Archive for May, 2009
Friday, May 29th, 2009
ING’s final, final offer to investors in its distressed CDO funds on Thursday morning exempted me from considering THE BUDGET – the only day when the media gets excited about accountancy.
I’ve never been to a ‘lock-up’… except that one time…
Helen Troup, ING NZ head,was probably more pleasant to listen to, anyway, than Bill English droning on about his “dubious distinction of being the first finance minister in 60 years to deliver a budget while the global economy is shrinking”.
Troup denied there was any ING conspiracy to bury its quite interesting offer by timing the release for just before THE BUDGET. She sounded a little like that old standard-bearer of Kiwi whiteware retailing, Alan Martin, with her statement that ING was doing “all it could to make things right”.
This is corporate damage control but it was done with a touch of sincerity. I believed Troup was concerned about the 8,000 out-of-pocket investors – how could you not be? But the revised deal is not a capitulation to critics who have demanded a ‘product recall’. ING and ANZ have batted the ball back to investors asking them to select from three choices “in light of their own individual circumstances” with no collective decision-making now required from unitholders.
Investors who sign up will waive any right to future legal action against ING or ANZ. It’s only fair.
Similarly in THE BUDGET, the government has also implicitly handed some fairly sophisticated investment decisions back to individuals.
There’s some interesting stuff in THE BUDGET (choose your favourite government department and have a look ) but the decision to ‘defer’ automatic payments to the New Zealand Super Fund for a decade has rightfully grabbed the headlines.
Nevermind that you could make a good case for investing more now to shore up future pension payments. Perhaps the government shouldn’t take on this investment risk but if it doesn’t individuals are going to have to without necessarily having the skills to do so.
Without the long-term funding that the NZ Super Fund was set up to address the country’s universal pension will come under pressure sooner rather than later.
But there are other solutions to the looming pension crisis. As Sydney Morning Herald columnist Ross Gittins details in this article, we can all just keep on working.
That might put things right.
Thursday, May 28th, 2009
I think I need some new pills. Last year’s Budget from Labour’s Michael Cullen was all about tax cuts. It looked like the Budget Bill English would like to have delivered.
Instead, English’s first Budget in the Key Government is all cancelled tax cuts, home insulation funding, new roads, school construction and preserving social welfare entitlements during the harsh recession. It kind of reads like a Labour document. There’s even a press statement from the Greens in it, for goodness sake. Far from slash and burn, Government spending continues to increase, just not as fast as before.
There’s plenty of scary rhetoric about the potential for Government debt to explode and the Budget documents show 10 years of deficits ahead – we haven’t seen anything like that for at least 20 years and this year’s will be the first deficit since 1994.
At first glance the forecast Budget deficits for the next two years look particularly scary as they approach $10 billion. Put that in perspective though. Peaking at a bit over 5% of gross domestic product, these forecast deficits are still lower than in the last Muldoon Budget, in 1984, when the projected deficit was peaking at 6.5% of GDP.
In other words, this may be the most crapulent time for any Finance Minister to have to write a Budget since the 1930′s, but New Zealand’s been in worse shape than this far more recently.
In response to that outlook 25 years ago, the incoming Finance Minister Roger Douglas introduced fundamental economic reforms which eventually tore his Government apart, even as those reforms produced the kinds of productivity gains that the 2009 Budget says it wants to achieve.
That was then, this is now. New Zealand’s politics no longer favour crash-through economics, so the question becomes whether Key and English’s first Budget really does enough to set New Zealand up for faster, smarter growth once the recession ends.
Some investments are admirable. The $323.3 million home insulation fund is a welcome acknowledgement that there are big health and productivity gains available simply by helping people live in houses that don’t make them sick. But it’s still an old Labour policy recycled.
Likewise, the Primary Growth Partnership is ultimately Jim Anderton’s Fast Forward science investment fund in drag. The creation of a $1 million Prime Minister’s Science Prize is a stake in the ground signalling that this Government recognises how important new discoveries will be to the New Zealand economy in the future, and there appears to be some welcome new funding for Crown-backed research. However, there is barely a word in the Budget to acknowledge the vital role of universities in creating wealth-producing knowledge.
