Ask Alan: 22 August 2019

G'day. Welcome to Ask Alan for this week, and it's great to see you. Thanks for joining me. And I've got a tie on because I'm out there selling my book. I was doing an event this morning, and I'm doing lots of events and tonight's the book launch. It's all happening at the moment. I don't normally wear a tie, but anyway I thought I better this morning. It was with barristers, they all had ties on, so I did a speech for them, signed a few books, it was fine. And you'll find the books in the book shops at the moment. If you don't want to pay full price, that's fine. The couple of offers we've got here at InvestSMART and Eureka Report are that if you're a new subscriber, which is obviously not you because you're watching Ask Alan here, but if you were a new subscriber, you could subscribe to Eureka Report for $198 and get a free book.

If you're an existing subscriber to Eureka Report, you can upgrade to Intelligent Investor for $198 and get a free book. That's an upgrade offer. And if you don't want to do any of that but you just want a cheap book, you can... They'll have it in the briefing on Saturday, but there's a code you can use on the bookseller's website, which will give you five bucks off. The code is InvestSMART. I think that's right, or smart... I think it's on our website and I'll have it in the briefing on Saturday. But if you do the code, you'll get the book sent to you for $29 instead of $35, so there you are. But look, we've got tonnes of questions so I better get stuck into them and remember the live stream and my answers are general advice and may not be appropriate for you. And if you've got any questions as we're going along, please feel free to pop them in, and I'll get to them.

So number one question is from Greg. "I was just reviewing some of your earlier CEO interviews and re-listened to the one you had with Justin Miller from Nuheara back in April, that’s NUH. Since then, they've completed a $4 million capital raise at 5 cents per share, and announced the sale of their Peruvian mining tenements, and a couple of days ago announced that they'd been approved as a supplier under the NDIS for autism. All of these announcements should be seen positively if the price currently sits at 3.4 cents, about half that at the time of your interview. Company appears to have great technology, the products get very favourable reviews, have a really good website, and appear to be embarking on a good strategy of targeting a very big pre hearing aid market at a price point which seems to be competitive. Is this a screaming buy or am I missing something? By the way, they have currently got a 30% Father's Day sale on all products at the moment. So I'm waiting on my IQ buds to arrive, so we'll be able to give a review shortly."

Well, I'll be interested in your review, Greg. I reckon there's two potential problems with Nuheara. One is that... Well it's the old Valley of Death situation. I mean yeah, they did raise $4 million. That means they've got $7 million in the bank, cash. It's not enough. It's not going to get them there. They're burning about $2 million per quarter. They've got a lot of expenses, so they're burning a lot of cash. The $7 million is not going to get them very far and I don't think it's going to get them to break even.

And so they still are not through the Valley of Death, which is where they've got a good product, haven't yet got a good business, and they need cash to keep going and they haven't yet got to break even, and so they are in the Valley of Death, and they haven't got through it. The second thing is that they had to pivot. They started off as a headphones business for listening to music and talking on the phone and so on and that didn't work because the things were too dear, and now they've pivoted to being more of a hearing aid business so that they are cheap hearing aids instead of... So they used to be expensive headphones, and now they're cheap hearing aids.

And I'm wondering whether... And I don't know this for sure, but I wonder whether they're going to end up not being either, that they're going to fall between the two stools. When people are going to buy a hearing aid, they want a proper hearing aid and they're prepared to pay a couple thousand bucks. Now maybe supplying autistic children under the NDIS will save them. Maybe that'll be a good business, I don't know. But I think it's probably a good idea to get them back on and talk about it, because I'm not sure where they're at strategically and whether their pivot is going to work. I just don't know. So I would say that it's definitely not a screaming buy. Whether it's a long term good prospect I think the jury is still out, Greg. I'm sorry, I'm afraid I think that the jury is out.

Ryan says, "Hi Alan, it would be great if you could interview the new CEO at Class Super, CL1, Andrew Russell. He outlined a new strategy at this morning's earnings call. He's only been in the role since leaving REA Group in May, so you might want to give him a few more months to settle in before you interview him with some tough questions."

