Forum Archive Index - February 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Pat,

> 
>At the time I started this thread on capital notes, I was
>considering if (1) a potential decrease in Govt. cash rate, (2) a
>softening of corporate earnings due to slowing down of NZ economy
>over the next 18 months or so and (3) the fact that capital notes in
>the USA (i.e., "convertible securities") are the flavour of the
>month over there - all these could make capital notes an interesting
>alternative to high yielding shares.
> 
>

Thanks for sharing your global overview.

>
>
>A decrease on RBNZ's cash rate would push the price of the the notes
>up hence there is some capital gains there.
>
>

Agreed.  However, I think an RBNZ cash rate cut would also push up 
the price of high yielding shares.  So I don't see a distince 
advantage for the capital notes there.

>
>
>A softening on earnings would not affect the income payments
>on the notes (assuming no default, of course!)
>whereas dividends from shares would go down (potentially).
>  
>

Agreed.   

>
>
>The issue that convertible securities is fashionable
>in the USA, and if replicated here, would push up the price 
>on the market.  
>
>

You added the rider 'if replicated here'.   A couple of key 
differences between the NZ and US market is that over there it is 
really hard to find good high yielding shares in the US.  Part of 
this is due to the US tax system which double taxes all dividends.  
So many companies structure their affairs so they don't pay 
dividends.  There is no system in the US equivalent to the NZ 
imputation credit system.

George Bush wants to introduce an imputation credit system and if 
this comes to pass you may find Americans start looking seriously at 
high yield shares again.  Curiosity may flow beyond the US market and 
some of those US investment dollars may head our way chasing NZ 
high yield shares and pushing up the price of those shares.  And this 
change in behaviour might not be fickle fashion, but a permanent 
change underpinned US legislation.

Of course the increasing likelihood of the US having to pay for a war 
in Iraq on its own, and the bill for constructing a new space shuttle 
may have torpedoed this tax cut plan.  Maybe our 'US correspondent' 
Allan Potts might like to comment if he reads this?

( and may I say Allan, if you are reading, I was most distressed to 
hear of the loss of the Space Shuttle Columbia today.  I for one 
certainly respect all the scientific research work, for world 
benefit, carried out by the US space program. The great people who 
were part of it and crewed Columbia did not deserve to die that way.  
The American people have my sympathy. )

>
>
>Obviously, all this is pure speculation but I was
>wondering to what extent those would make the case for capital notes
>over the next 18-24 months a little bit more compelling.  
>
>

I think the case for capital notes and other bonds is a lot better 
now than it was a year ago.

>
>
>Whether the market right now has already priced all of the 
>above or not, I don't know.
>
>

That's a tough call and I don't follow to US political scene closely 
enough to answer it.

>
> 
>In any case, I was interested to read your comment on your
>porfolio's performance last year.  I've been piling up high yielding
>shares for quite some time now - since I saw live a presentation by
>Peter Lynch in 1998.  He had just two overhead charts durng the
>entire 90 minutes - one of them, he said, encapsulated his
>philosophy: "Dividends drive the market".  Since then, I've been fan
>of high yields.  At the moment, I have CMO, ALF, WKL, CNZ, NAP, LPC,
>KIP, RBD, HLG, and STU.  As you can see I'm still sceptical of
>WRI... but you've been slowly convincing me ;-)
>
>

CNZ,NAP and KIP are property shares which I tend to stack up against 
other property investments.  Wakefield Hospital is on the takeover 
trail, and how that will affect future earnings is something I 
haven't studied.  Allied Farmers is probably worth owning in 
anticipation of the reduction in the future dividend yield, through a 
pushed up share price.  Colonial Motors is part of the fickle motor 
market.  I don't know but I'm guessing it has to be watched closely 
because of that. Hallenstein Glasson is one of the few NZ retailers 
whose expansion over in Australia has succeeded.   I don't know the 
share well but its probably one to pick up if the price is right.  
LPC, RBD and STU I own myself, albeit STU only via an indirect 
interest in 'Onesteel' in Australia.

SNOOPY



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