The Dim-Post

August 20, 2013

Moneyscramble: round 2

Filed under: finance — danylmc @ 1:18 pm

The very pragmatic, fiscally sensible government led by very serious experienced businessman John Key has announced it will extend interest free loans to investors in Meridian Energy for 40% of the share value. Because giving people interest free loans to buy your own dividend returning assets off you is how things are done in the real world.

If you take a look at the share price for Mighty River Power you can see why they’ve come to this:

mrp

This also seems like a good time to revisit John Roughan’s column urging the Herald’s readers to buy these shares:

Investors in Mighty River Power should send the champagne next week to Russel Norman, Green Party, Parliament Buildings, Wellington.

The stock looked a good buy even before he talked the Labour Party into threatening price control on electricity. It looks an even better one now.

I hope Roughan put his money where his idiot mouth is and invested heavily.

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25 Comments »

  1. The information expressed by the Prime Minister (PM) does not suggest or imply and should not be construed, in any manner, a guarantee of future performance and/or investment advice. Past performance does not guarantee future results. Therefore, no current or prospective investor should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended and/or endorsed by the PM), or product made reference to directly or indirectly in Government publications or on Government websites, or indirectly via link to any unaffiliated third-party website, will be profitable or equal to corresponding indicated performance levels. Returns are projected and based on data believed to be accurate and reliable.

    Comment by George D — August 20, 2013 @ 1:31 pm

  2. “Because giving people interest free loans to buy your own dividend returning assets off you is how things are done in the real world.”

    How come I gotta pay a fee to get a passport? I own the passport office and have paid taxes “all my life”.

    Comment by Clunking Fist — August 20, 2013 @ 1:55 pm

  3. “Because giving people interest free loans to buy your own dividend returning assets off you is how things are done in the real world.”

    How come I gotta pay an encroachment fee for my garage? I own the council and all its land and have paid rates “all my life”.

    I guess I SHOULD pay a fee to the govt (by way of compensation to fellow taxpayers perhaps?) since they will lose an income stream and I will gain one?

    Comment by Clunking Fist — August 20, 2013 @ 2:02 pm

  4. I’m not quite sure of the point you’re trying to make CF or why you think it relevant to this thread.

    it sounds like your error comes from thinking that because you’re part of a collective that you speak and act for the entire collective. this is similar to what the government is doing in assuming because we elected them they can do whatever they like on our behalf

    Comment by nommopilot — August 20, 2013 @ 2:13 pm

  5. Oh yes nom, he indeed speaks for all tory Stifling Cunks. In this case saying anything, anything at all, to stifle the fact that the family farm is not only being hocked off, but we’re now also being charged 100 mill extra for the wrapping paper.

    Comment by ak — August 20, 2013 @ 2:40 pm

  6. To be honest, this could be a fine deal, providing the share price is struck right, ie if there is a sufficient premium to capture the value of the foregone interest. Much as I want to criticise the Nats and all.

    Comment by Stephen J — August 20, 2013 @ 3:02 pm

  7. He thinks that way because he got his political education from Michael Cullen (sorry SIR Michael Cullen).
    Don’t you remember his claiming absolute authority when he announced “We won, you lost, eat that!”?

    Comment by Alwyn — August 20, 2013 @ 3:04 pm

  8. sorry stephen – i dont see how “public asset partially sold to private interests on tick” can be considered a good deal for said public – who, after all, is who the govt is meant to be working for.

    Comment by framu — August 20, 2013 @ 3:08 pm

  9. I’m not quite sure of the point you’re trying to make CF or why you think it relevant to this thread.

    I’m glad I’m not the only one to wonder that.

    But, back to the point, apparently the holder of the shares in 18 months will have to pay back the 40% (rather than the original purchaser) http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11111330 So, won’t the effect of this proposal be to instantly devalue the shares by 40% upon issue?

    Comment by RJL — August 20, 2013 @ 3:10 pm

  10. Framu: if you put the basic argument about selling public assets aside, the question is whether a deal structured like this makes sense for the vendor. And it could. The analogy would be with stores that offer interest free payments on goods. Those stores make money by charging enough that it effectively covers the interest. Such deals are *good* deals from the vendor’s point of view if the buyer is confused on this point and more willing to do a deal than otherwise.The fact that the asset sold here has an income stream of its own makes no difference, as long as the price paid reflects the value of that stream. However, it does all hinge on the price offered by the vendor, which we don’t know.

