The ASX 200 breaks through the 6000 mark, NBN, peak oil demand…and is lithium the new oil?

This week James Kirby and I discuss:
  • The ASX 200 breaking through the 6000 mark;
  • Is the NBN all it’s cracked up to be?
  • Peak oil demand;
  • Is lithium the new oil?
  • The huge leak that is the paradise papers;
  • What is going on at Ardent Leisure? Does Dreamworld need a new name?
  • Is Virgin about to be privatised? and
  • What are the risks of Xero delisting from the New Zealand Stock Exchange?

Hello, I’m Alan Kohler, publisher of The Constant Investor.

And I’m James Kirby, Wealth Editor at The Australian.

And this is The Money Café.

The Money Café.

Well James, the café is full today.  There’s plenty of people here and it’s a bit noisy, a bit busier than usual so we’ll have to speak up.

It is, reflecting good times, Alan.

Good times.  Well, I said to them the other day how’s business?  And like every café owner here they moaned like mad, how terrible things are, because things are always terrible.

Dare I say they’re like the farmers, never quite happy.

Well, James, the ASX200 index joined the All Ordinaries above 6,000 this week.  We’ll call that the BT Financial Mega Trend, after all the bull market – there’s no bigger Mega Trend, you’d have to say, than a bull market and we’re clearly in one at the moment.  ASX200 above 6,000, what do you think of that?

ASX200 is the one that matters though, didn’t really burst through, it kind of staggered, kind of crawled over.

I don’t think that’s right, why is that the one that matters, come on?

Well because it’s the one that the international fund managers watch and they’re only interested in the big cap companies and all the big cap companies are in the ASX200.  The other thing was it took an awful long time for it to cross the line.  It actually nearly got to 6,000 several times, several times, and one of those times was two and a half years ago.  So, it is actually genuinely significant to see it cross 6,000 and hold over the line not in any very convincing way but it’s up and over 6,000.  So, you have to think we are finally motoring into new territory now.  Next stop, 6,800 which was the level we hit exactly a decade ago this month at the peak of the 2007 boom.  The other thing which is interesting is that once upon a time you’d say well this is a psychological barrier, which it always was, but additionally with that momentum trading and the amount of algorithm trading and ETF trading in the market there’s a sort of acceleration of everything upwards and downwards.  So, when you do crack that 6,000 it really should make a difference.

There’s a lot of quite bullish reports coming out from pretty big time brokers this week as well.  So, I think there’s a lot of things and I think we may go for a run, if you know what I mean, between now and Christmas and we could see the market doing quite well the next few weeks.

Indeed, and I think the market has got a lot of momentum now and not because it’s so much going through 6,000, which as you say is a psychological barrier, but it’s had a tremendous October.  October is traditionally quite a bad month, obviously it’s when the October 1987 crash happened which distorts the averages a bit.  But, overall October has not been a good month but this year it’s been terrific and there is some momentum in the market.  I’ve been reading a few things suggesting that there’s a fair chance the market will melt up, as they say, as opposed to melt down.

Yeah, and I think what will melt it up?  You’d have to think it’s not the banks, right.  I mean the banks, you would hope, are a neutral issue for the market but I think what will really drive it up, you’d have to think, is resources.  Resources and industrials, and resource related activity.  If you look at the market since February the biggest lifter actually is BHP and Rio is in there too.

That’s right, because of the combination of oil and iron ore, although iron ore has been a bit weak but oil has been quite strong.  I think that what we’re entering into broadly in a macro sort of thematic is it’s all about growth now.

Yes, we’re off the dividend drip.

That’s it.  So, that means that the stocks that are dealt with as if they’re fixed interest securities and bought for income are likely to underperform now because interest rates are rising around the world.

Yes.

And so things like the infrastructure stocks, possibly banks…

That’s why I mentioned banks but mind you banks work both ways, don’t they?  They can pick up on growth as well but your mascot, if you like, or whatever the opposite of a mascot is for the whole thing, is Telstra which is absolutely beaten from pillar to post because it was bought for dividend and it doesn’t do one anymore, or at least they cut it back.

While we’re on Telstra they’re having this humiliation of having to pay all those 42,000 people over the NBN.

Yeah, 42,000, that’s an enormous amount of people.

I know.  They’re not giving them very much, are they?

I know but to do that – and, I’d like to know how do you find out if you’re one of the 42,000?  I think we are in our house but how do you know?

Well, did you get fibbed to?

Yes.

You did?

Yeah.

What did they say to you?

I can’t remember but we got a note.

