Thursday, July 31, 2008

Warehouse decision a loser for all

Discuss this company at the Share Investor Forum

In the absence of a detailed summary of the decision out today by the Court of Appeal to stymie a bid for The Warehouse by Foodstuffs or Woolworths Australia, I have to say I am surprised by the decision.

This from Paula Rebstock, Commerce Commission chairman

"New Zealand consumers know that more competition is needed in the supermarket sector. In coming to its decision to decline the acquisition the Commission considered that The Warehouse had already brought important new dimensions to supermarket competition, and potential competition, through its innovative supercentre stores."

What "new dimensions" have the Warehouse brought to Supermarket competition?

Answer? None.

It has 3 "Extra" format stores whose performance thus far has been underwhelming and its potential for the future is in doubt.

The Commerce Commission and Paula Rebstock have made a name for themselves over this appeal and it seems that was all this exercise has been about. Commercial realities have been left in the dust.

Either the legal team for the defence has lost an easily winnable case and or the Court of Appeal Judge is a knuckle dragging, dribble mouthed fool for making such an inconceivably out of touch decision.

Was the Judge off his medication that day?

That is the only conclusion that a sane individual can come to.

The Commerce Commission's legal team had only one string to their bow, the Warehouse Extra stores and their possible beneficial impact on grocery prices but they have no material influence in the supermarket sector and are unlikely to in the future. They have less than .05% of the grocery market.

Rebstock and her Commission have dragged this possible sale saga out for far too long, it has cost the three companies involved, the Kiwi taxpayer, The Warehouse,Foodstuffs and Woolworths shareholders and ultimately the New Zealand consumer.

Economies of scale can be brought to bear if one of the parties bought The Warehouse and that ultimately means cheaper grocery prices.

Unless a likely appeal to the Supreme Court is successful, New Zealand consumers will be the biggest losers.

Warehouse shares were down .60c to NZ$3.22 per share on 4.6 million shares today on the news.

Disclosure I own WHS shares

The Warehouse @ Share Investor

Long vs Short: The Warehouse Group
Warehouse bidders ready to lay money down
The Warehouse set to cut lose "extra" impediment
The Warehouse sale could hinge on "Extra" decision
The case for The Warehouse without a buyer
Foodstuffs take their foot off the gas
Woolworths seek leave to appeal to Supreme Court
Warehouse appeal decision imminent
Warehouse Court of Appeal decision in Commerce Commission's favour
Why did you buy that stock?[The Warehouse]
The Warehouse set for turbulent 2008
Commerce Commission makes a meal of Warehouse takeover
Warehouse Court of Appeal case lay in"Extras" hands
WHS Court of Appeal case could be dismissed next week
Borders decision an indicator of Warehouse takeover outcome
Commerce Commission impacts on the Warehouse bottom line
The Warehouse in play
Outcomes of Commerce Commission decision
The fight for control begins soon

Share Investor Forum-Discuss this topic

Related Links

The Warehouse Financial Data

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c Share Investor 2008 & 2009

Warehouse Court of Appeal decision in Commerce Commission's favour

8.58am The Court of Appeal has overturned the High Court's ruling allowing rival grocery firms to bid for The Warehouse[WHS] by Foodstuffs and Woolworths Australia.

The Commerce Commission case argued that if either Woolworths or Foodstuffs bought The Warehouse, it would result in a "substantial lessening of competition".

This was after the Commerce Commissions case was defeated in the High Court in 2007 and an appeal against that decision was lodged earlier this year.

Trading in The Warehouse shares was thin yesterday, July 30 (NZ time), and price movement was mildly upwards during intra day trading but finished flat, so no pre announcement indications could be gleaned from the markets.

The sale process began almost 2 years ago but has been stymied by the Commerce Commission due to their contention that a purchase of The Warehouse by either Foodstuffs or Woolworths would impact to the detriment of food consumers. The Warehouse, Foodstuffs and Woolworths all argue that The Warehouse food offerings are not significant or successful enough to warrant a Commerce Commission appeal

It is likely that Foodstuffs, Woolworths and The Warehouse will appeal the Court of Appeal's decision to the Supreme Court in Wellington.

The Warehouse @ Share Investor

Why did you buy that stock?[The Warehouse]
The Warehouse set for turbulent 2008
WHS Court of Appeal case could be dismissed next week
Commerce Commission impacts on the Warehouse bottom line
The Warehouse in play
Outcomes of Commerce Commission decision
The fight for control begins soon

Disc I own WHS shares

c Share Investor 2008
& Cartoon Emmerson 2008

Starbuck's New Zealand cup doesn't runneth over

News from the USA that around 600 "unprofitable" company owned Starbucks stores are to be closed and that similar things are happening in Australia, with 61 of 84 stores closing, is bad news for investors in the franchisee operator of Starbucks in New Zealand, Restaurant Brands [RBD.NZ].

