Why the dollar is rising and why Facebook is fast losing friends.

This week James Kirby and I discuss: 
  • The US dollar.
  • What’s the worst and best performing fund according to Mercer?
  • QUINTIS – the shorts win big time!
  • The David Jones write-down and Woolworths class action off.
  • Fairfax, Domain, and Antony Catalano.
  • Is the tide turning against Facebook?


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

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

And we are The Money Café.

The Money Café.

Have you been watching the tennis, James?

No, I haven’t, I’ve got to admit I have been watching the Big Bash.

You’re a cricket fan, you’ve been glued to the Big Bash.

I have a deal with my other half that only every second night which I think is fairly fair.

Every second night?

Well, my team has been playing virtually every second night, the Renegades, and they just about staggered across the line last night.  So, one more win and they’re in the semis which is not a huge achievement against the other teams.

I’m a cricket fan but I think the tennis is so much more interesting.

Yeah.

It really is, I mean better television is all I’m saying.  I’m not sure I’d go.

Yes, well it’s fantastic to go, it’s a fabulous atmosphere down there when you go down there on a summer’s night.

I’m sure it is.  Now, we’ve got a fair bit to talk about today, James, so we’d better get into it.  Just by way of preview we’re going to talk about the US Dollar, the Mercer returns for fund managers, the Domain situation with Antony Catalano leaving, Woolworths class action as Quintis, which has gone broke.  We were talking about that last year when the big short sellers came in.  David Jones write down and you’ve got a topic about Facebook, which I’m very interested to hear you talk about, James.

Yes, that’s going to be a good topic, actually.

US Dollar slumped last night after the US Treasury Secretary, Steve Mnuchin, said they quite like it being down.

So, why did the US Dollar, which is dropping and we’re rising against it – why on earth would the US Treasury Secretary say we like it being down and then further why would it fall even more when he said that?

Yeah, well that’s right.  Firstly it’s in a strong downtrend, has been for 12 months.

Against everything.

Against everything.  The DXY, the US Dollar trade weighted index has fallen now 13% in 12 months which is quite a lot and it’s really in a downtrend and really everyone is looking for an excuse to sell it.  The thing last night from Steve Mnuchin was just another excuse to sell it, absolutely no substance in the sense that just because Steve Mnuchin says that.  Firstly, it’s not a surprise because of course the United States likes the dollar being weak because they’re trying to combat what they believe is currency manipulation in China.

But why?  I mean the US economy is ticking along fairly strongly, isn’t it?  US bond yields are rising aren’t they?  So, how come it’s falling?

How come it’s falling, indeed.

Have you got the answer?  Is there an obvious answer that I’m unaware of?

Well, firstly it’s relative to the Euro and the Yen primarily and the European and Japanese economies – even though the US economy is strong, relatively strong compared to us perhaps, it’s not strong compared to Europe and Japan.  Those two economies are much stronger and so those currencies are stronger.  But, also I think there is a clear difference between how the – what you might call a macro economic markets feel, that is to say the currency and bond markets, how they feel, and the stock market feels about Trump’s tax cuts.  The stock market is focussed on earnings per share and so the tax cut…

Plays straight into the numbers.

Lifts earnings per share and so therefore that’s good.  But, the tax cuts are not good, the market thinks and the economists all say the tax cuts are not going to pay for themselves, they’re going to blow out the budget deficit.  So, it is going to be bad for the economy.

Okay, but that’s ultimately, isn’t it, that’s down the track.

Well, yes, but the US Dollar was recovering up until December the 15th and as I’ve written for The Australian on December the 15th three things happened.  One is that the Fed actually increased interest rates on that day and the Senate and the House of Representatives in the US actually agreed on the tax package so that’s the day on which it actually happened in a way, and the US Dollar stopped rising and fell a lot.  It wouldn’t have fallen because the Fed increased interest rates because rising interest rates lead to a rise in the currency, not a fall.  Therefore the dollar fell because the tax package was passed, was agreed to that day.

Yeah, so as you say, the macro markets such as bond markets and currency markets are cautious, if anything, but meanwhile the share market roars along, doesn’t it?  And it’s amazing just how strong it is.  Just to put people in the frame we did at least 11% on shares last year and another 4% on dividends, and that’s people bringing home like 15% perhaps after franking on local shares and we didn’t even do particularly well compared to the US.  Now, in the year ahead the forecasts are broadly similar, something similar again, 10% plus, and I just looked at that Mercer survey and it’s the survey that tells you how the managed funds are doing.  What was remarkable was just how well they’re all doing.  The worst funds, the worst ones, did about 6%.  Normally the worst ones do a minus.