All right. I will. I think it's an interesting business, they've done very poorly. I don't really know why. There's another question on them later, I'll just see if I can get to that now actually.

While we're talking about Class, Nitin says, "Hi Alan, you previously interviewed CL1's CEO, and he was shown the door after the interview, I hope not because of the interview and the share price is only heading down. Unfortunately, I made a mistake of buying it. They announced the results yesterday, which were okay. Do you know what is happening with the business? Can you please interview the next CEO, the new CEO?"

The answer is yes, I will. Greg is putting him on the list as we speak.

Robert says, "Hi Alan, perhaps I've made a bit of a classic investing mistake. Last year I bought some stocks in the ETF, IJR which is the iShares S&P Small-Cap, thinking that it might have similar or even better performance than the ETF, IVV, which is the iShares S&P 500. The former has gone backwards, while the latter has gone forwards. What might be some of the reasons that IJR has underperformed IVV?"

Well, I can't say I'm an expert on any of this, but the IJR benchmark index is the S&P 600 Small-Cap. This is American, not Australian Small-Cap. It's the 600 Small-Cap, and I think you may be, Rob, you may be a bit of a victim of the trend towards ETF investing, because ETF money is pouring into the big cap stocks, making them bigger. The money's not necessarily... I know IJR is an ETF, but they're not that popular. The Small-Cap ETFs are not the ones really that the money's going into. It's really the S&P 500 type ETFs. Money is pouring into those things. It's therefore going into the big companies according to their size, which is what ETF investing is all about and as the money pours into them, they get bigger.

So I think one of the reasons that those S&P 500 type ETFs are outperforming is because simply there's a self-fulfilling element to it, in that the money pours in, they get bigger, the index goes up, and more money comes in. So there's a bit of self-fulfilling prophecy about it, but the Small-Caps don't get it. Now the Small-Cap index really does have 600 stocks in it, and there's a lot of them are very, very small. I mean that is a huge portfolio. You're buying 600 companies.

But the other thing I'd say Rob is that... So that's the last 12 months performance of the IJR has been poor, that's true. But the 10-year performance of it is 15% per annum. So it's not bad, I mean you might just have to be patient. It has been a good investment over a long period. It's just had a bad 12 months, possibly because it's been a great 12 months for Big-Caps, and the money's tended to focus on them rather than the Small-Caps. But I think over the long term Small-Caps do tend to outperform Large-Caps. Although as I was saying, it may be that that is being distorted at the moment by all the money going into ETFs.

Anon says, "What's your view on Blackmores at the moment?”

Look, I think it's a good brand name, good brand. The business lost its way. They lost contact with Daigous, the Chinese buyers who send stuff to China, and that really hurt them last year and they are trying to get that back now. If you go onto our website, onto the Eureka Report website, and search Blackmores or Marcus Blackmore, you'll find a couple of interviews I did with Marcus Blackmore this year and last year. They're very informative interviews, well worth listening to. He's frank, you know, he's one of these CEOs or chairmen who doesn't muck around. He tells you what he really thinks, and he's quite open about what happened and what they have to do about it.

So I think that's the best thing to do is to have a look at those interviews, read the transcripts of them. I don't really have much of a view about Blackmores. It's come down a long way, a long way. But I've got no idea whether it's come down enough yet. So that's all I can say.

RH says, "To A Kohler. Regarding your graph on Thursday night on the ABC, 15th of August, shows recessions occurred after yields went negative. Quite a time delay I note. Why? Surely if markets crash, it wouldn't be months after negative yields, would it? You didn't clarify. Please advise."

Okay. The reason that there are recessions after the yield curve goes negative, and it's not so much yields going negative. That graph on August 15 referred to the yield curve. The yield curve is the difference between short and long term interest rates and the yield curve going negative refers to the time when long term interest rates go lower than short term interest rates. And the point is, and everyone's been talking about it, is that the yield curve, which is the difference between the 10 year bond yield and the two year bond yield, has gone negative before every recession in the past 50 years.