Bad news because it is an indication of how many of RBD's franchised stores are losing money.

"Any announcements internationally won't have any effect on the way we do business in New Zealand...the New Zealand operation continued to trade strongly", said Paul Wood, GM of Starbucks in New Zealand, in reaction to Howard Schultz', Starbuck's global CEO, announcement of the closures.

Regular readers of mine will know that I don't agree with Paul Wood's contention. I would argue that the Schultz announcement confirms my suspicions that Kiwi Starbucks are losing money.

Paul Wood maybe right when he says the local Starbucks is "trading strongly", although that is up for argument- small sales increases have come from price increases which haven't kept pace with inflation and rising business costs- but what he didn't say was if they were trading profitably.

RBD's Starbucks are suffering from excessive cost structures. Their leases, especially in their high profile stores, are prohibitively high. That has been the case since the brands arrival here in 1998.

Of late, other running costs have impacted on the size of the loss. Rising coffee, electricity and labour costs are among just a few attacks on the expensively priced coffee makers ability to make money.

The increasing amount of competition for the coffee buck in New Zealand has also made things look bleak for any promise of a profit anytime soon.

McDonalds especially has taken custom off Starbucks. Their lower cost and sometimes better quality offerings has had a severe impact. The fact that the Big Mac has a drive through service while Starbucks is devoid of both that and fast in-store service means revenue increases will not come until something has changed.

There is also a myriad of other competition like Robert Harris, Gloria Jeans, Dunkin Donuts and a whole host of smaller chains, "coffee-to-go" installations and independent operators. Most of which were not around when Starbucks opened here 10 years ago.

After years of losses, the promise of profit for Restaurant Brands Kiwi Starbucks looks even further away than it did at its introduction to this country. Its only hope for real increased sales is to dramatically increase store numbers but that is the very reason the brand got into trouble here in the first place-too much overhead not enough custom.

As RBD are contemplating selling their loss making Pizza Hut chain, the only hope for pegging back theirs and their shareholders losses from the Starbucks brand is for it to be sold as well.

The alternative will be a similar announcement to that of Howard Schultz.

Starbucks[SBUX] shares were up 76 cents at US$14.99 on the New York Stock Exchange and at near year lows look good for a recovery under the eye of the founder once again.

Restaurant Brands @ Share Investor

RBD gives KFC a push
McDonalds playing chicken with KFC
Restaurant Brand's Pizza Hut faces increasing competition
RBD sales analysis
RBD saga continues: CEO leaves
The secret recipe is out
2007 FY profit analysis
Delivering increased profit in October 2007
No reason for optimism in latest sales figures

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c Share Investor 2008

Tuesday, July 29, 2008

Don't forget Money Managers

In the wake of big coverage of late over the collapse of Hanover Finance last week and 25 other finance companies going to the wall, I thought I might revisit a subject that I have covered since I started writing on the Internet.

Doug Somers Edgar, his Money Managers (MM) company and the myriad of companies within that structure-some of them second rate finance companies-that "lend" money to each other have a host of similarities to some of the finance companies that have collapsed over the last 2 years.

Inter-company lending is just one factor that Money Managers uses to not only clip the ticket but to finance risky lending for dubious projects, to companies closely affiliated or part owned by MM interests. Many projects have fallen over, just do a Google search of Doug's full name and you will find a long list, he does when searching for individuals to sue and has landed on Share Investor.

That is where we get to the crux of my column today. We have seen alot of ballyhoo and publicity over the Eric Watsons and Rod Petricevics of this world and their part played in finance company losses, and rightly so, but our friend Doug Somers seems to have been largely lost in the sheer number of collapses.

While other financial collapses have made top of the bulletin news casts and front page mainstream coverage, Doug's MM gets coverage in blogs and weighty financial tomes such as the National Business Review.

I dont fully understand mainstream medias hands off attitude to Money Managers and their money magician former svengali and now minor shareholder, Doug Somers Edgar.

Lets correct the balance here then.

Just this last Sunday 27 July, in the wake of the Hanover collapse, NZ$ 60 million has been put at risk from Money Manager's Totara First Mortgage becoming insolvent and repayments to investors suspended

At the beginning of June 2008, the latest in the massive First Step losses reveals a slowdown in promised repayments to out of pocket investors. There is NZ $38 million lost and $108 million of investors money at risk in the wound down First Step vehicle. Some of the money at risk is owed by a MM owned company Club Finance.

As the economy moves deeper into recession and individuals and companies who have lent money off finance companies and related party lenders, some of them within the Money Managers fold, have trouble paying back money, there will be further losses incurred by investors in Money Managers.

Keep it tuned here.