Do you remember who the worst one was?

Yeah, I do.

We need to name names, James.

We will name its name but I want to make sure I get its name absolutely correct.  Its Russell, it was a Russell value fund.

Newscorp has got its fund with Russell.

They have their super with Russell, they do, but not necessarily…

Poor old Newscorp employees, I hope you’re not in the Newscorp fund, are you James?

I’m not in the fund, I am an SMSF person, Alan, needless to say.  But, of course we wouldn’t all be in the Russell Australian Value Premium Fund which is the one, but even at that – the point I’m making is that even at that it went up 6%, the next worst one, if you like, was Janus Henderson up 7%, 8% to be precise.  I mean, the worst ones are doing damn good numbers, the best ones are doing numbers that are just out of the ball park.  I mean, here’s the best local managed fund of the year, Bennelong.

Yeah, Bennelong Concentrated Equities Fund, 30%, fantastic.

Yeah, it’s amazing.

Well, it’s great.

They are amazing numbers.

They are but they’ve been consistently the best.

They have, yeah, Bennelong have been very good for a long time.

Over the years, and so they are really good stock pickers.

The median manager did about 13% so it’s really a very strong time.  There was a couple of interesting things about this survey.  I look at it every year but it rarely sort of throws up such interesting aspects.  Another thing was for all the efforts of the shorters if you look at the long/short funds where have shorting activity by hedge funds and you look at the standard funds it’s more or less the same, they did 13.9, the guys that do all the shorting, and the ordinary every day plain vanilla fund did 13.8.  So, for all the hijinks of shorting they didn’t do any better.

But, I’ll tell you one shorting fund that’s going to do well and report good returns this year is Glaukos, if you remember we talked about them last year and they were shorting Quintis. 

Yes, we did, what an amazing story.  Did you talk to those guys?

Yeah, I did, I interviewed them.

And at the time they said we’re going into Australia and then they announced – they said we’ve picked our target and it was Quintis which is a Sandalwood MFS.  Well, what happened after that?

Well, Quintis came out and said that’s shocking, these bastards.

That’s right, how unfair.

How unfair, goodness gracious, there was flurries of protests.

Including, I bet, protests from Adam Gilchrist, speaking of cricket.  Adam Gilchrist, the wonderful cricketer, was a key shareholder in that company.  It’s based in WA, you know.

Yeah, that’s right.  Well, there you are, so he’s been bowled.

He has been bowled, he’s been clean bowled.

Clean bowled.

Because Quintis are in receivership.  I mean, my oh my, how often does a hedge fund get it so right, I mean how often does a short seller say here’s the one we’re going for and they bring it all the way down to its knees.

Actually, I can’t remember what the price of Quintis was when Quintis went short but I’m pretty sure it was over a dollar, it was a fair bit and now it’s zero.

Yeah, all the way down.

So, it’s goodnight.

Amazing.  So, you’ve got to think that that story is going to go around the international markets and American hedge funds are going to come rolling in here saying there must be soft targets sitting up in the ASX.

Maybe, but it’s worth noting however that shorters – just because a hedge fund like Glaukos goes short a company doesn’t mean they’re right.  Shorters often get it wrong.

Yes, they get it wrong, look Syrah Resources…

And they only make a lot of money if they are right that the company is a lemon.  They have to have picked the lemon.

And it costs them a lot when they get it wrong.

Well, that’s right.  It’s worth knowing that you can’t just look on the most shorted stocks and go all those stocks are going to go down because that isn’t necessarily the case.

Syrah Resources, which is, I am pretty certain, a graphite stock was one of the most shorted stocks last year and guess what, it’s going great.

There you are.

It’s going great.  But, I’ll tell you what isn’t going great are the retailers.  Now, I’m not sure if David Jones is up there with most shorted stocks but Myer traditionally again and again is one of the most shorted stocks.

And it’s been a happy hunting ground for the shorters, of course, because they’ve made plenty of money.  But, the reason we mention David Jones today is because the parent company which paid 2.2 billion dollars for David Jones in 2015 or ’14.

Yeah, the South Africans, they paid 2 billion, right, two years ago?

2.2 billion two years ago and today they announced a $717 million write down of its investment, so ouch, that’s a third of what they paid has kind of sprouted wings and flown out the window.