Tertiary education will have to wait till next year. For the moment, the only action there is to pull back about $200 million of annual spending which the Government says Labour never set aside money for.
An extra 600 police and 246 more probation officers is no doubt politically attractive, and may make sense since crime and recessions do tend to go together. However, there’s something just a bit depressing about this being the single largest source of new job creation in the Budget, accompanied by major new prison funding to house what is already one of the largest prison populations in the OECD, per head of population.
The appearance of an additional $90 million to support the operating expenses of KiwiRail also underlines low quality investments which this Government remains saddled with.
At his Budget press conference, Bill English described the quest for the elusive grail of higher productivity as a matter of “getting 200 things right, not just one or two”. In that sense, this Budget is barely a start.
Productivity forecasts assume that fewer people will do the same amount of work over the next two years, creating a short-term jump in productivity on an hours worked basis to around 3% annually.
However in three years’ time, that rate drops back to 1.5% a year, and flatlines from there. Given that the Budget disparages New Zealand’s average annual productivity growth of 1.8% over the last decade, we have to assume that there is more, better, cleverer policy to come.
To the extent that the Budget lays out a credible path for Government debt control – always assuming there isn’t another big jump downwards in the world economy – English’s first effort does represent “a plan”.
What the Government’s economic policy doesn’t yet represent is a credible vision for what New Zealand should look like once it comes out the other side of the recession.
Labour’s Helen Clark and Jim Bolger before her struggled with “the vision thing” and got away with it because they both governed during periods of generally strong economic growth. The 2010 Budget therefore represents a test of whether this Government, led by the charming and possibly visionary John Key, can paint the big pick seat as English delivers debt-control budgetture any better.
Wednesday, May 27th, 2009
The long tail of the finance company monster is finally appearing in the court system. From what I understand a number of legal cases against financial advisers for putting clients into now-defunct, frozen or worthless finance company investments have been settled out of court – which is perfectly legitimate and probably the best outcome for most parties.
But the out-of-court action prevents the justice system from creating useful legal precedents for how to handle such claims – what does constitute negligent financial advice? Investments do fail, should advisers cop the blame for all of them? And who’s going to pay for it all?
That last question is the one that obsesses litigators. There’s no point suing a person or entity with no assets. And as Tamsyn Parker’s story in the New Zealand Herald this week revealed, that’s just what Donna Barraclough and Tony Hall’s legal team were trying to establish in the case of collapsed financial advisory firm Vestar and its professional indemnity (PI) insurer QBE.
The result was not a good one for Hall and Barraclough – the High Court in New Plymouth ruled that due to exclusion clauses in Vestar’s PI policy, QBE was not obliged to stump up if negligent advice was proven in their case.
And Vestar itself – or the company it morphed into, FP North – is broke. According to FP North’s second liquidator’s report published in March this year, the group is about $20 million short of being able to pay its unsecured creditors (that’s excluding the $7.5 million it owes to ASB, which is first in the queue anyway).
As the liquidators dourly note: “The Company has received a considerable number of notices from investors of their intention to claim losses against the Company and it’s [sic] insurers. A number of these have progressed to legal proceedings.
“The Liquidators are responding to each case individually. We are advising potential litigants that the Company has insufficient funds to defend any action.”
Hence Barraclough and Hall’s move to chase QBE. The ruling against them calls into question the value of PI cover; an issue the advisory industry itself is currently facing.
“It seems that with financial advisers they can get away with not having to pay,” Barraclough told the Herald, but many of them just can’t without PI backing them up.
The New Plymouth Vestar case also highlights how confusing and expensive it is for consumers to seek redress through the court system for poor advice. A proper, consumer-friendly financial complaints system is on the drawing board but until then a number of genuine investor claims will die in the arms of lawyers.
Barraclough and Hall haven’t given up, though, and will now target the former Vestar investment committee and directors (of whom only one is listed, Jason Robert Duncan Maywald – or as I know him ‘the guy who never returns phonecalls’,). The couple are certainly persistent and I hope they get some satisfaction beyond creating another legal precedent.
Monday, May 25th, 2009
The mixed messages keep coming. Last week Standard & Poor’s lowered its outlook for the UK’s top-notch AAA rating, raising fears that the US may face a similar fate soon.