Related Share Investor reading

Money Managers First Step gives investors the middle finger
Money Managers First Step saga: 3 Story wrap

c Share Investor 2008

Monday, July 28, 2008

Stocks on my Watchlist: NZ Farming Systems Uruguay

On Saturday night I was watching New Zealand's TV One, a conservative channel with middle of the road programming and an audience of mostly over 50 year olds. I'm not there yet.

What I saw at 7.00pm was the channels longest running show, Country Calendar. The show has been running for my whole life, slightly longer than 40 years.

I haven't seen country Calendar for many years but used to regularly watch it in the 70s and 80s.

From my memory it has always been about innovative farming and new ways to make farming easier and therefore increasing the bottom line.

I have checked in periodically over the years and have lost interest because it seems to have lost its focus, for me, on its essential businesslike thrust and become just another "lifestyle show".

Last Saturday I was blown away though, transfixed on the programme as I used to be so many years ago.

The show was about PGG Wrightsons Ltd [PGW.NZ] push into dairy farming. In partnership with its stake in NZ Farming Systems Uruguay Ltd [NZS.NZ] NZFSU, which is managed, part-owned by Wrightson and listed on the NZ Stockmarket, this New Zealand company is forging a new frontier in farming outside its familiar home environment.

As many New Zealanders might know, dairy farming in New Zealand has become big business. It is an industry that contributes a massive amount to our export earnings.

However higher costs of production, labour, land cost and development,inadequate milk supply to meet world dairy demand now and into the future, an NZ dairy sector dominated by a major global milk supplier in Fonterra short of supply, and a whole host of other rising business costs mean the cheaper cost of dairy farming in places like Uruguay make the future of NZ Farming Systems very exciting.

If we look at the way New Zealand's biggest company Fonterra operates, we see that they control a large amount of the worlds milk supply. Much of that milk supply comes from outside New Zealand because we simply cannot produce enough milk solids to keep up with world demand for dairy produce.

NZFSU is a great first step for a listed New Zealand company to take a part in the growing dairy boom. India and China are increasingly becoming dairy consumers and investors in NZFSU will be well placed to reap the financial rewards as the market becomes more mature in Uruguay.

The cheaper cost of doing business in this infant market, with lower land, labour, tax and other ongoing costs, and its geographical position closer to already big dairy consumers like mainland USA, give clear business advantages to the early entrants into new dairy producer markets.

Unlike Fonterra though, mum and dad investors are able to take a stake in NZFSU by buying a chunk of its listed shares.

Fonterra shareholders, dairy farm owners, decided to put off a partial float of their company in a meeting held last year, so buying NZFSU or PGG Wrightson shares is the only way kiwis can get a stake in New Zealand's biggest industry.

It may well be one of the best long term investments one could make considering current and future dairy demand.

Related Links

NZ Farming Systems Uruguay - Investor relations
PPG Wrightsons


Bird on a Wire: The Inside Story from a Straight Talking CEO

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c Share Investor 2008

Friday, July 25, 2008

Share Investor Forum July Giveaway (UPDATED)

Join up to the New Share Investor Forum, make a valuable post in the "market" section of the site and go into the draw to win the following prize. Current members are also eligible to enter the giveaway by simply making a post.

For every additional friend that you refer to the Share Investor Forum you get another chance in the draw.

The Economist is an excellent read, devoid of the usual leftist drivel that one finds in the bulk of the worlds financial media.

The Economist 6 month subscription valued at US$60.00(BUY IT HERE)


THE ECONOMIST is a weekly news and business publication written for top business decision-makers and opinion leaders who need a wide range of information and views on world events. It explores the close links between domestic and international issues, business, finance, current affairs, science and technology. Regular editorial departments include American Survey, Asia, Europe, International, Business, Finance, Science and Technology, and the Arts. In additions, The Economist also publishes special monthly editorial surveys that focus on industries, markets or countries.

**The competition is valid from Tuesday 1 July 2008 up to and including July 31 2008, Pacific GMT + 12 hours.

c Share Investor 2008

2008 NBR Rich List

The 2008 NBR Rich List is out. I suspect most Kiwis will be looking at the list with a large amount of jealousy and an unhealthy level of suspicion.

The NBR says Mr Key's well-known rag to riches story sees him owning properties in Auckland, Wellington, Omaha Beach, as well as an apartment in London and newly acquired $US3.25m holiday home in Hawaii.


Rich List to 10:

1 Graeme Hart $6 billion

2 Todd Family $2.6 billion

3 Eamon Cleary $2.1 billion

4 Christopher Chandler $2 billion

4 Richard Chandler $2 billion

6 Goodman Family $1.64 bilion

7 Lynette Erceg $1.4 billion

7 Stephen Jennings $1.4 billion

9 Wade Thompson $750 million

10 Sir Michael Fay $700 million

10 Douglas Myers $700 million

10 David Richwhite $700 million.

NBR @ Share Investor

2010 NBR Rich List
2009 NBR Rich List
2008 NBR Rich List
NBR Headlines

Share Investor Forum-Discuss this topic


Every Bastard Says No: The 42 Below Story

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c Share Investor 2008

Thursday, July 24, 2008

Hanover Collapse: It was just a matter of time

In a post I wrote on October 5 , as part of the 2007 Friday Free for all series, I had the following story about the impact of Finance companies falling over. Hanover was picked as one of the dodgy ones.