And it went negative two weeks ago. It's now positive again, but it went negative two weeks ago. And everyone said, "Oh, there's a recession coming." But what you need to understand or remember is that the reason that there's a recession usually, after the yield curve goes negative, is that it's because the short term interest rates have gone up in turn, because the central bank, that is to say in America that is the Federal Reserve, has put up interest rates in order to crunch down on inflation.

And so in effect what's happening is that the Central Bank is causing the recession. It's not the yield curve that causes the recession. It's the Central Bank putting up short term interest rates. As a by-product of that, the yield curve goes negative because short term interest rates go up faster than long term interest rates, and you get that inverse yield curve situation, but it's the rise in short term interest rates that cause the recession. What's happening this time is that there's no rise in short term interest rates. In fact, they're coming down. The other thing to note, you talked about the delay, and asked why there isn't such a delay? Well, it's because monetary policy, interest rates going up or down, has a delay. It never acts immediately. It usually takes 12 months in fact. In those cases, it took less than 12 months because they put up interest rates a lot and it really had a big impact on confidence.

But normally, monetary policy takes 12 to 18 months to have an impact, have an effect, and so that's why there's a delay after that time. I hope that helps, and explains it. If you've got any further questions on that, please don't hesitate to send them in and I'll get to it next week.

Chris says, "Hi Alan, enjoyed reading your briefing on Saturday as usual. Just one observation regarding your once every 118 days idea. This may be a statistically accurate, summary of the collated data which normalised the notable days trading, but would it not be more realistic to say that while 3% falls are not rare events, the chart shows that they tend to come in clusters?"

That's absolutely true. Chris, you're making a making a good point, and it may be that was the first... The other day was the first of a number. That's true. They do tend to come in clusters. So, fair point.

This is a long question from Bernie about ETFs. Wondering if there's flaws in the structure. First is, they transact through an unaffiliated authorised participant who could offer to buy and sell the ETF at prices they determine. And he worries that in a severe downturn, this connection to the market will be lost, and that the authorised participant will take an exceedingly cautious position which will accentuate the loss in the ETF. Secondly, the nature of buyers of ETFs may be more inclined to sell in the downturn compared to other market players, which will further accentuate a downturn.

Look, you're right, Bernie, we're in a bit of uncharted territory here. The money going into ETFs has increased markedly since the GFC. That is to say since the last big downturn, so we don't know how ETF investors are necessarily going to perform, and how the structure of ETFs is going to perform if there's another one like that. All I can say is I hope there isn't another one like that, but if there is, we'll find out because we don't know. That is true. I think a lot of the concerns are overblown, but I could be wrong. It is true that there's a lot more ETFs now than there used to be. That's for sure.

Peter says, "Hi, Alan. Just received a letter from AMP regarding the SPP, the share participation plan. What are your thoughts on this?"

My thoughts are that $1.60 is okay. That's the price of it. It's the lower of $1.60 or two and a half percent discount, as I understand it. At the moment, the price... Well, when the SPP was announced on August the 8th, I think, the share price was $1.73, and it's now $1.74, so it's more or less the same. It did pop up to $1.90, and then popped down again. And so the share price is basically the same as it was when the thing was announced. The $1.60, what is that? Seven and a half percent discount on the current price. That's not to be sneezed at, but really you should only do it if you want to put more money into AMP because you like it, and you think it's going to do well.

Me? I'm conflicted about AMP as an investment. I think that it's very interesting. It's got a lot of funds under management, $200 billion, makes it, I think, the largest fund manager in the country. That's in AMP Capital, and really AMP Capital should be worth a lot, a lot more than the whole company. I think that the future of aligned advice, as a distribution model for financial services, is flawed and is coming to an end. I don't think it's going to last. So I think that I wrote in the briefing the other day, last Saturday, that I think AMP needs to be broken up. If it was broken up, then I think the sum of the parts would be worth more than the current whole. So therefore, it would be a decent investment. But it's possible that they won't break it up, and drive the thing into the ground. And so, if you've already got a fair few AMP shares, that might be enough. That's all I'm saying.