By the end of the week, though, it was the GBP that had strengthened 4.9%, just behind the leading group of currencies rallying against the USD (topped by the Hungarian Forint +6.3%).
Late Friday there was also news that the US government will follow the European lead and raise the subsidy on US dairy exports. The NZD/USD did dip this morning but it is still up 5.4% over a week and a morning.
Behind the rallying ‘risk’ currencies is the green shoots scenario. Faith is growing that we have turned the corner in the financial crisis and the consequent global recession. This may not have pushed share prices up sharply last week but it did have a significant impact on currency markets.
In particular it places currencies such as the GBP and EUR above the trading ranges of previous weeks. For technical traders – and they form a large proportion of the market – the rally has created bullish indicators such as the EUR/JPY 50-day average crossing above 200-day average. The momentum shown, and the likely supporting fundamental reports to come, imply further upside risk for the NZD.
As suggested a couple of weeks ago, 63c is a likely place for the NZD/USD to stall but the odds of a NZD/USD within the 65-70c range are rapidly increasing.
Friday, May 22nd, 2009
First, a disclosure. Between 2003 and 2006, I was chief propagandist for Contact Energy.
So anything I say about this week’s electricity “revelations” is either hopelessly compromised or tempered by an undeniable and weary wisdom, depending on your point of view.
The thing is, Energy Minister Gerry Brownlee just doesn’t make sense when he dismisses the reality of rising electricity production costs as “one little aspect of a business plan.” That’s how he characterised the fact that no matter where you look – to wind, hydro, new gas, post-carbon coal, geothermal, tidal, solar and pretty much anything else you care to name – new energy sources cost more than the old ones.
Add in the fact that soon all energy prices will include the cost of carbon, and there’s no way that Brownlee’s Canute-like edict banning power price rises will hold for anything more than a few months. In fact, it will be intriguing to see who blinks first. All the power companies will have been looking at residential tariff increases in the three-to-seven percentage point range and some will be desperate to make that change to preserve profitability.
Of course, the appropriate public response to a power company crying poor is: “Diddums – wee”.
And Brownlee is playing that sentiment for all it’s worth. Neither his officials nor the affected power companies think that the $4.3 billion of so-called “over-charging” or “gouging” is an accurate number. It is the product of theoretical modelling by a world expert in energy market dynamics, Professor Frank Wolak, and there are big question marks over how he has priced water, which is at the heart of the issue.
Using seven years’ worth of data and taking almost five years to complete his analysis, Wolak has made an extraordinary discovery, not. That is, when energy is scarce it becomes more valuable. So, when hydro lakes are low, the wholesale price of electricity rises.
What Wolak found was that the rules in the New Zealand electricity market don’t work well when the system is under stress, such as occurs in a dry year. He found also that the single most likely player to exercise market power has been Meridian Energy. Not that you’d know that from this week’s announcements which appeared to make Meridian, Contact, MightyRiverPower, and Genesis equally culpable for ramping prices during hydro shortages.
Ironically, the only energy company found to have done anything even remotely dodgy was TrustPower, which got a slap on the hand from the Commerce Commission for initiating an apparently anti-competitive conversation with Genesis back in 2004.
Not that any of that matters politically, since noone likes power companies.
Armed with Wolak, Brownlee is able to have a whack at a popular whipping boy.
Yet when you strip away the rhetoric, the Government still wants electricity to be produced and traded according to signals from a market, and may only look to change the way the rules work when the system is under stress, eg when hydro lakes are low, the transmission system fails, or a big piece of gas-fired kit falls over unexpectedly.
There is virtually nobody in the electricity industry who doesn’t acknowledge that this would probably be a good thing, but from the political theatre surrounding the Wolak report release, anyone would think New Zealand’s electricity system was heading for a fundamental re-regulation.
Let’s hope that’s not the case. If we built power stations like we did in the good old days, we’d get projects like the Clyde Dam which is still producing electricity at way above the current market rates. The fact that water flowing through the dam is “free” is irrelevant when the total cost of the project made it uneconomic unless taxpayers carried its true cost. In other words, we’re still paying in our taxes for the Clyde Dam and its many cost-overruns, while continuing to live with the national myth that our power is cheap.