If you were watching the TV over the last few weeks you would have noticed that the saturation advertising the Hanover was running had stopped. That is because they were insolvent.

This will not be the last one to go. All prospective investors in finance companies should be very wary about putting their hard earned dollars at risk.

Think seriously about not reinvesting if you already have money in this sector. Try a term deposit instead.

Financial Impact-from Share Investor's Friday Free for all: Edition 6

The fallout from the dodgy finance company industry rolls on again this week.

Hanover Finance, one of New Zealands biggest finance companies is to cut its Australian staff from 44 to 32.

Hanover has been busy re branding itself with an expensive advertising campaign as a warm , friendly, safe and solid industry player.

I'm still a little wary over this and other companies and their long term future in lending.

Even Hanover's size wont protect it from going under and there are rumours going around about its stability.

Even the State Kiwibank, the loss making division of NZ Post, has reportedly done 6 million taxpayer dollars in the Northern Rock collapse in the UK. One has to wonder why it was invested there.

Auckland-based investment firm Clegg & Co Finance has been placed in receivership this week. NZ $15 million of investors money is at risk.

On August 28 Brian Clegg, the director of Clegg and Co, wrote to investors written under a Classic Finance letterhead:

He writes about the publicity surrounding the collapse of finance companies, but believes his company is one of the "safe" ones, because it was "still operating profitably and successfully in accordance with our lending policy", and had kept out of high-risk lending.

In yet another collapse, investors in Five Star Consumer Finance heard today that they would expect to receive back 26c to 40c in the dollar on money invested but nothing forthcoming until December.

Related Share Investor reading

Money Managers Saga: 3 Story wrap
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Financial 101: Learn before you leap

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c Share Investor 2007 & 2008

Tuesday, July 22, 2008

Why did you buy that stock? [Kiwi Income Property Trust]

Kiwi Income Property Trust [KIP.NZ] was an addition to my portfolio earlier this year.

I wanted direct exposure to the commercial property market without actually buying a building outright.

Kiwi first came onto my horizon when I noticed they had ownership of the 40 level Vero office building in Downtown Auckland, and then my interest was piqued when their Sylvia Park shopping centre in Mt Wellington opened.

Why did you buy that stock?

Why did you buy that stock? [Hallenstein Glasson]
Why did you buy that stock? [Briscoe Group]
Why did you buy that stock? [Fisher & Paykel Healthcare]
Why did you buy that stock? [Pumpkin Patch Ltd]
Why did you buy that stock? [Ryman Healthcare]
Why did you buy that stock? [Michael Hill International]
Why did you buy that stock? [Mainfreight]
Why did you buy that stock? [The Warehouse]
Why did you buy that stock? [Goodman Fielder]
Why did you buy that stock? [Auckland Airport]
Why did you buy that stock? [Sky City Entertainment]

That is all I knew about the company. I like what I saw in its two high profile assets and went digging a little further. Kiwi have a good mix of quality properties, shopping centres and office buildings from Auckland down to Christchurch, among them; Northlands Shopping Centre, Centre Place Shopping Centre, North City Shopping Centre, The Plaza Shopping Centre, Downtown Plaza Shopping Centre, Langdons Road, PricewaterhouseCoopers Building, The Farmers Building and Countrywide Building.

In a property company one of the number one things an investor should look for is good quality assets. For me Kiwi fit the bill, so that for me is the main reason for me to make my small purchase of shares.

Coming a close second is management. Good properties are only going to get good returns over a long period if they are managed well and Kiwi property certainly is.

Since its creation in 1993 the company assets have grown to over NZ $2 billion, it has a great occupancy rate for its properties and it increased profit to just over $63 million in 2008, from just under $48 million last year.

The mix, age, quality of construction and geographical spread of assets show how good management have planned ahead.

The Sylvia Park shopping centre is a case in point. New Zealand's largest retail centre, it has room and space to grow and has over delivered in terms of initial expectations.

The only problem that they have had, and this seems endemic with shopping centre planners, they under estimated the need for car parking, something they are now remedying with a multi story car park now under construction.

Now another reason I bought this stock was that it was cheap in comparison to its share price high, at just over $1.70 per share, and its net asset value to capital market price. Its current market cap of NZ$872 million is less than the net asset value of just over $1.1 billion, so I had to buy.