Manfred says, "My Eureka subscription finishes next week. Do not need InvestSMART. How do I renew Eureka only?" Well, if you're an existing Eureka only subscriber, you just have to renew it. The retail price is $330. That's the deal and it should be fine. So the way InvestSMART was working was, it had what's called essentials and then premium. Essentials is basically Eureka Report, and premium is basically Intelligent Investor for premium. If you're a premium subscriber, you get Intelligent Investor and Eureka Report. If you only want Eureka Report now, you'd need to go onto the website and make sure that that happens. If you have any problems with that, please let me know. Just write to the thing, address it to me, I'll get it, and I will see that you're looked after. But you'll be looked after anyway. They're fantastic around here. The customer service people here are great. If you have any questions, just ring them up. They'll be really helpful. Just use the 1300 number on the website, and they're always fantastic. So if you're having any issues, just do that.

Anon says, "Thanks for the articles on EML." Which is... What's the company? EML is EML Payments. That's it. That's what it is. It's a payment business. "And I can't get my head around this market for gift cards. Why does it exist? It is easier than ever to pay. Card, watch, phone, your banks, net banking, PayPal. As a gift, I get the concept of a gift card being more thoughtful, at least to people who aren't me, but is this part of the business truly a long term thing? Am I alone here?"

Look, I don't know, Anon, whoever you are. I think, I go to Bunnings all the time. There's always these Bunnings gift cards. Who buys them? I want to know. Who gets a $50 Bunnings gift card? Goodness gracious. Anyway, apparently, it's a thing. EML's business is growing. They seem to be doing okay. They are growing in the US. Maybe there's more gift cards going on in the US than there is here. I don't know. You're asking the wrong person, Anon.

Barry says, "Market crash, alternatives?" I'm not quite sure what the question is. What are the alternatives to what you're currently investing in if there's a market crash?

Well, I don't know. It depends. I don't think there's going to be a market crash, but of course there might be, and if you think there is going to be a market crash, then the alternatives are cash, gold, possibly Bitcoins, silver. My view is, really you're better off with real assets. I'm really interested in, as a kind of a defensive investment, infrastructure, not necessarily listed infrastructure. I think that obviously, if there's a market crash, then Transurban, and Sydney airport, and APA group, and the other infrastructure stocks will all go down as well, simply because a crash ropes in everything. But just because there's a market crash, Transurban's business is going to be fine. The business is unaffected by the crash, and if there was a crash, you would buy more Transurban stocks, that's for sure, if the thing came down. I don't know whether that's answered your question, Barry, because I'm not sure what the question is.

Dave says, "Hi Alan. I found this a really good read." And he links to a story about Poseidon 50 years ago, which I wrote about the other day in my briefing, because it's 50 years since Poseidon took off. August 2, 1969. And I became a financial journalist in, I think, March, 1970, just after Poseidon peaked at $280, and I was signed to be the stock exchange reporter, and it was all happening down at the stock exchange, I'll tell you what. Anyway, Dave says, "I note that the Canadian nickel strike inflamed the situation with the nickel price going up." Which it did in 1969, the nickel price went up because of all the demand for stainless steel and because there was a Canadian nickel price, which is set out in this story that Dave linked to.

And then he asks, "Has the Brazilian tailing dam problems done something similar to the price of iron?"

Yes, it has. Nothing like what happened in '69, and the price of iron ore has come down again quite a long way. I think it's lost almost half the rise. It's back down to $90 or something. It is true that the Brazilian tailing dam did choke off supply, no doubt about it. Was a big part of the reason the iron ore price went up a lot. Now it's come back down. There was not and is not a bubble in iron ore stocks, as there was in nickel stocks back in '69, so I think that the analogy between nickel in '69 and iron ore in 2012 only goes so far, Dave.

