay their criticisms for now. The Private Equity owners are said to be reluctant to continue holding the loss-making asset, presenting an opportunity to acquire the company at a price more favourable to Sky TV.

However, rightly or wrongly, the prevailing view remains that an expansion into radio is inconsistent with the vision of a modern, digital company. The key will be to explain why this view is wrong, and why Sky TV will be a better owner of Mediaworks than Oaktree and Quadrant were.

August would present an ideal opportunity for this. Sky TV has previously indicated it will report a profit and a return to dividend payments in August, and spirits will no doubt be buoyant.

If Sky TV completes its due diligence and chooses to proceed with the acquisition, the company shareholders will be asked to vote in support of such a transaction. Normally, these votes are perfunctory – generally speaking, shareholders trust that the management team of the company they own has their best interests at heart, and has the best information available to make the best possible decision.

A vote against such an acquisition would effectively be saying that they have lost confidence in the management of the company.

It is also entirely possible that, following the conclusion of due diligence, the company decides to walk away from making any offer. Even if this were to occur, shareholders will still want some clarification on what the future of Sky TV holds, and the vision CEO Mulaney has for the company.

The next few months will be a very important period for Sky TV's future, regardless of the decision it now faces.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Rising oil prices are continuing to cause havoc worldwide, as a broad range of factors conflate with no obvious short-term solution.

The war in Ukraine is clearly a leading cause. The lifting of lockdowns around the world and a return to tourism is also seeing demand for fuel increase.

Normally, this would be matched by a ramp-up of investment into new supply. However, US producers have been reluctant to commit money towards this, stating that they lack the confidence that future demand will be strong enough to justify such an investment.

Instead, the profits being made at today's high prices are being used to buy back their own shares. Exxon Mobil, once the world's biggest listed company, recently announced a $30 billion USD buyback programme.

In little old New Zealand, we have largely been shielded from some of the worst of these impacts, after the Government reduced the petrol excise tax by 25 cents (equating to about 29 when including GST) until June. This was later extended by two months.

We do not have any realistic capacity to increase our national oil production. We are price takers, with our best hopes lying in reducing our reliance and therefore demand for oil. Whether through electric car ownership, public transport, carpooling, biking or working from home, our prevailing strategy appears to be targeting the demand side of oil.

Recent surveys have shown that the cost of fuel is one of the biggest issues facing New Zealanders, exceeding the likes of Climate Change and Poverty. In the US, it is typically the biggest or second biggest concern surveyors hold. There is even a tenuous, but generally accepted link between petrol prices and political popularity – Governments do not tend to survive when petrol prices rise dramatically.

The cost of petrol is influential partly because it is attached to the price of most other goods – as transportation costs increase, these cost increases are passed onto consumers. Groceries become more expensive. Labour becomes more expensive.

Realistically, with the world's second largest exporter of oil at war, it is difficult to be optimistic that these trends will reverse. The world has been through periods of elevated oil prices before, and these periods are generally followed by a supply response. This may happen again.

However, judging by the rising share price of the likes of Woodside Energy, investors seem to be accepting that these high prices are, at least in the short-term, here to stay.

_ _ _ _ _ _ _ _ _ _ _ _

Fonterra is the latest company to announce a share buyback, allocating $50 million to buy its own shares for cancellation.

$50 million equates to about 16 million shares at current pricing, an amount that should not be difficult to complete over the prescribed twelve month period. The rationale provided for the buyback was that the market was mispricing (undervaluing) the company, and the most efficient use of excess co-operative money was in buying its own shares.

Fonterra states it will continue to assess investment opportunities throughout the twelve month period.

I expect this trend towards share buybacks to continue. Businesses seem reluctant to commit to long-term investments in this environment, taking the safer option of simply buying their own shares as a means of delivering gains to shareholders.

_ _ _ _ _ _ _ _ _ _ _ _

Chris Lee writes:

When organisations are not meeting their required standards, failing in their obligations, there might be many explanations.

The problem might be COVID, or the weather, or unavailability of funding or inability to attract the necessary labour.

If the organisations are failing, a sane leader would consider the liability for that failure.

Will there be penalties as happened in the delayed completion of the brilliantly engineered Transmission Gully highway?

Will there be compensation claims, as the banks have faced for their appalling failures to calculate their charges correctly?

Right now, if I led the organisation whose task is to provide roads in New Zealand that are fit for purpose, I would be building a contingency fund to compensate the victims of my organisation's failures.