In the Why did you buy that stock? series I have to ask myself if I would still buy today. At the current share price of $1.13 it represents excellent value and I would like to add some more, should my wife stop taking me off overseas and making me pay for it!

Related Share Investor reading

10 Basic Buffet questions to ask before investing

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c Share Investor 2008

Sunday, July 20, 2008

Stocks on my Watchlist: Metlifecare Ltd

Once a darling of the NZX stockmarket, Metlifecare Ltd[MET.NZ], one of two listed retirement and elderly care village companies, the other being Ryman Healthcare [RYM.NZ], its share price now languishes at a NZ$ 4.36 close this last Friday 18 July and they announced a loss for the half year to December 31 2007 of $12.3 million.

The loss has been explained by management as a result of changes from the application of International Financial Reporting Standards (IFRS). Ryman on the other hand reported a significant increase in profit for the same period.

As at 6:15 pm, 18 Jul (20 min delay)

However, this must put in context with a market that is trying to do its best impression of a lead balloon being tossed from the Empire State Building.

So what would be so attractive to a prospective purchaser?

The fact that the sector of the economy that the MET participates in has had a history of good results and its long term future looks excellent because as we all know the elderly amongst us, save you and I, are living longer and will increasingly need and want the safety, care and security that a well managed retirement village will give them.

Of course long term success is no guarantee, but Metlifecare is a well managed company with a history of good planning, focused property development, for their individual villages and good returns for shareholders and as I have said operates in a growth industry.

Now there have been a couple of attempts over the last few years for a takeover of this company but bidders have been unsuccessful as there are several large shareholders and a couple of them declined to let the bidder have their way, Fisher Funds, the New Zealand fund manager but one of them.

The last bid for the MET was in excess of the closing price last Friday 18 July, which was well short of a stock price high of above 9 bucks Kiwi in 2007. This brings me to another reason why this company is on my radar.

In my humble opinion the current share price represents good value and aren't there heaps of them around at the moment! Net asset backing per share is $6.93, you do the math. Market conditions as they are today have cut the company's capital value by more than half, just like its listed competitor, Ryman Healthcare, which I already own.
Metlifecare "Pinesong" under

So what, the property market, which by definition Metlifecare has exposure to, is in the doldrums. That simply ain't going to last and I wouldn't be surprised if the company isn't getting its tyres kicked by larger investors looking for good companies.

OK, I know Mr Market has got a bad case of the Wiggles right now and it is hard to "pick the market bottom", but if you are one of those guys who do the Rorschach chart predictions, do yourself a favour and stick this one on your slide rule.

I'm putting on my watchlist and looking for a weak day(yes another one) to buy.

Related Share Investor reading

Why did you buy that stock? [Ryman Healthcare]
Time for retirement?

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c Share Investor 2008

Friday, July 18, 2008

Getting fluffy and cute with Teresa Gattung

Come back Teresa, all is forgiven, we love you!

That is what I would be saying if I wasn't being realistic about the disastrous job that Teresa Gattung did at the helm of Telecom New Zealand [TEL] .

Teresa, whose expertise is apparently in marketing, milked Telecom of dividends, failed to invest for the future and cost long term Telecom shareholders billions , as the company share price recently plumbed the depths of sub NZ$3.20 .

After all that she has been resurrected like one of those genetically enhanced sheep from the 2007 film "Black Sheep", the girl just wont die.

Appropriate that I make an early sheep joke because now someone has shepherded her back to New Zealand to become chairwoman of The Wool Company, which is undergoing a complete re-branding under the guidance of PGG Wrightson [PGW] chairman Craig Norgate.

Now you might think this post is about sticking it to Gattung again. Well that is where you would be wrong.

While Ms Gattung was the worst possible person to head a communications company, principally because she doesn't communicate well, as a marketer, she is perfect for resurrecting the tired image and fortunes of the New Zealand wool industry.

Wool isn't sexy, it is still being used mainly in lower margin products like carpet and bulk wool, whereas it could be marketed for use in higher margin goods like quality clothing, specialist outdoor gear and other high end product.

Now I could be wrong, she maybe an awful marketer, however, at Telecom, under her wing, she developed some of the best marketing in business at the time.

The high end wool business could be a high value export business if managed and marketed well and you have to give Gattung a couple of years before you can right her off completely.

Lets hope she doesn't try to pull the wool over her customers eyes, as she did at Telecom.

Related Share Investor reading

Share Investor Forum-Discuss this topic
Telecom NZ Hangs up
Business Gobbledygook puts up barriers to communication
A Rare Breed
Telecom NZ facing a watershed period
Biology a major key in "glass ceiling" for women
Telecom rewards Gattung for mediocrity

c Share Investor 2008

Share Investor Portfolio: 18 July 2008

The Share Investor Portfolio now contains 17 stocks listed on the NZSX. The bulk of the portfolio started back in 2002 and I have added to the bulk of it by using dividends and some cash.