Right.

Yeah, so I think we will get it.  I think we mentioned in the previous podcast we got it, we were all excited, the whole house was excited and there was no difference whatsoever to our speeds in the house even though we had – and it’s quite awkward to get the NBN, quite a lot of messing around as you would know if you watched that great Four Corners show a few weeks ago which really showed how bad the whole thing is.  But, talking about stocks that’s Telstra, another very interesting development this week is on oil.  I mean when you think about the average Australian investor they had the banks, they had Woolworths, they had a couple of resource stocks, often BHP, Rio and they might have had Woodside or Santos or even Oil Search.  But the situation in oil is changing too.  You never really believed in peak oil, did you?

No, of course not.  Well, the proposition was that we’d all be stuffed because we’d get to peak oil production, peak oil reserves.

Yeah, wasn’t it really that the world would run out of oil, wasn’t that – that was the theory.

Yeah, and there’s a guy in Sydney who keeps writing to me about it who has been writing to me for years about it, peak oil.

Yes, I think I know who you mean.

Yes.

Yes, he’s a very active correspondent.

Yeah, exactly.  So he goes on and on about it, and for a while there it was a big deal and everyone thought peak oil would happen.  But now, in fact, what we’re looking at is peak oil demand.

Which is a very different thing though.

Which is a different thing.

It’s a very different thing.  So, peak oil – I mean I don’t want to be facetious about it because obviously there’s a limited amount of resources in the ground but peak oil never happened and nothing even remotely like peak oil happened.  In fact, when peak oil was supposed to happen oil prices went down because of the shale oil in the US.

Of which there’s a fair bit.

There seems to be, yeah.

They’re not running out any time soon.

Yeah, it’s a long slow road back to $100 a barrel.  But, what’s very interesting, Alan, this week is that OPEC.  In the unlikely event any of our listeners don’t know what OPEC is – I mean OPEC was the cartel, the Saudi cartel, that stopped the world in the 70s when it basically controlled oil prices and it still controls oil prices to some degree.  Anyway, OPEC this week said, they said – this isn’t a left-wing or a green think tank, this is the world’s oil cartel, said we will reach peak oil demand in the mid-2030s, so 20 years away from now.  So, they’re conceding but it’s not peak oil as we know it.

No, it’s not peak oil production, that’s peak oil demand.

What’s the difference?

Well, the original peak oil, as you pointed out, was that we’d run out of oil.  But now we’re not going to run out of oil, and we know that because of technology, discovering fracking and horizontal drilling which unlocked all the American deposits.  But now, as I say, there’s going to be a drop off in demand.

Which from an investment point of view is really interesting because you do wonder long term, these oil companies, they’re going to have to change their spots.

Sure.

Not easy.

Well, the new oil will be lithium, the batteries.

Or may I say nickel or cobalt.  I saw this morning where there’s eight times as much nickel in your lithium ion battery as lithium.

Sure, you need lithium, cobalt, nickel, copper and graphite.

All involved.

Are all in the batteries, and there’s going to be – I mean pick one of them as being the new oil but they’re all kind of together because we’re going to electrify transport, that’s what’s going to happen.

I suppose the wonderful thing for Australians and Australian investors especially is that we’re lucky enough to be sitting here with a stock exchange that has quite literally dozens of players and some of them will make it, some of them will become important but at the moment it’s very speculative, it’s very speculative just now.  But I just saw where Mincor which is not speculative, it’s like a billion dollar company known primarily as a gold miner, has been racing up the boards not for the gold but for their nickel which has been underestimated and underplayed.

Well, the nickel price has taken off lately because of the potential lithium demand.  I interviewed the CEO of a company called Talga Resources this morning, a fellow called Mark Thompson.

What do they do?

They have five graphite deposits in northern Sweden.  So it’s not darkest Africa it’s Sweden.

Yes, because apparently it’s the Congo, I think, that has…

They’ve got all the cobalt.

Has all the cobalt, yeah, which is always tricky.

So, Talga has got all this graphite in Sweden and so graphite costs quite a lot but then they make graphene from it which is some sort of refined version, which costs as much as $50,000 a tonne.

Wow.

And it costs $500 to get out of the ground.  So, the margin is pretty good.

Substantial.  Even if it’s under ice, even if it’s under the North Pole.

Well, it is definitely cold up there, northern Sweden.

Yeah, so how can an investor get into this area where it’s riddled, might I say, with specy small caps.  How do you safely enter this?