Someone is going to have to come into the Chairman’s office for a little chat I would imagine at Woolworths Cape Town, or Johannesburg, where they’re actually based.  But, they did something wrong there, I mean they did something very wrong.  They spent $2 billion on a company that’s now worth, according to them, 1.3.

Yeah, and you know where a lot of the value is being transferred to?  Kogan, which is now with $650 million and back when Woolworths South Africa bought David Jones it was worth a fraction of that.

Yes.

It’s been huge.  I mean, obviously not all of it, there’s been a tremendous amount of revenue increases by other online retailers.

Somebody will win, won’t they, somebody always wins.  I’m just looking at the top shorted stocks, by the way, just looking at them number three is JB Hi-Fi which is retail.  Also, in that list is Flight Centre which you could argue is retail and Myer, of course, in there with about 10% of the stock shorted and Harvey Norman.  So, got to think that it’s not over yet on the retail crunch.

It’s definitely not over yet, certainly not, and they’ve got work to do, those companies, that’s for sure.

Why don’t we stay with retail and talk about Woolworths?  What has happened there?

Well it’s just that there was going to be a class action about the Master’s debacle, speaking of retail debacles and write downs.  They lost heaps of money in Master’s and there was going to be a class action and IMF Bentham, the listed litigation funder, announced today that they weren’t proceeding.  A bit of a sigh of relief at Woolies just noting that.

I wonder why, that’s unusual for them to go so far down the line and then pull back.  I wonder why they changed their mind?

They have to show that directors did something wrong rather than just made a mistake, I mean there is a – what’s it called, a business rule or some sort of protection for directors who make a mistake.

Rather than willingly.

Rather than mislead or don’t keep the market informed and so on.

But, IMF had gone as far as – they had actually said we will finance it did they, and now they’ve changed their minds?

Well, they were looking at it, they said they were investigating it, they never said that they were going to.

Okay, I see.  Well, I tell you what, there’s no lack of class actions if people are interested, if you want a bit of class action action.

I’m wondering whether there’ll be a class action over Domain.

Well, possibly.  Well, no, we’re jumping ahead, let’s explain the circumstances first of all of what’s happened at Domain, why don’t you explain what occurred?

Well, it’s pretty simple.  They hived off the company from Fairfax in October, the stock started trading at $3.70, two months later Antony Catalano…

The Chief Executive and the key person, without doubt, in that company…

Yeah.

Has left.

And the shares have collapsed.  Well, actually they’ve started to recover, so it turns out it’s not that bad now but the share price fell 14% on Monday.

Why would you have a class action against a guy just resigning?

Well, only if – and I’m not saying this is the case, but if you were able to show that they knew, that either Antony Catalano or somebody at Fairfax knew that he was going to quit and they went ahead with it anyway so that people were buying.

They went ahead with it…

It’s a question of whether the market has been fully informed.

Yes, I got you, okay.

The only reason I raise it is because – and I don’t believe this of Catalano for a moment however it is a short period of time.

It’s incredibly short, three months, yeah.

You would think firstly it’s hardly a surprise that he had to move to Sydney or might have had to move to Sydney, which is the stated reason for quitting, but also people commute between cities all the time including his boss, Greg Hywood, who was living in Melbourne when he was appointed CEO of Fairfax and commuted all the time for years.  I think he might live in Sydney now but the idea that you have to move to Sydney is ridiculous.

Well, it certainly didn’t seem to be a compelling reason to stand down.  One of the things, just talking about what’s been reported, what’s been suggested, I mean possible explanations for what’s going on, The Australian reported that TPG which had previously made a bid for Fairfax, that Antony Catalano has had a meeting with TPG people in recent times.  A scenario that’s been put forward is that TPG might come back, bid for Domain which is much cleaner minus it’s newspapers, not cluttered by newspapers now, and then Antony Catalano being a free agent could join.  How’s that?

Well, if TPG buys Domain on the cheap and Antony Catalano goes back as CEO working for TPG that really would be a scandal.  I mean, fair dinkum there’d be a class action before you could blink.

Well, let’s see what happens, Alan, stranger things have happened.  Actually, just to reverse a little you do remember the CEO of Quintis when those shorters…

Well, he did.

He jumped out, didn’t he?

He jumped out but he said he was putting together a bid, exactly.

He said he was putting together a bid but he…

Maybe he still is, he might buy it off the receiver.