The Share Investor Portfolio as at 18 July 2008

  • Auckland International Airport [AIA] 1000
  • ASB Capital NO. 2 Ltd [ASBPB] 10000
  • Briscoe Group Ltd [BGR] 3000
  • Fletcher Building Ltd [FBU] 1000
  • Fisher & Paykel Healthcare Corp Ltd [FPH] 5000
  • Freightways Ltd [FRE] 8200
  • Goodman Fielder Ltd [GFF] 2000
  • Halleinstein Glasson Ltd [HLG] 1000
  • Kiwi Income Property Trust [KIP] 1000
  • Mainfreight Ltd [MFT] 3125
  • Michael Hill International Ltd [MHI] 3000
  • Postie Plus Ltd [PPG] 2535
  • Pumpkin Patch Ltd [PPL] 5000
  • Ryman Healthcare Ltd [RYM] 5000
  • Sky City Entertainment [SKC] 35000
  • Steel & Tube Holdings Ltd [STU] 400
  • The Warehouse Group Ltd [WHS] 8000

Related Share Investor Reading: Why did you buy that stock?

Why did you buy that stock? [Fletcher Building Ltd]
Why did you buy that stock? [Freightways Ltd]
Why did you buy that stock? [Kiwi Income Property Trust]
Why did you buy that stock? [Hallenstein Glasson]
Why did you buy that stock? [Briscoe Group]
Why did you buy that stock? [Fisher & Paykel Healthcare]
Why did you buy that stock? [Pumpkin Patch Ltd]
Why did you buy that stock? [Ryman Healthcare]
Why did you buy that stock? [Michael Hill International]
Why did you buy that stock? [Mainfreight Ltd]
Why did you buy that stock? [The Warehouse Group]
Why did you buy that stock? [Goodman Fielder]
Why did you buy that stock? [Auckland Airport]
Why did you buy that stock? [Sky City Entertainment]

Discuss this topic @

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c Share Investor 2008

Thursday, July 17, 2008

Not so sweet Fanny Mae

The Fannie Mae and Freddie Mac saga is big by world standards.

Trillions of dollars of mortgages are involved, in fact the firms between them own or guarantee about half of the $12 trillion in U.S. mortgages.

I asked a question about 6 years ago, what would happen if these two institutions tipped over? This was in the light of many US companies involved in "accounting irregularities" at the time and that Fannie and Freddie was a possible inclusion.

The immediate cause of the problems that became public at Freddie Mac in 2002 appeared to be accounting properly for the use of derivatives, what Warren Buffett has called "financial weapons of mass destruction". Under the previous accounting procedures, income for the years 2000, 2001 and 2002 was understated, with income for the future overstated. Freddie and Fannie management decided that this method would be used to “smooth out” earnings, providing reassurance to financial markets and leading ultimately to lower interest rate costs.

The President of Freddie Mac was sacked for his part in the company's "accounting problems".

While assets of the 2 big macs went up in value, via customers house prices, there wasn't a problem, but as the sub prime saga unfolded property prices were hit and Fanny and Freddie now have a big cash flow problem. They are essentially insolvent.

I now know the answer to my question and it ain't a pleasant one to stomach, especially given the problem was painfully evident years ago.

These entities will probably go under without US taxpayer funds being pumped into them and the current credit crises that the business and financial world is experiencing will get considerably worse and there would probably be a contagion effect with other banks going under. The derivatives market upon which most of Fannie and Freddie's business is backed, would unwind and explode upon other financial institutions holding theses derivatives as assets, some of them the ones we have already seen in the news and some we haven't heard from yet.

As the planet is facing tough economic times at present, for Fannie May and Freddie Mac to go under would no doubt cause a massive recession the likes of we haven't seen in generations so one could understand why Henry Paulson and the Fed are looking at bailing these turkeys out.

But, and its a big giant butt, why should the US taxpayer have to bail out even more financial institutions, this time possibly to the whopping tune of US$1 trillion?

The answer is that they will take the rest of us down with them if nothing is done. Hard to stomach, given those that didn't binge on cheap debt and over spend, were not the ones who took the risks in the first place but will suffer anyway.

In New Zealand our mainstream lenders haven't been as reckless, however, the present Labour government wants to start our own sub prime lending, so it could be a problem for us in the future.

Kiwis would be affected indirectly though by a collapse of the two macs, so it is an important story for New Zealand and every other country because a collapse would affect our fragile economy and faith in markets, lending and business even more than it already has.

The bizarre thing is though, while we have been flooded with Tony Veitch and Winston Peter's stories, coverage by our local media over Freddie Mac and Fannie Mae has been largely relegated to small pieces in the businesses pages and biz segments on TV news, not in the mainstream news, where it clearly deserves to be.