Well, so I went up to BetaShares, the Australian business that has a bunch of ETFs and I said listen, you need to do an ETF on lithium or batteries, you need to do an ETF of batteries.  Because they’ve got an ETF of cyber security and another ETF of robotics.

And this is listed on the Australian stock exchange, these products?

Yeah, these are ETFs, they’ve got about 40 different ETFs.  So, I think they absolutely have to – there has to be a batteries ETF.

It will be the way in, I suppose it will certainly be a…

There isn’t one at the moment.

Yeah, but until then we have to take our chances with every company and of course every company claims that they’re going to win but they’re not going to win.  We’ll see a handful of winners I expect sooner or later in that area.  What else did we have this week – yes, we had the Paradise Papers which was of course yet another gigantic leak which probably all came out of one little file out of one little Bermudan tax…

Well, it was 13.4 million documents, if you don’t mind.

I know, I wouldn’t like to have had to read them.  But, in any event there’s this wonderful international consortium of investigative journalists which operates and is run by an Irish-Australian called Gerard Ryle, who once worked with us on Fairfax.  They discovered this time around that everyone from the Queen to Bono to who knows who else – yes, very interesting, Wilbur Ross, Trump’s Commerce Secretary, had had offshore interests in Russian shipping firms.  What do you reckon?

I sat down with my cup of tea in front of the Four Corners Monday night ready to watch the whole thing unfold.  They had Marian Wilkinson on the job.  They talked about Wilbur Ross a bit and it wasn’t about his tax evasion, it was about his links to Russia.  Then they went on and on about Michael Hutchence’s estate which is in there.  That’s just a straight out battle over the estate of Michael Hutchence.

Well, what was the link between – okay, was he mentioned in them or…?

Yeah, it was in there.  I came out of it thinking that actually the journalists, our mate Gerard Ryle and the rest of them, they couldn’t find any stories about tax evasion because it’s all legal.

It’s legal, I know.

There’s nothing in it, right.

Well, no, it’s not that there’s nothing in it, it’s just it’s legal.

Well the thing is it’s all banal.

It’s banal if you already knew it, Alan, none of it was news to you.

No, well what I’m saying is it’s outrageous the way that the world’s companies – and they listed all the companies, all of them…

And Apple, of course.

Facebook, Apple, McDonalds, Walmart – there’s a whole list of companies that are just routinely using, legally using, tax havens to avoid tax.  You think well really, what an absolute shocker this is, it’s terrible and it’s legal.

But how on earth do you police it, how do you change it?

Well, I don’t know.  But I’ll tell you something, the fact that the conservative politicians in Australia and America, the Republicans in America and the Coalition here, spend all their time rabbiting on about how in order to get jobs and growth we need to cut company tax, I think encourages them – so, all the companies are going well if the deal is that we need to cut company tax in order to promote jobs and growth, okay we’ll do that.  The companies, I’m sure, are persuading themselves that they’re doing it in the national interests because…

Because they’re cutting tax by not paying it, is that what you mean?

Because the Republicans and the Coalition are saying that we need to cut company tax in order to promote jobs and growth.  Naturally the companies go well okay, we’ll do our bit for jobs and growth by putting our profits through Bermuda.

Or you could say they’re doing their bit for their shareholders by doing what’s legally open to them and wouldn’t they be fools if their rivals were doing it and they didn’t.

That’s right, so there needs to be…

I mean, that’s a logical…

There needs to be a fundamental change to the taxation system.  The problem is that they’re taxing profits and profits are based on where something is produced rather than where the thing is sold.  So, Google’s search results are produced wherever they like, in Ireland or Bermuda or whatever.

Yes, whatever jurisdiction is the best at the time.

But the sale is made here.  The whole thing needs to be re-oriented towards where the dollar is made rather than where the product is produced.

Yeah, I think that’s a really strong line of inquiry.  The only thing I saw in terms of what you could do – interesting, it is the UK that sort of led on this.  I say it’s interesting because it’s a conservative government there too and it was under David Cameron that they started to make some moves on this.  But what’s debated there at the moment is that the government could possibly boycott – not allow companies who advise on offshore tax to get government tenders.  That’s sort of being debated there at the moment.

That’s a good idea.

Well it’s an idea at least.

It’s something, sure.

Yeah, it is.

What else have we got to talk about?  What about Telstra, we talked about that, didn’t we?