It has been cheap in the past, and it remains competitive with much of the OECD today. However, every single power company and energy analyst will tell you that the next tranche of new generation will cost more than the last.
The other thing to note is that this alleged “gouging” only occurred in three specific periods – the 2001, 2003 and 2006 dry winters.
Of greater interest perhaps, but outside the scope of Wolak, is the unfettered success that power companies have enjoyed in annually pushing up residential electricity prices well ahead of the rate of inflation.
While all face the same upward cost pressures, the reality is that the generator-retailers’ marketing capabilities have generally been somewhere in the Cro-Magnon Era until very recently.
Consumers are only just beginning to trust that they can change power provider without unleashing an unholy bureaucratic tangle, and in some parts of the country where there is little incentive to compete, many customers have yet to work out that there’s even a choice.
The Max Bradford reforms, from which the current market stems, never promised lower power prices, not that it stops critics constantly asserting that this was the case.
Rather, they promised to place competitive commercial pressure on power providers to ensure both that the lowest cost new generation was built first, and that retailers would curb their price setting in the face of retail competition.
The first of those two outcomes has arguably been achieved. The current race to build new geothermal plant, producing electricity at around eight cents per kilowatt hour, is testimony to that. When natural gas was coming out of the Maui field at half its current price, new geothermal developments made no sense at all and very little new was built for several decades.
Now, with wind and new gas sites typically producing electricity at above eight cents per Kwh, geothermal is suddenly flavour of the month.
The second intended outcome of the Bradford reforms – a dynamic and competitive retail electricity market – has been very slow in coming but it is starting to arrive. But it’s looking like too little too late for an industry just begging for a kicking from a Government that’s keen to be seen to be doing things.
Friday, May 22nd, 2009
New Zealand fund managers, even award-winning ones, are crap was the message most media organisations gleaned from Morningstar’s D- rating of the country. I doubt if many of them even bothered to read past the press release and into the full study, where Morningstar warned that “the report should not be construed as grading each country’s ‘fund industry’”.
“It aims much more broadly than that, in recognition of the fact that the mutual fund investor experience is shaped by far more than the fund industry alone,” the report says.
So the whole system is crap, according to Morningstar – government, regulators, tax policy wonks, researchers, media, – not just those useless fund managers and their lawyer lackeys who draft incomprehensible investment statements and prospectuses.
Actually Morningstar was not so harsh to New Zealand in the report text and the D- was simply the result of the researcher’s skewed – in a statistical sense – scoring system. The study gave extra weight to areas it dubbed ‘investor protection’ and ‘transparency in prospectus and reports’, where New Zealand scored particularly badly.
I think the D- played nicely into New Zealand’s well-developed inferiority complex – an A+ to Morningstar’s marketing department for generating a lot of coverage – but it shouldn’t be taken at face value.
As several commentators have already pointed out the report failed to give New Zealand much credit for its new PIE tax regime or KiwiSaver – perhaps proper acknowledgement of these advances could’ve lifted us up to a D+ on the Morningstar scale, above Spain at least.
The report did raise some important points about fee transparency in the New Zealand market. There is no standard way fund managers express fees here and that does have to change.
Vance Arkinstall, head of the Investment Savings and Insurance Association (ISI), put out a release saying the industry was working towards “improved voluntary standards for consistent disclosure of fees and charges and reports on investment performance”.
Well it’s been working towards that for 20 years. Voluntary standards are rubbish anyway – uniform fee disclosure will have to be mandated.
But Morningstar’s main beef about transparency was that New Zealand (and Australian) fund managers don’t disclose their portfolio holdings or provide an update and profiles of who is running the money.
And this is where the report veers towards supporting Morningstar’s commercial interests rather than upholding the rights of investors. Morningstar makes money by selling reports and tools (such as the so-called ‘Global style box’, which analyses the underlying holdings of funds) based on this information.
Anthony Serhan, Morningstar head of research, got a bit upset when I put this to him. Serhan admitted the portfolio and fund manager profile information would make the researcher’s job a bit easier but he said investors would also like to know this stuff.