Confidence in the economy is much needed right now, Fannie and Freddie have knocked it about again. What Henry Paulson does in the next few days is going to be the difference between a complete meltdown and the status quo.

Unfortunately, I fear there are more Freddies and Fannies to come.

That just ain't sweet.

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Wednesday, July 16, 2008

Financial weapons of mass destruction

In the wake of the Fannie Mae and Freddie Mac fallout last week, I thought it appropriate to re-post an article that I wrote in April this year for the Everything Warren Buffett Blog on reactions to the sub prime fallout.

In less than 5 months things have gotten considerably worse.

Latest on global financial fallout - to July 17 2008

The Fannie-Freddie Dodge -Washington Post
Dollar Little Changed Before Housing, Manufacturing Reports - Bloomberg
Financial crisis and inflation fears plunge w markets - Merco Press
Dollar up, stocks dip on Fannie Freddie plan - Forbes
Economic pain: 'Payback' for debt-fueled growth? - USA Today
Of Course It's A Recession -Forbes
Britain Appears Recession-Bound - BusinessWeek
Economist Predicts Worst is Just Ahead - West Orlando News

The announcement on March 31 (US time) that secretary Paulson is going to regulate the United State's financial markets with changes to it not seen since the Great Depression leaves me with a thought that has been running rat wheels in my mind ever since the current "Credit Crunch" kicked off.

Midway through last year, the Fed began sticking its filthy little hands in dikes all across the financial backbone of the USA by propping up institutions who had lent too much money to those who now cannot pay and to keep the wheels of commerce greased by trying to increase liquidity in the credit market-so we can do business with each other.

Now I am skeptical at the best of times as to State involvement in anything, let alone interfering in capital markets and don't have the foggiest whether the announcement by Paulson is going to change anything in the future at all.

Global financial fallout - to April 31 2008

German watchdog eyes $600 bln global bank losses: report- Reuters
Overhaul of Wall Street regulation doesn't address current crisis- International Herald Tribune
International Financial Panel Urges Bank Disclosures on Risk Exposure- Wall Street Journal
G7 to press big banks to reveal extent of credit crunch losses -Times Online
US prepares to give Fed sweeping oversight powers -Taipei Times
Ghosts of the Great Depression -Business Spectator
US Fed to be grilled over massive support to financial system- MercoPress
World Bank cuts East Asia growth forecast- Channel News Asia
East Asia Economies Pressed by Inflation- The Associated Press

The 1933 changes didn't stop the bear market in the 1970s, it didn't stop the sharemarket crash of 1987 or the tech bubble bursting in 2000 or the current credit crisis because of dodgy lending and investment practices related to that lending.

The interventions by the Fed and its global equivalents, to shore up credit liquidity is the main rat on the wheel in my mind.

What have these interventions stopped?

One can only speculate but one can do that with a largish amount of surety.

During the Great Depression, when faith in financial markets at the time was at an all time low there simply wasn't any intervention by the State apparatus to ameliorate what happened on that infamous day in 1929 when Wall Street threw a woopsey and capitalism jumped out of tall buildings in the financial districts around New York and around the world.

Have interventions in financial markets by State backed funds globally stopped some sort of 2008 crash from happening?

Probably, but not to the extent of 1929, but it is clear that it would have been a crash of some serious nature had there not been intervention.

Another question I have running through my head is, how long will the squillions of taxpayer dollars pumped into the economy stave off the inevitability of a bigger blowout?

That is harder to answer. In order to know better one would have to know the losses involved in the Sub prime loans and associated sub prime bonds, and we are no closer to knowing that than knowing if Hillary Clinton is going to be the Democratic Party leader or if Barry Obama still loves his preacher.

The vexed question of the massive derivatives market also looms in the minds of investors:

Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by nondealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.

"Derivatives are financial weapons of mass destruction. The dangers are now latent--but they could be lethal".

[Warren Buffett 2003]

Warren Buffett aside, I don't think anyone fancies the Fed's chances of shoring up the derivatives market should the dominoes start to topple.

What is clear is this scenario has at least the rest of the year to fully play out and further State intervention should be carefully applied only if is really going to work and not because the Fed needs to be seen to be doing something.

Hold onto those gold bars and keep the cash under the mattress, you just might need it.

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Sky City outlines a clear future plan

Today's newsletter to Sky City Entertainment [SKC.NZ] shareholders got me a little excited for the company and its future direction, and that hasn't happened for a few years.

The content of the newsletter outlined the direction that CEO Nigel Morrison wanted the company was to proceed towards, how it was going to get there, and a time frame to stick to.

The language was clear, to the point, and had none of the "management speak" of past shareholder communication.

It reminds me somewhat of the management at Mainfreight Ltd [MFT.NZ] and their no nonsense approach to ramming their point home.