Brad says, "Hi Alan. Just wondering what your thoughts are Nearmap’s recent results. All of the numbers appear very good, but it dropped 9% today. What was the market expecting? What would have the market accepted? Your thoughts are very much appreciated."

Well, Nearmap, I think, is a good business, and it seems to be getting somewhere in the US. Yes, it dropped 9%. Don't forget that last week it went up 7%, so it's a bit of a volatile stock. It's also still losing money. It's got a fair bit of money in the bank. I can't remember how much, but it's not about to run out of cash. So I don't think it's, especially, a valley of death situation, but it's still spending quite a lot. But one of the things that I noticed as I looked at the cashflow report, even though it's cash positive on an operating basis, there's another line in their cash flow statement which I found quite interesting, if I can find it again. Yeah, here it is. So they've got cash flows from operating activities and it's positive $25 million in the latest 12 months, up from $13 million last year, so it doubled the operating positive cash flow.

Then they've got cash flows from investing operations, and then they've got payments for capture costs, $20 million, plus plant and equipment purchases, payments for development costs, which they're also capitalising. And those things are about $17 million, so the total cash used in the investing activities is $37 million, so $25 minus $37 minus the $12 million. But then there's a little note against the thing where it says, "Payments for capture costs," and that is a reclassification of costs that used to be in the operating costs line, but they've been reclassified to be investing costs to better reflect the nature of the related asset, which is capitalised.

They've bumped some operating costs, $20 million worth of operating costs from the opex line to the capex line and that's made their cash flow look better. So it may be that the analysts and the institutions had a look at that and thought, "Hello. They've gone a bit dodgy on us," and maybe they’ve sold for that reason.

Well, I mean, they're not hiding it. It's there. It's in the fine print, but it's interesting that they've done that reclassification. I haven't had a chance to speak to them about the justification for that, but I think we should put them on the list and interview them again. What's this bloke’s name? Rob Newman, I think, is the CEO. And I think we need to talk to him again Brad, what do you reckon? Let's get him and quiz him about that reclassification.

Ann says, "I have a Magellan High Conviction Trust priority offer. How should I regard this? Is it more for income or capital gain? I am old, but do not need the income, and my sons, who will inherit the units at the purchase price, may do will."

I think it's a good offer. The priority offer, it's a question of whether you qualify for it. I'm assuming that since you've had that offer Ann, you will qualify. And what happens in the priority offer is what they're doing is they're releasing this new trust, a High Conviction investment trust, and what they're doing is, for those who qualify for the priority offer, they get a bonus of 7.5% of what they pay in extra units. So that's not to be sneezed at at all. I think that Magellan is a terrific fund manager, and I think you should regard it as a good offer and one that you will take up for your sons because this mob are pretty good. It isn't really, I don't think it's an income stock at all. I think it's growth. But that's okay if you don't need the income, it's fine and the priority offer of 7.5 %, assuming you qualify, is great and definitely not to be sneezed at.

John says, "Hi, Alan. I bought ISX a few months ago, but bought more for trade than a long term investment. The stock has been on a good run since."

Bloody hell, has it ever. This company's called iSignthis. It started the year at 15 cents. It's now a dollar. That's fantastic, let's face it. It's had a fantastic run, John, so well done.

"Do you know much about the business? And do you think it has the potential to turn into a good business worth holding long term?"

Listen, I know a little bit about it. You know, just enough to be dangerous, probably. But iSignthis is a documentary verification service that's primarily selling in Europe in line with their know your customer regulation. It's a service that's provided to banks and other financial institutions, in particular, who are required by EU regulations to know your customer and to have verification of documents, special verification, which this mob does.

Personally, I think it is a long term... It's not trade. I mean, this is a long term business. It's global in nature. It's a terrific Australian piece of software. And I think there's no reason to think that it's finished its run. You'd need to look into it more and understand it more, and if you don't feel like going for the run, you've had a decent profit already, so you might want to take some. But you could probably sell some and stay with it for nothing. Sell enough to recover your costs and you're doing fine.