That is true for some but I suspect investors are more interested in understanding fund management fees and knowing they have recourse when things go wrong.
Thursday, May 21st, 2009
Over at Lee’s general store this morning I noted The Dominion’s lead story was about the “surprise” multi-billion dollar “windfall” about to hit New Zealand courtesy of the Australian superannuation system. It shouldn’t have been a surprise, the story has been floating around since last August – I’ll claim the scoop on that one.
The news, if you missed it, is that repatriated New Zealanders who have accumulated savings in Australian super schemes should soon – well maybe next year (or the year after) – be able to transfer it to their KiwiSaver schemes.
The stories have concentrated on the so-called ‘lost’ superannuation accounts but, once trans-Tasman portability has been approved, even New Zealanders who know where their Australian super is should be able to bring it back home.There are at least couple of reasons why they wouldn’t want to, however.
For one, investments in Australian super schemes are taxed at a lower rate than in New Zealand – 15% versus the 19.5% or 30% impost applied to KiwiSaver investment returns. Secondly, holding Australian-dollar denominated retirement assets could add a nice touch of currency diversity to your portfolio.
But if you only have a piddling amount – depending on your definition of piddling – locked away in an Australian super fund it could make sense to import it to your KiwiSaver scheme rather than having two sets of fees eroding the miniature nest egg.
And the ‘lost’ super pool is a good place for Kiwis to start tracking these tiny sums. According to the Australian Tax Office (ATO), about $15 billion of compulsory super savings sits in dormant accounts, which are managed by one of several Eligible Rollover Funds (ERF). The best guess is that perhaps one-third of this $15 billion belongs to New Zealanders who have fled back home leaving behind their unloved super. If true, that’s more than is currently circulating in the entire KiwiSaver system – our local managers would appreciate any Australian funds you can spare.
There are a few free online search engines to help you find your lost super such as Ausfund and the ATO itself. Other providers will charge a fee for the service. You may be asked to recall the details of all those menial ‘hospitality’ jobs you once held and the addresses of the various dives you called home. Good luck.
The fact that so much super money sits unclaimed is down to a design flaw of the Australian system which its government is only now trying to correct. When compulsory super started there in 1992 each employer selected a provider, or ran their own non-transferable schemes,with the result that when people changed jobs they usually also were signed up to a different fund. What followed has been almost 20 years of expensive administrative complexity.
With its single individual, portable account model KiwiSaver has at least avoided that pitfall. Thank you Australia.
Thursday, May 21st, 2009
Our new site has been live for a few weeks now, and one of the most common themes I hear is that visitors didn’t realise just how much content the site offered. From news through to education.
Well, here’s where I’ll let you into a little secret.
Most of the content was already there! Unfortunately it was so ‘creatively’ filed away in the old site, it often made it very hard to find. Granted, we have added some great new features too like our Daily ShareChat column. To ensure you can navigate your way around the site, I’ve decided to run a short series of articles explaining where you can find some of the exciting things on ShareChat now.
Did you know you can find out the latest foreign exchange news and rates in our Forex Section? We have a weekly commentary here and a handy live currency rate chart here.
Did you know that we have added two new intra day charts to our Markets page? Here’s where you can get a quick visual snapshot of what both the NZX50 and ASX200 are doing during the day.
Did you know about our Seminars page? This is one of my favourite pages – here’s where you’ll find out what is happening around the country as far as educating yourself in the market. Some are even free! You’ll find it under the Investing tab.
But wait there’s more…. (cringe, I’m beginning to sound like a tv advert). We’ve been busy behind the scenes tweaking the site in response some to great reader feedback.
You might notice that we’ve included the Indices in the top header, next to the ShareChat logo – a great place for a quick glance to see what the markets are doing during the day. We’ve also slightly enlarged the charts which appear next to articles on NZX shares.
Our new column Daily ShareChat column is a huge hit. If you haven’t read Jenny Ruth’s articles yet, I invite you to click on this link and take a look. As a quick recap, last week’s Broker’s calls were:
First NZ Capital rated Sky City Entertainment (NZX: SKC ) as OUTPERFORM.
ABN Amro Craigs rated NZX (NZX: NZX ) as HOLD.