Now whether management achieve their stated goals is another question, but previous management were truly awful communicators; to their shareholders,within the company and definitely to their customers and the market.

A clear way of communication in business often translates into positive results. Uncomplicated communication gives a clear direction for employees and can translate into a more productive and happier workforce and hopefully a better bottom line.

Morrison has also made practical moves towards the stated company goal, new management have been hired to grow individual casino businesses and a focus on organic growth is emphasised throughout the shareholder communication.

The direction the company is headed is most directly apparent in the outlook for 2009.

"Our shareholders have made it clear to us that they want us to focus on maximising the performance of the assets we operate. This is what we will be doing. as we have said previously, we expect to achieve this within an 18-month time frame. We will retain tight control over capital and not expend capital unless we are very confident of healthy returns for shareholders".

Lets hope the follow through shows some concrete results in the following 18 months.

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Tuesday, July 15, 2008

As recession bites Sky City bites back

I have had a correspondent through email over several months asking me about whether he should sell his Sky City Entertainment Group Ltd [SKC.NZX] shares. In March he asked the following question.

I'm a big fan of your blog, checking it most days for updates (particularly after a tough day on the sharemarket).

I just have a quick question regarding SKC. I hold some shares, which make up about 2/5ths of my (rather small) portfolio - as of late, they seem to be doing nothing but falling. Now, I am not one to sell on a whim, but I have been asking myself recently, is SKC something I should stick with?

I bought in at $4.30 and, after the 7 cent drop today, have lost a fair amount of money. Where do you see this stock going in the short to medium term? How about the long term? I've read the newspaper articles, including the ones on your page, that were posted today, but I'm not sure what to make of the situation.

I suppose selling when the price is so low is not really an option, but would love to know what you think as you are also a holder of SKC shares.

My answer was:

Now I don't really recommend what others should be doing with their
shares or investments but I will tell you what I am going to do with
my SKC shares and why and maybe that will give you an idea.

The rider is that your circumstances will be different to mine: the
dollar amount you are talking about will be different, your investment
term might be longer or shorter, you may have held the shares longer
or shorter than me, etc ,etc.

You will have to decide based on those and other conditions.

I have held my 35000 shares for around 6 years and hold them at a cost
of just over 2 bucks a share.

I don't check share prices daily but it sounds like the SP is around
$NZ 3.70 odd as of today. That is the lowest price they have ever been
since 2002 but at one stage mine were worth $70000.00 more at their
high point of around $5.70.

My investment term for shares is a minimum of 10 years, so I'm not
particularly worried about their current share price. Every share is
getting battered.

The current uncertainties re the credit crunch are a concern to me and
I believe shares could drop another 20% easily, so be prepared for
your shares to drop below 3 bucks.

In the long run though, SKC shows some promise.

The new head seems aggressive in his desire to improve business
without buying more businesses and he has the track record in other
casinos to back up his big mouth.

Some fat has been trimmed from operating costs and I believe the
company is ready to bounce back.

The company does have a largish debt burden but has very cheap credit
funding secured for many years.

The only cloud on the horizon is government legislation.

It is a great cash business, a monopoly in most of its markets and a
great hedge in uncertain economic times.

I have no intention of selling, but if you need the money the shares
are not going to improve in value until the credit crunch has blown
over and that is going to take many months to come.

I hope that has been helpful.

In subsequent emails my correspondent continued to fret over the plunging price of his Sky City holding.

I answered that the company will do OK in a recession, with the implication being that other companies will suffer.

Retailing stocks in New Zealand have been especially hard hit. I have held several retail stocks for some years but given plunging stock prices have bought some new retail stocks, as well as other sectors, into the Share Investor Portfolio.

The general point made to my correspondent was that you shouldn't sell your shares unless you really needed to or if there was something significantly wrong with the company you invested in.

The Sky City example makes a good general point. Stocks and investments are losing value currently. There are good reasons why that is the case. A probable global recession brought on by the Sub Prime credit crunch and high oil, interest and food costs will have impacts on company profits. That will not last forever though, so unless you need the money selling is not a good idea.

You invested in a business and businesses have good and bad times. Get used to it.

Investors who sold Sky City over its share price rort will probably be kicking themselves. The capital value of the company has nearly halved since February but the profit guidance made in that month was re affirmed yesterday.

"There's a lot of concern that in this environment there are a lot of companies contemplating earnings downgrades and we wanted to confirm that we weren't," SkyCity chief executive Nigel Morrison said.

Proving that Mr Market has gone overboard in marking this company down.

Sky City isn't recession proof though. Expect it to struggle slightly in the 1 July to 31 Dec half.

Other stocks listed on the NZX have also been oversold in my opinion.

My correspondent didn't sell his Sky City shares shares.

Disc: I own SKC shares in the Share Investor Portfolio

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