We did mention Telstra but we have some questions.  Just before we do the questions I think we should mention, quickly, two corporate stories.  One is Ardent Leisure where people want to know, I suppose, this really inept company in many ways and also has a tragic backdrop with the Dream World accident a year or so ago, and that’s still in the courts.  But, now their CEO is gone, that is the CEO who replaced the CEO who was there at the time of the tragedy, he’s gone and he only lasted five months.  What do you think is happening there?

Well, so as you say Deborah Thomas was the CEO in charge, and she had only recently been appointed, she was in charge when the four people were killed at Dream World and she mishandled the reaction to it.  It wasn’t her fault that they got killed, obviously, but she buggered up the…

She certainly mishandled.

She mishandled the reaction to it and she hung onto her job for a little while and then had to go.  So, they appoint Simon Kelly five months ago, he takes over, five months later he’s gone and he quits.  I don’t think he was sacked, he clearly left because he was hired by the former Chairman and in the meantime the Chairman changes.  So it was Neil Balnaves.

Neil Balnaves was the former Chairman, yeah.

The former Chairman.  So, he went in the way of Deborah Thomas.  Gary Weiss takes over…

The legendary Gary Weiss took over, and so what happened with this guy was he found that there was a new Chairman behind him so to speak.

Who was a bit more interested in what was going on.  So, it looks like Gary Weiss was all over him like a rash and he said this is not what I signed up for.

This is not the job I thought it was.  I’ve got to say surely Gary Weiss and his new team at Ardent will wake up some day and say let’s re-brand Dream World and give it a new name because the associations with that brand, I think, are just shot really.  I’m surprised they haven’t done it already.

Yeah, what’s your idea for a brand, what should we call it?

Anything except Dream World.

Kirby World?

I haven’t gone as far as to put any names on it.  The other thing which was interesting was Virgin.  Talk of Virgin privatising at the same time that it seems to be turning the corner.

Well, it’s 90% owned by four airlines and Richard Branson.  So, there’s only 10% on the market floated.

Yeah, you wonder why they bother.

Well, that’s true.  You’d think that the fact that they’re now thinking about taking out that 10% would indicate that things are about to turn the corner and they’re about to go really well now.

It would, and who remembers the Flight Centre story, folks.  Flight Centre, a few years ago, amazingly things were so bad that they were putting together a deal to privatise it and boy oh boy was that a signal that Flight Centre was turning the corner and about to do well.  So, whenever you see a company about to be privatised certainly I would take a second glance.  It can often be a signal that it’s just about to – because no one knows more than the management.

Sure, and of course the reverse usually applies where the private equity characters sell it to the mug punters in the market, like what happened with Myer.

That’s right, the golden days are over, Dick Smith.

And Dick Smith.

And on we go, how long do you want to talk for?  Yeah, I know.  Very true, two sides of the same coin.

We’ll see Myer get bloody privatised when it gets cheap enough so that the mug punters have all been fleeced sufficiently.

It could happen again.  Now, onto questions.  We have two questions.  Well, we have one, Alan, which we have already decided we simply can’t even attempt to answer so we’ll come back to that one next week.  It’s from David and he’s talking about – well, he’s talking about safe harbour for directors and company law which we must seek legal advice on.

We wouldn’t have a clue, David.

We are not prepared to go in there, David, I’m afraid.  On the other hand Richard asks; hi guys, love the podcast.  Dual listed Xero de-listing from New Zealand to be on the ASX, what are the benefits or risks here?  What are the benefits or risks of a company that de-lists in New Zealand to be on the ASX only?  Gee, I don’t immediately see.

Well, the reason for a dual listing of any sort is so that you get access to both capital markets and people in both places can invest in their own currency and don’t have to buy Australian Dollars, or whatever it is, to invest in it and so on.  So, you’re basically tapping both capital markets.  I would say that no longer tapping the New Zealand capital market is not too much of a disadvantage just at a guess.  Because, I’m just saying…

Yeah, it’s not one of the world’s deepest.

I’m just saying, Richard, it’s probably okay.

Just saying, not making any particular negative interpretations but don’t worry about it, Richard, I imagine the ASX will be deep enough.

Indeed, and there’s quite a few Kiwis in Australia as well, it has to be said.

There is.  Well, maybe we’ll leave it there for this week, Alan.

Thanks very much for listening everybody and until next week please subscribe to The Money Café, leave us a review and tell your friends.  We’d appreciate that.  We also would love to get any questions you have, and don’t make them too hard or we’ll have to put them off until next week as we did with David, and do our homework.  But, otherwise we’ll see you next week.  I’m Alan Kohler, Publisher of The Constant Investor.

I’m James Kirby, Wealth Editor at The Australian.