Specifically, that organisation is guilty of appalling failure to maintain State Highway One.

As I drove to Taupo for a short address to a group of largely retired people, I watched cars and trucks ducking and diving to avoid the atrocious holes in the road surface, bad enough between Bulls and Waiouru, simply dangerous on the Desert Road to Turangi.

I can foresee that if nothing is fixed, we face peril when we inevitably cede highway priority to electric Penny Farthings and insist families visiting their Taupo holiday houses travel in convoys of those cycles.

Whole families will disappear irretrievably down the crevices and chasms that pock the road.

Since December last year, when the road was awful, it has deteriorated to a dangerous state, a threat to tyres and even to wheels.

One hopes the Crown is preparing to compensate those owners of vehicles damaged by this neglect.

_ _ _ _ _ _ _ _ _ _

In a Christchurch newspaper last week, the Christchurch entrepreneur Bernard Whimp advertised that he will soon offer his alleged investment skills to ''retail'' investors.

Whimp, of course, was the emperor of the low-ball offers that saw him fall foul of the authorities in previous decades, and earned him the contempt of the media and the financial services sector.

His low-ball offers were legal, and eventually allowed, after ensuring that even the most inattentive investor realized that low-ball offers are of great value only to the offeror, Mr Whimp.

I have watched a nauseating, staged interview in which a guileless ''interviewer'' asked patsy questions, allowing Whimp to explain his theories that could allow him to be a champion fund manager.

I have watched Doug (Somers) Edgar and many others beguile an innocent audience with their predictions of riches, awaiting to be picked.

If Whimp produces an offer to New Zealand retail investors, blessed by the Financial Markets Authority, I offer my response at no cost to any intending investor.

Any such investor may e-mail or call me.

Travel

Edward will be in Wellington on June 17.

Johnny will be in Tauranga on Wednesday, June 15 and Christchurch on Wednesday, June 22.

David Colman will be in New Plymouth on June 20.

Michael plans to visit Auckland, Hamilton and Tauranga in the weeks ahead.

Please let us know if you'd like to be contacted about an appointment


Taking Stock 2 June 2022

Most investors will be familiar with the name of Christine Lagarde, the impressive French woman with a world-class career, and now one of the most influential people on the planet.

Lagarde was a high-performing lawyer, a French Cabinet Minister in areas, like agriculture and fisheries, and, under a new president, France's Minister of Finance, fifteen years ago.

She became the Chairwoman and Managing Director of the International Monetary Fund, where she served two terms and is now the President of the European Central Bank, aged in her 60s

So we should all just accept she sits on the top table surrounded by networks of private and public sector sages, to whose knowledge and wisdom she will have ample access.

That platinum standard of network is rewarded only to the very best people in the field.

Her influence in matters like global financial stability, and even in areas like investment outlooks, is at a level beyond the horizon for those in politics, regulation, or capital markets in New Zealand.

Of course, those top table roles do not lead to infallibility. Indeed, at the IMF her predecessor was of such poor judgement that he figured he could help himself to hotel servants, revealing a predilection that spoke of vulgar, extreme entitlement and landed him in the colosseum of public ignominy, a body now rapidly created thanks to social media's juries.

Two weeks ago, Lagarde spoke publicly and equivocably about cryptocurrencies.

They had no value, at all, she said. Nix. Zero. None.

With a Gallic swish of her hand, the subject was concluded; no need to debate it.

Many, many others have long viewed the various cryptocurrencies as being nothing other than a platform on which to release one's gambling instincts.

The underlying value, for those in that camp, could just as easily have been the equivalent of a paper cup. The whole concept was to exploit the Bigger Fool theory, daring others to pay more for an alleged means of payment, those in that camp believed.

The desperate country of Venezuela, facing inflation galloping at double-figure rates PER DAY, and anxious to escape from the use of the US dollar, authorized Bitcoin to be used in all payments, giving the concept a grain of credibility.

Having no special interest in Venezuela, I may have missed any recent announcements but to date its use of Bitcoin has been disastrous, as the gambling fraternity has shrunk in numbers, and all cryptocurrencies are in free fall, Bitcoin retreating roughly 40 percent in 2022.

After cryptocurrencies had attracted a new breed of gamblers, a new fad arrived, non-fungible tokens (NFTs) appealing to those who sought an instant multiplication of their wealth by trading a new concept.