But, look, I think it's a terrific business. Yeah, I like it. I haven't bought any myself, but I do like it. I think it's a good business long term.

Rex says, "Alan, ABC Business Reporter, Stephen Letts, who's a very good friend of mine, wrote this week, 'The bond black hole is getting larger and scarier with a third of the global market now negative.' He adds, 'In the past two weeks, the proliferation of negative yielding bonds has erupted. 30% of the global tradable bond universe is being sold with a guaranteed loss attached to the coupon. That's an eye-watering US$16.7 trillion worth.'

My question is how does the quantity of negative yielding bonds around the world get larger and larger? I assume the growth can only be by central banks' governments issuing more bonds with negative coupon rates. But some of the Letts article seems to suggest to a bond novice like me that the secondary trading market can itself, by forcing the price of a bond up, turn a normal bond with a low yield of, say, 0.05% into a negative yielding bond of, say, -0.03%. But according to my maths, that's not possible."

Well, how it works is, if the price goes to a point... So the thing is that all bonds have a face value, usually $100, and then they have a coupon. Say the coupon is 5%, so you've got a $100 bond paying 5% and it's 10 years. At some point, the bond goes to a price at which, if you held it for the rest of the term, say you've got six years to go, you buy the bond... I don't know what the maths is, but if you buy the bond for a certain price, you've got six years to go on its face value, if you hold it to the end of the maturity term, end of the term, collect all the interest, you'll end up with less money at the end than you had at the start.

That's why it's negative yielding. It doesn't mean that it's got a negative running yield, although, of course, that's kind of the effect of it, but it still pays the coupon, right? The 5% coupon. But it's 5% of $100. So, say, you've paid $100, you've paid $100, you're getting $5 per year in interest, right?

So it's not so much that you're going to get minus, you're going to pay the owner of the bond or the government that issued the bond each year for the rest of the term. What it means is that if you buy that bond at the current price and get your 5% or your $5 interest for the rest of the term, say six years, at the end of that time, you'll have less money because you'll only get $100 back and you'll have taken six years times 5%. So there you go. You can think about it. So six times $5 is $30, so at the end of the term of the bond, you'll get back $100. You've had $30 in interest over those six years, so your return on your investment is $130, but if you paid $140 for the bond, then it's negative. You've lost $10 and that's what's going on.

So when people talk about negative yielding bonds, that's what we're talking about. The price of the bond is greater than the interest remaining on it over the term plus the face value that you get back at the end of the time. And, as Steve said, there's tonnes of it out there, $16.7 trillion. And last night, Germany issued a bond, a 30-year bond, maturing in 2050, with a coupon. Not just a market yield, but a coupon of -0.11%. That means if you bought that bond off Germany and held it for 30 years, you would end up with less money than you started with. Unsurprisingly, it hasn't gone very well. The auction has been a bit of a flop. But some people bought them. Last time I looked, they'd sold about €600 or €700 million. They just didn't get away the two billion that they tried to sell. I mean, €600 million with a negative yielding German bond, heavens above, for 30 years.

Will says, "What listed product would you recommend to protect an ASX 200 portfolio from a fall?"

Well, Will, you need to go to CMC Markets or IG Markets and take out a put option at, say, at 10% below the current level and it'll cost you money. What you're doing is you're buying insurance, and insurance always costs money. So there you go. You can do that. Buy a put option, which means that you've always got the option to sell at a certain price. You determine it, whatever the price might be. It might be 5% below the current level or 10% or even 20%, but whatever it is, you can do that. I think that's the easiest thing to do. There's also CFDs, which kind of do the same thing. But that's what I'd suggest.

That's it, last question. Thanks very much for your company, everyone. It's been excellent, as always. Remember the livestream, and my answers are general advice, not personal. It may not be appropriate for you, so please bear that in mind and I will see you next week.