    Comment by Stephen J — August 20, 2013 @ 3:26 pm

  11. Those stores make money by charging enough that it effectively covers the interest…

    Well, such stores make money by selling the TV (or whatever) at a greater dollar value than what it is worth to the store. But, sure HP works because the buyer has insufficient capital to make the purchase outright, so the buyer is willing to pay long-term for the access to additional purchasing power now.

    However, most share buyers are actually institutional investors (who have their own ready capital sources). Why would they want to pay more long-term for the privilege of buying shares on HP, when they already have access to the required capital right now? The only way this will make sense from the point of view of an institutional investor is if the additional purchasing power provided by 40% discount is *cheaper* than the institutions own sources of capitals. That is, the price must be set *lower* than the value of the discount. So, there will be a net loss on the HP scheme for us/treasury.

    Comment by RJL — August 20, 2013 @ 3:48 pm

  12. RJL, my understanding is that you can borrow up to 40% value with no interest, not that you receive a 40% discount, so I’m having trouble making sense of your argument.

    I agree though that this makes much more sense as an offer to unsophisticated retail investors.

    Also, consider the risk of borrowing to buy an asset that can drop in value, so that you can’t pay back the debt by selling the asset. Even if there is no interest on the borrowing, that’s still a high-risk strategy. Effectively this is buying the shares on margin. It’s not really that great a deal for the buyer.

    Comment by Stephen J — August 20, 2013 @ 3:56 pm

  13. stephen J – i dont think we can put the issue of selling public assets aside – it is part and parcel of the whole deal. Unless selling shares on tick is some sort of common practice these days we have to look at the whole issue.

    remember “Because giving people interest free loans to buy your own dividend returning assets off you is how things are done in the real world”

    Comment by framu — August 20, 2013 @ 4:04 pm

  14. selling appliances on hire purchases isn’t necessarily a way of tricking people. People may be tricked, but alternatively they may be rationally taking advantage of it to get the use of the appliance earlier than they could if they had to pay upfront. However, this doesn’t make sense for buying shares, as they are purely a money-making technique, so either it’s a trick, or it’s a gamble between the buyer and the seller in which they’re both betting on the idea that they know better than the other and will therefore get the better deal.

    Comment by kahikatea — August 20, 2013 @ 4:46 pm

  15. “Unless selling shares on tick is some sort of common practice these days” — in the form of margin trading facilities, yes it is.

    “However, this doesn’t make sense for buying shares, as they are purely a money-making technique” — in this case, I get the stream of dividends and the opportunity of ownership sooner.

    Like I keep saying, at the right price, it could be a good deal for the seller. Danyl’s criticism is predicated on the wrong price being set. That’s all.

    Comment by Stephen J — August 20, 2013 @ 5:08 pm

  16. However, this doesn’t make sense for buying shares…

    It does if the intent is merely to inflate the number of buyers, by loaning capital to Mum and Dads investors, and by allowing the government to pretend that the price institutional purchases pay is greater than it really is. The vendor (i.e. Bill English) doesn’t care whether or not he wins on any associated gamble with the movement of the share price.

    Comment by RJL — August 20, 2013 @ 5:49 pm

  17. Like I keep saying, at the right price, it could be a good deal for the seller.

    If it’s a good deal for the seller, it’s a bad deal for the buyer. Institutional buyers aren’t going to be fooled into a bad deal. Therefore, it will be a bad deal for the seller. Which English doesn’t care about, because the nett effect will be to inflate the number of buyers and to disguise (by inflating) the true value of the float.

    Comment by RJL — August 20, 2013 @ 5:54 pm

  18. John Roughan wasn’t the only one to trumpet the “MRP is a bargain thanks to the Labour/Greens Devilbeast!” line. This from DPF over on Kiwiblog, the day of the announcement of the $2.50 share price:

    Yay, this means I’ll get all the shares I applied for. It also means I picked up the shares for around $600 cheaper than they might have been, thanks to Labour and Greens.