NFTs began with such nonsense as unique pencil drawings by anyone who might be known to those whose lives centre on watching television, movies or concerts.

Presumably, a drawing signed by Sabrina or John Wayne would have attracted bids of millions from those who had made tens of millions from, in effect, playing chicken, with Cryptocurrencies, or perhaps from gambling on meme stocks, like Game Stop.

The era of NFTs has now evolved, with usage being of some value to those who love to collect music or sporting memorabilia.

But fundamentally NFTs were invented to fill the spending urges of those who had accumulated absurd financial excesses, probably by gambling.  Those who worked to earn their fortune would surely have more respect for their money.

Well, all of this background on those inventions that enable gambling to happen is about to be surpassed by a new fad that might tempt the most addicted gamblers.

A young American couple have gained approval to install a new platform (Kalshi), in commodity exchanges that will enable anyone to bet on anything. They have raised $30 million to install their platform.

I hope that such betting would be restricted to issues where the outcome is binary and cannot be manufactured by either party.

In essence, if I wanted to bet $1000 that it will rain at midday on Xmas Day in Paraparaumu Beach, as measured by the Met Office, I could offer that bet on the platform.

Others, for part or all of that sum, could bet against me.

Hopefully, the new platform will enable a punter to bet only on an outcome that cannot be manipulated by another party.

The manipulation threat is obvious.

If a punter bet a million that a bomb blast would destroy a public lavatory in Timbuktu, the punter might find a person to arrange this, to win his bet.

I recall many years ago reading a book in which a USA media group won a reputation for ''scoops'' by positioning its journalists in advance of an ''accident'' or ''event'' that the media group had organised.

Ultimately the media group paid terrorists to create mayhem, the journalists pre-positioned to film and narrate the event, gaining huge boosts in circulation with their run of ''scoops''.

It was a novel, not based on facts, as far as I know.

Years later I was driving three teammates back to Kapiti, after competing in a sporting event. We left Rotorua at 9 PM after a long tiring day.

For a while, the four of us in my car listened to the harness races and kept alert by betting $1 each on the yet-to-be-announced size of the trifecta, after each race. The nearest to the actual figure won $3.00, paid up, immediately, milk tokens not accepted.

When the races ended one bright spark offered to bet that we would reach the next town, say Turangi, at 10.12 pm. Others offered different times.

I bet 10.16 pm. I won. The $3 came to me as my car arrived at Turangi exactly at 10.16 pm. 

Slowly the penny dropped.

''That was a dopey idea,'' the bright spark realized. ''Lee is the guy in charge of the accelerator!''

I do ponder whether huge bets on a new platform will be manipulated.

I also ponder what caused mankind to so disrespect the value of money that they would indulge in such enormous helpings in activities that have zero added value to the world. What next?

Christine Lagarde is no fool.

Some ideas have a real value of nix.

 _ _ _ _ _ _ _ _ _ _ _

Our seminar programme ended this week, after visits to a dozen New Zealand cities, talking to approximately 1100 investors.

A summary of the seminar has been included in our client's quarterly newsletter, published in the first days of June, sent to all advised clients.

The purpose of the seminar was to bring urgency to the need for all investors to refresh their asset allocations, after digesting the variables that make market direction unpredictable.

Rarely, certainly not in my career, have so many extreme variables conflated. Given my longevity in financial markets (48 years) it is unlikely many financial market participants would have had the necessary experience of such variables to have any more useful vision of the future.

Yet almost daily, often in newspaper supplements aimed at selling advertising, we read the solemnly- delivered advice to all investors that ''holding out'' will deliver the best results if measured in a few years.

There is probably no need for me to yet again analyse this dross, or to note the self-serving motives of those who are keen to feature in the presentations. One vacuous financial planner told National Radio that retired people needing income should bet on asset price growth because it is not taxable for most. Why is the media so undiscerning in its choice of commentators?

Kiwisaver fund managers, indeed all fund managers, are paid extravagantly providing they can grow, or at worst hold on to, the existing level of funds they manage. Capital protection is not their motive; fees are.

Financial planners who have never worked in the engine rooms of financial markets may wish to bet on another round of price rises. Good luck, with that. Fund managers should know better.

If you are unsure about fund managers, look at the bonus (extra) fees that rely on the managers taking extra risk (like punting on cryptocurrencies), The worst of our fund managers do not, of course, represent all of them. Many are wise.

Yet never do I recall a fund manager wise enough to note that the threat of capital loss might imply that loss-averse investors should revert to no-fee bonds or bank deposits. That option seldom is mentioned.