Morningstar Research rated Fisher & Paykel Appliances Holdings (NZX: FPA ) as suiting investors with a high appetite for risk.
Forsyth Barr rated PGG Wrightson (NZX: PGW ) as HOLD
McDouall Stuart rated Telecom (NZX: TEL ) as HOLD
We might have a few BUY recommendations appearing this week – so be sure to check back daily. If you’d prefer to automatically receive the Daily ShareChat in your inbox, it is included in our After the Bell newsletter. You can subscribe to that here. (it’s free).
I would like to congratulate George, who is the winner of our recent competition open to newsletter subscribers. We gave away a set of Go Learn Shares CD-Roms valued at $340. Having watched the CD-Roms previously, I can personally recommend them. You can even view a couple of free sample chapters in our Investing Section.
Watch this space as I’ll continue to source some great giveaways for you. Meanwhile, if you would like to subscribe to any of our popular newsletters, click here.
As always, I appreciate your feedback so if you have any comments or suggestions send them through to me.
Tuesday, May 19th, 2009
In April I whined about the Institute of Financial Advisers (IFA) refusing to name a financial planner – code-named ‘C’ – who had seriously breached the organisation’s standards resulting in a 64-year old client losing most of her retirement money in the finance company abyss.
What a difference a month makes. Just this week the IFA, which represents about 1,200 financial advisers, named and shamed two members for very similar breaches to the crimes of the anonymous ‘C’.
But the IFA disciplinary committee deemed that Craig Lunn and Bruce Ryder stepped beyond ‘C’ in the seriousness of the offences. This is the first time the advisory industry body has publicised the names of members who have breached its code of ethics and professional conduct – it’s a big move for IFA, which deserves a lot of credit for making such a bold decision.
In common with ‘C’, Lunn and Ryder were principally insurance advisers who the IFA said shouldn’t have been giving investment advice. There are plenty of advisers who do both but once new regulations come into force – probably next year – many might decide to specialise in one or the other. Under the proposed regulations investment advisers will be subject to much more stringent compliance and competency requirements than those focusing solely on insurance.
And reading the IFA rulings in the cases of Lunn and Ryder you can see why this might be a good thing. Ryder, for example, plonked the entire $100,000 of the complainant’s money – raised from the sale of a house – into Bridgecorp. And while he defended the investment, citing positive research reports on Bridgecorp from the likes of Rapid Ratings and interest.co.nz, it’s an obvious breach of the eggs/basket rule.
Both Ryder and Lunn were fined by the IFA to cover costs of $30,000 and $37,000 respectively.
“We acknowledge that the costs are significant. That is the unfortunate nature of professional fees,” the IFA ruling said.
Monday, May 18th, 2009
The reaction to the risk-accumulation of earlier weeks came last week. Prices were down across a number of asset classes, including the NZD, and the JPY was up. This is likely, though, to be a check in the rally rather than a full-scale return to the pessimism of earlier this year.
The bad news does continue – Eurozone GDP down 2.5% in the March quarter – but the forward-looking economic indicators still point to improvement ahead, or at least stabilisation. Meanwhile US corporates continue to report lower earnings but not generally as bad as feared.
This theme of “things are bad but are not getting any worse” is likely to be repeated this week: declining GDP in Japan but stabilising housing markets in the US and improving sentiment in Europe. Keeping downward pressure on markets for now is likely to be anticipation of General Motors in bankruptcy.
The local markets have stayed with the global trends and appear likely to do the same this week.
There are two currency trends of note for the NZD. First, for all the talk of green shoots, the major three currencies remain largely range-bound.
Once again people were keen to sell EUR/USD when it approaches $1.38 (hence the NZD/USD recent peaks in the low 60s this year). There would be nothing unusual about the EUR/USD sliding another 1-2%; hence a NZD/USD around 57.5c is possible near-term.
The second trend is the gradual strengthening of the AUD. There is little to suggest this trend has ended. It is likely to resume once equity markets start rising again. And it could resume without an equity market rally should, as will happen eventually, the currency-equity correlation ceases. An upward trending AUD will drag the NZD generally higher (although not the NZD/AUD).
In sum, look for buying opportunities for the NZD.
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