    I will get 2,000 shares, which is 214 more than I would have got if the price was $2.80. Assuming the real value is $2.80 if the nationalisation policy never eventuates, then those 214 bonus shares are worth $600.

    Not heard much about what a bargain the purchase was since then, but. You’d think he’d be thanking the Devilbeast for saving him from taking an even bigger bath, but there’s no gratitude in this world.

    Comment by Flashing Light — August 20, 2013 @ 9:04 pm

  19. Danyl’s criticism is predicated on the wrong price being set. That’s all.
    I got push-polled tonight with all sorts of questions re my disposition towards the share market and the Meridian float in particular, with a side-helping of “Did the Mighty River Power float make you want to buy Meridian shares ?”.

    The fact, Stephen J, is that English et al are now realising that selling assets during a global recession is a bad idea, and that yet another energy company on our market is unlikely to do well, AND one that is in competition with Chinese modern developments (i.e. new aluminium smelters) is basically a shite deal WHICH IS WHY they want to hoodwink retail investors into investing into Meridian with the “x months interest free” deal. This is why they did a $30 million corporate welfare deal – they know Rio Tinto is going to cut & run, but $30 million of taxpayer’s money is a spinnable cost to keep the facade going.

    Remember: the Key National government are about transferring wealth from ordinary Kiwis to the already wealthy. Getting Mum & Dad investors into the Meridian float is about paying for the unaffordable tax cuts for the wealthy, nothing more.

    Comment by mikaerecurtis — August 20, 2013 @ 9:34 pm

  20. “Unless selling shares on tick is some sort of common practice these days” — in the form of margin trading facilities, yes it is.

    And a practice which is now being viewed with concern “margin debt on Wall Street hovers near $377bn, just below its all-time high and well above peaks before the dotcom crash and the Lehman crisis. ”

    http://www.telegraph.co.uk/finance/economics/10240740/Investors-euphoric-as-US-margin-debt-reaches-danger-levels.html

    The use of instalments was a vital part of making the UK privatisations of the 1980s very successful. I don’t recall any privatisation having such a long gap between instalments and incorporating up to three dividend payments. It’s quite possible that the proposed scheme may enable a higher price to be set because the yield will be very attractive. But then if these are such solid investments why would you do that?

    Comment by TerryB — August 20, 2013 @ 9:53 pm

  21. they know Rio Tinto is going to cut & run, but $30 million of taxpayer’s money is a spinnable cost to keep the facade going.

    $70 million if you count the foregone interest (or twice what we saved by not allowing post-grads to get student allowances)…

    Financial Wizzzzards (/zoidbergvoice)

    Comment by nommopilot — August 20, 2013 @ 9:59 pm

  22. This loan sweetener to get people to buy the shares illuminates in the starkest possible way that these sales of vital infrastructure have always been about a marriage of extreme ideology and crony capitalism, not rational economic common sense.

    Comment by Sanctuary — August 21, 2013 @ 7:11 am

  23. “…I hope Roughan put his money where his idiot mouth is and invested heavily…”

    Today’s Herald editorial was probably written by Roughan. It is the very model of neo-liberal wishful amnesia informed by nothing more than blind faith and held together by utter idiocy (if you accept the definition of idiocy is continually doing the same thing in the expectation of a different result).

    Comment by Sanctuary — August 21, 2013 @ 7:25 am

  24. This is a hilarious turn. He should offer interest free loans to do some currency trading too, then we can all be aspirational, whilst saving (or selling out) the kiwi dollar.

    Comment by Ben Wilson — August 21, 2013 @ 5:28 pm

  25. How desperate. The desperate, grasping, capitalist agenda of National is sickening. Shortly after they won their first term, they secretly developed plans to sell off state assets when there was no need for it as it was before they has borrowed billions of dollars. Yet they did not campaign on asset sales until the 2011 election. Then claimed they had a mandate to sell state assets because they won a second term, even though most people were against the idea. You saw it on TV every night during the campaign, “I support National but I don’t support the asset sales.” How can you have a public mandate to do something when most people do not support what you plan to do, and when you intended to implement this policy three years before campaigning on it, and were setting it all up three years before you campaigned on it and three years before anyone knew the plan?

    Comment by Daniel Lang — August 26, 2013 @ 10:09 am


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