Public servants with no accountability for investment results, especially no accountability for losses, and with no wealth management skills join the salespeople in repeating the meaningless dross, that ''all will come right in the future''. Their input is valueless. They should be silent

Our seminars defined the variables and noted that none of the best financial market analysts would dare to forecast an outcome, let alone timing for that outcome, concluding that caution was a sane response to extreme levels of variables.

We did not need to repeat the words of world-renowned 85-year-old financial guru, Charlie Ellis, who noted the first rule of successful investing is ''not to lose''.

We did quote another sage, Jeremy Grantham who BEFORE THE RUSSIAN INVASION noted that the world markets would never again surge based on cheap inputs – Commodities, energy, labour, food, cost of money etc.

The years of easy profits and high dividends may be ending.

He named his podcast then ''The end of cheap''.

Ignore Ellis and Grantham at your peril!

Our seminar urged investors to make an honest re-assessment of their attitude to risk, and to adjust their asset allocations if the previous allocations were not appropriate for their circumstances, and for the new set of variables.

For those who neither were willing or able to sit out an unknown number of years, or for those who could not replace lost capital, risk could be reduced with little or no threat to income by increasing allocations to the best offerings of the New Zealand corporate bond market.

The seminars noted that by definition all attendants (having investment portfolios) were privileged, given the median person on retirement has surplus capital of less than $50,000.

Furthermore recently published data showed that virtually all New Zealanders were privileged.

If one divides the 7.8 billion people on the globe, by 78 million, one gets to 100 people, roughly the average audience for the seminars.

If the room of 100 people reflected the average person on the planet then

- 73 would have a cellphone

- 30 would have access to the internet

- 49 would live in a rural area; 51 in an urban area.

- 33 would be Christians, 22 Muslims; 12 would have no religion

- 11 would live in Europe, 5 in North America, 15 in Africa, 9 in South America, and nearly 60 in Asia/Pacific

- 7 would have tertiary education

- 17 would be illiterate

- 26 would die before reaching 14, 66 would die between 14 and 64, and 8 would live beyond 65

- 6 would have access to potable water, tertiary education, the internet, and homeownership.

The seminar urged attendants to protect their privileged position by safeguarding essential capital, accepting that capital might need to supplement income to cater for a period of high inflation.

The variables are unprecedented. 

Nobody should be taken in by self-serving salespeople delivering dross to the media or by those mouthing empty platitudes.

 _ _ _ _ _ _ _ _ _ _ _ _

Johnny Lee writes:

The bizarre episode of DGL Corporation's (DGC) NZX listing is coming to an end.

The company announced it has made the decision to delist from the New Zealand Stock Exchange, listing solely on the Australian market.

DGC made headlines a month ago when its CEO and major shareholder, Simon Henry, spoke to media and made the baffling decision to insult Nadia Lim, one of the founders of unrelated company My Food Bag.

Since the comments were made, DGC has fallen about 20%. My Food Bag has fallen close to 2%.

The rationale given for the decision to delist was that New Zealand ownership of the company was expected to be greater than what transpired during its brief tenure on the exchange.

If true, this would represent a stunning lack of foresight. Institutional shareholders do not look favourably upon companies where a majority shareholder also happens to be the chief executive and a director.

Ironically, this governance test was fully justified in this scenario.

Investors in any of Henry's future ambitions will also be mindful of this experience.

The one positive I can draw from this entire affair is that it will make a useful case study for companies on how not to conduct themselves.

The delisting will occur at the end of this month. NZX shareholders will be issued an Australian Securityholder Reference Number in due course. 

Those wanting to avoid this outcome will need to sell prior to delisting. Judging by recent trading activity, shareholders are already making the decision to quit.

Travel

Chris will be in Taupo on Monday June 6, available to meet with clients, before talking to a group on June 7.

Edward will be in Auckland over three days in early June. He will be in the boardroom at the Ellerslie International Hotel on Wednesday 8 June (FULL), at Aristotles in Wairau Park on Thursday 9 June, and in Jarden House, Auckland CBD on Friday 10 June.

Edward will be in Wellington on June 17.

Johnny will be in Tauranga on Wednesday, June 15 and Christchurch on Wednesday, June 22.

 

Michael plans to visit Auckland, Hamilton and Tauranga in the weeks ahead. Please let us know if you'd like to be contacted about an appointment.

Chris Lee


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