Taking Stock

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Taking Stock 13 May 2021


THE Labour Government's budget this month may offer some comfort that the ravages of Covid-19 have been accommodated by either clever management or good luck.

But the truth is that the many insidious outcomes have yet to surface in New Zealand, if you define ''surfacing'' as being a presence in our mainstream media, where goofiness prevails, front pages more interested in random car accidents than events that affect us all, profoundly.

The imminent budget should be mindful of the following:-

1. Our supply chain (of crucial imports) is imperilled. Motor vehicles, auto parts, household brown goods and whiteware, pharmaceuticals, recreational boats, cycles, building materials and countless other items are both slower to reach our markets and much more expensive, because of short supply. Inflation figures will soon reflect this.

2. Both tiers of our labour market are suffering from shortages. Skilled workers in areas like health, education, policing, technology, and in regulation enforcement, are scarcely available. Manual workers and skilled people who work in agriculture, horticulture, aquaculture, viticulture and silviculture are all in great demand.

The logical outcome is higher wages. Inflation figures . . .?

Meanwhile the creation of money has led to an inevitable rise in wealth of the haves, leaving a growing gap between those people, and those who own neither a house, nor a portfolio of assets, like shareholdings in companies. In the USA, the average money supply over 20 years was a few trillion. It is now nearer $20 trillion, an astonishing phenomenon.

Civil division cannot increase indefinitely, without consequence.

There is unlikely to be any more certain outcome than real consumer price inflation, followed by understandable social grumpiness, as the trickle-up process accelerates.

Anecdotally, though it escapes the notice of the daily newspapers and our television reporters, inflation has already soared in many sectors.

Obviously housing price rises and rents have had increases loudly described in the media, but not so obvious has been the rising cost of luxury vehicles, recreational boats, seaside holiday baches and staples such as food, petrol, electricity, rates and insurance.

If a Consumer Price Index (CPI) was modelled on the spending of people of mature years I guarantee that the index would display today double-figure increases, at a time when for most of the work force, remuneration increases are modest or even frozen.

More than a decade ago, the Reserve Bank mooted the compilation of two consumer indexes, one for senior citizens, and one for the average consumer, who is said to be mid-30s, has a large mortgage, and spends heavily on goods that have become cheaper through improved technology and through importing from countries with low wages and minimal worker protection standards.

So if the ''average'' person paid more for petrol, electricity, rates etc but enjoyed lower interest rates and cheaper television sets, the savings would offset the increases, resulting in a CPI figure of next-to-nothing.

Any time soon the components of the CPI will have to be recalibrated if we aspire to hide the curse of high inflation.

High inflation accompanied by minimal borrowing costs seems oxymoronic. Obviously many wealthy people would simply borrow even more to invest in assets that soar, boosted by high inflation, demand being higher than supply.

Such an outcome feeds inequality.

One unexpected cause of the problem of lack of supply (of imported goods) is now said to be changes in the weather, caused by global warming.

The link between supply problems and climate change is said to be the increasing height of angry wave patterns, and the shortage of ships to deliver containers.

The pressure to speed up delivery of goods, ranging from cars, to cellphones, to building materials, has led to dangerous overloading of container ships, and to a gung-ho seafaring attitude towards ever-bigger waves.

Last year a record 3000 containers were lost overboard, and this year's figures suggest the problem is worsening.

More, and heavier, containers are being loaded onto vessels. And captains are being incentivised, indeed instructed, not to be deterred by dangerous seas.

According to the World Shipping Council, the worst-ever figure for lost containers was around 5000 lost boxes, in 2013, but of that figure 4293 were lost in one awful incident when a ship broke in two in the Indian Ocean.

This year 750 containers were lost from a Maersk vessel en route to Los Angeles from China in January, and in February 260 containers fell off another Maersk vessel when it was buffeted by high seas.

In recent months the shipping industry says it has encountered the worst seas for 70 years.

More than 220 million containers are shipped across the ocean each year, suggesting that losses are relatively tiny, but there is no argument that the losses are increasing and that the average value of the goods in a container is increasing.

We surely do not want a container full of microchips and semiconductors to feed the bottom of the ocean.

Few of us will have forgotten the impact of the grounded vessel in the Suez Canal in March.

It might be stretching the point to blame container losses for the fracture of our supply chain – factory closures for Covid are the real issue – but it is not irrelevant that the sea patterns are demonstrably an increasing threat.

Fractured supply chains, genuine labour shortages, and the printing of funny money are still the major issues for investors, consumers, and those who make such decisions as the freezing of wages for whole sectors of the public, even if none of these subjects are used to sell newspapers or attract advertising.

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THE fifteen years of legal bills that arose from the forlorn fight over Feltex's failure have come to an end, mercifully.

The fight for compensation from directors and promoters of the Feltex share listing has been led by a former employee of the Fay Richwhite company, now a sad shadow of its former alpha-like presence.

That employee was Tony Gavigan whose partner at home is a lawyer of no special distinction, practising just down the road from their home in St Mary's Bay. The two of them have been the prime legal team.

Much of the money raised from the public has been paid to meet legal bills.