Well, he might buy it off the receiver, yeah, and then you’d have…

Yeah, it wouldn’t be the first time that’s happened.

I know.  So, the whole Catalano scenario is not implausible.

I think it’s implausible, I really think that that’s not credible.

It’s not inconceivable except you rarely see it at that scale, at the billion dollar market cap level.

No, but I think Catalano himself has more ethics than that, really, to do that.  He wouldn’t do that.

Well, the story isn’t over.  Now, we have an – it was an issue that we were both going to mention this week I noticed, and it’s turned out that there’s a question on it anyway from a listener.  I think you have it there, do you want to read it out?

Hi, Alan and James, love the podcast – I love that part of the question.

Yeah, it’s my favourite part.

I love the podcast, unfortunately for me it’s the highlight of my Thursday train ride.  Why is that unfortunate, Tom?  That’s good.  He’s got a question for us: do you guys foresee any US government being bold enough to break up one of the big four, Facebook, Amazon, Apple, Google?

It’s a top question, Tom.

Top question, Tom, well done.

And history would suggest, yes, that the US government and perhaps only the US government have the power to have a look at these people.

Or the guts.

Yeah, because they’re aggressive, aren’t they?  They really are.

They broke up AT&T.

They broke up Standard Oil once upon a time.

They did.

AT&T, so was that in like the 80s?

The Baby Bells.

Yeah, that’s right.  Was AT&T the last kind of really big one?

Yeah, I think so.

It’s like an anti-cartel type thing.

Yeah, they do break ups in the US, not very often, but you know.

Well, one of the things that Tom – the context of Tom’s question is there is a sense…

By the way, this is our BT Mega Trend.

It is, yes, meant to say that.  The BT Mega Trend this week is the changing attitudes, perhaps, towards the tech titans, especially Facebook.  Now, last night at Davos, the meeting in Switzerland, Mark Benioff, who’s the CEO of Salesforce which is another sort of Silicon Valley tech titan, he didn’t just say Facebook are doing bad things, he said Facebook should be treated like a cigarette company which is pretty severe.  His point is that it’s addictive and bad for children, bad for teenagers, and should be regulated and his words were it should be reined in.

It’s interesting.  There’s been an open letter published to the directors of Apple by two of the big shareholders, I can’t remember the names of them.

Yeah that’s right, the Californian Pension Fund, one of those big state pension funds, and what was their thing about Apple, the kids again, isn’t it?

Yeah, kids, that smartphones are harmful to children, they were addictive and harmful and so they are asking the directors of Apple to do something.  I mean, it’s not so much the smartphones itself it’s what the kids do with them which is Facebook. 

But, I wonder what can you do?  I’ve seen babies in bassinets in planes given iPads and they love them, but what can the…

Well, it keeps them quiet, it shuts them up.

That’s right, a lot to be said for that, however what could they do?  That’s a different issue than breaking them up too, isn’t really?  That’s more like a technology policing rather than a market regulation.

The power of Google and Facebook is to do with their algorithms which are sort of – I don’t know, they’re evil things that kind of follow what we’re interested in and make us addicted to them.  I do think in general that politicians, bureaucrats and governments have been caught short by the development of artificial intelligence in general and algorithms and so on in terms of the…

Yeah, and the machine learning especially with Google, yes.

Yeah, and I think they’ve kind of let it happen and they’re just kind of talking about immigration instead and company tax cuts, anything but that, and actually there are some things to be focussed on about that and I think…

And actually, we may as well throw in that Rupert Murdoch hit his straps this week and said it’s about time Facebook started paying media groups.

Our fearless leader.

And hey, I’m all in support of that.  Great subject, Tom, thank you.  Yeah, I don’t want to write for free for anybody or have my stuff reproduced for free, I don’t like that.  I think it’s worth paying for.

You don’t have to put your stuff on – they don’t have to put your stuff on Facebook, they only do it because they need to, they want to use it.

Well, we’re all sort of trapped within the ecosystem that they’ve built around us, so perhaps it’ll change.

Yeah, anyway, very good.  Well, I think that’s it for the week.

I think it is.

We’ve answered the question.  Now, don’t forget everybody you can subscribe to The Money Café on Apple Podcasts or your app of choice and while you’re there it’s pretty helpful if you can leave a rating or review because that helps everyone find the show.  Send in a question, would love to answer it, the more the better, e-mail us for that on hello@theconstantinvestor.com.  Until next week, I’m Alan Kohler.

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