Had the claim succeeded, Gavigan and his partner would have been well rewarded.

The claim failed and kept failing in the courts, the very last case being a plea to the Supreme Court to reverse a Court of Appeal finding, which in effect said that the case had gone on for far too long and was wasting time and the various defendants' money.

My view always was that had the case had a fair chance of succeeding, the team leading the attack would have had bazookas rather than Colt 45s.

I am certain Gavigan was sincere in his hopes, but I believe he was raising millions for an attempt that had little show of success after the court first decided that the potential defendants had behaved lawfully.

Class actions are now more fruitful than they were in previous years, largely because the litigation funders have had many successes, and gradually are obtaining more clarity about the likely responses of the court.

Litigation funders employ the sharpest in the profession, usually.

The action against the goofy Mainzeal directors is fairly convincing evidence of their effectiveness.

I also observe that highly skilled solicitors are more often happy to be involved. They want to see the law better defined, and they want miscreants to be accountable. They do not just reach for the low-hanging fruit.

Only a few years ago one often observed full-blooded legal bills for half-hearted efforts, so things are getting better in 2021.

The Feltex saga was a disgrace.

Anecdotes of gross over-selling by at least one party in the initial listing process in today's more vigorous environment would probably have ended the careers of some of the distinctly mediocre people involved.

I doubt that the best of the capital markets people today would offer to sell Feltex.

The directors of Feltex would be unlikely to record on their CVs any role they played in Feltex.

It is said that one of the ''modern'' manufacturing plants extolled by the prospectus as being ''efficient'' had broken skylights and windows, pigeons nesting in the ceilings, and plant long beyond its use-by date.

The Feltex initial public offer deserved to be challenged. Within two years, it was shown to be a lousy offer.

But after the court decided its directors and the promoters had met the standards of the day when the prospectus appeared, the Feltex case had to fizzle out, unless the best legal minds were engaged to push for different interpretations of the law.

A great deal of investor money has reached a bonfire.

Thankfully there will be no more investors lamenting the thrusting of money to meet the costs of the litigation effort.

All investors should look for names in the Feltex process that have regularly appeared in other corporate disasters.

Never-again lists should be updated.

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From next week, Johnny will be writing and editing Taking Stock, for an unknown but lengthy time.

I undertake surgery on Monday and will be under instruction from bossy people for a few months but hope to defy all predictions and be contributing to Taking Stock in a month or two.

In the unlikely event that this week’s Taking Stock is my swansong, may I record my belief that it has been a privilege to have an audience in newspapers and with our newsletters, for 36 years. Thank you most sincerely.

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Johnny Lee writes:

A2 Milk's update to market this week did not make pleasant reading, but broadly confirmed what many investors had already suspected – the recovery to previous levels is taking longer than expected and the ''Daigou'' channel has not yet returned as anticipated.

Daigou, or Surrogate Shopping, forms a significant part of A2's distribution network into China. Agents within Australia, often Chinese students, agree to purchase and either courier or physically carry supplies into China for resale at a significant profit.

This practice became commonplace for infant formula after 2008, when 54,000 Chinese babies were hospitalised after consuming tainted formula. The high level of trust in New Zealand safety standards led to a boom in demand for our products.

Daigou carries some advantages over traditional retailing – including access to immediate scale and a functional distribution network with virtually no capital expense. As A2 Milk has grown, it is now considering ''evolving its channels to market''.

One major disadvantage is the obvious lack of control. For premium brands demanding premium pricing, A2 lacks the ability to set pricing to its eventual consumer, relying on market forces to set prices. The Daigou market is also vulnerable to counterfeiting.

Daigou is not universally popular among consumers, especially in the infant formula space. Many criticise the practice of foreign nationals buying huge volumes of an essential product to send abroad for a profit. A2 Milk, of course, is simply trying to sell its product.

COVID saw a significant increase in stockpiling, as many feared a breakdown in supply chains. This stockpiling, coupled with a sharp decline in birth rates, has led to A2 paring back its short-term expectations, and put in place a plan to take ''more aggressive actions to address excess inventory''. Birth rates are relevant as infant nutrition makes up a majority of A2 Milk's revenue.

Declining birth rates are a worldwide phenomenon. Virtually every country outside the African continent is now below replacement value. While this does lead to broader issues around the shape of the workforce and societal planning around infrastructure, it also leads to specific problems for companies like A2 Milk.

A2 Milk also announced it was considering a buy-back. By using its considerable cash reserves to buy back shares, the company is effectively saying it believes that buying shares in A2 Milk is the best use of shareholder funds. Share buybacks are becoming increasingly common. With fewer shares on issue, the value of the remaining shares should, theoretically, increase.

ATM's share price fell sharply after the announcement, having fallen over 60% from the lofty heights of August last year. Investors, or potential investors, will be cautiously awaiting its full-year results, due in August, for another update.


Edward will be in Auckland on June 10 & June 11, Napier on June 24 & June 25 and in Nelson in July 8 & July 9.

Johnny will be in Christchurch on June 17 and returning in July.

Kevin will be in Timaru on June 14.

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