But what would Solomon Lew do with Myer? Is Bitcoin becoming respectable? The future of shopping centres.

This week James Kirby and I discuss:
  • Does a Sydney home price fall really mean national market is doomed?
  • Interest rates are tipped to rise… and tipped to fall.
  • Bad week for ASIC, missing the deadline to file charges against Bill Lewski.
  • ASIC also gave the green light to Harvey Norman this week lifting the shareprice.
  • Myer’s under pressure from major shareholder Solomon Lew.
  • The NAB result is good, but why announce the plan to cut staff?
  • Bitcoin gets thumbs up from Chicago board of exchange, but Alan still thinks it’s poo.
  • Facebook profit is impressive, but not that impressive.
  • Is retail doomed?

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

And I’m Alan Kohler, Publisher of The Constant Investor.

And we are The Money Café.

The Money Café.

Well, Alan, it’s been a great week from a news point of view.  That is there is so much news swirling around us; financial news, investment news, property news.  I really don’t know where to start.  It would be hard to ignore the house price story.  Actually, all that happened was that Sydney house prices fell in one month 0.5% and that meant that over the quarter Sydney house prices fell but that’s really all that happened.  Nonetheless people seem to be very worried very quickly.  Should we be worried do you think?

What I think – he said, avoiding the question – I think that we can safely say the boom is over.  The Sydney property boom is over.  The national Australian property boom is over.

Hang on, was there a national property boom?  I mean Perth prices have been falling for months and months, Brisbane prices are drifting…

The national average, obviously which is distorted by Sydney and Melbourne in particular – it was really a Melbourne and Sydney boom, not a national.  As you point out Perth was falling.  So we can say the boom is over.  Sydney prices are falling, as you say they have fallen two months in a row.  At this stage you wouldn’t say you wouldn’t be worried because booms always end and this was going to correct.

Yes, and they have had a great run.

Sure, Sydney house prices are up 74% from the time they began rising in 2012.

Yes, that’s one hell of a run, isn’t it?

That’s a hell of a run, 74%.

I suppose what people want to know is, or what people are worried about is, does it peel off?  Does it all unravel and do we find that they fall 2%, 5%, 10% in the months ahead?

What’s happened so far is that the investment buying has dried up, or to some extent dried up, because the regulators have clamped down on bank lending and stopped them lending or at least told them to wind back their lending on interest only loans and high loan to valuation ratio lending, that is to say above 90% LVR, less than 10% deposit.  Those loans have come down and that’s kind of restricted the buying.  All we’ve seen so far is restrictions in buying.  Crashes are caused by panic selling, people trying to sell in a hurry, and the reason they would do that and the reason they always do that is because interest rates go up a lot and they have to sell because they can’t afford to service the loans anymore or because there’s a recession and they lose their jobs, or both.

But we have neither of those things on the agenda.

That’s right.

Although I am curious about rates in that I can present to you a major Australian bank, two of them actually, ANZ and NAB, that says rates are going to rise.  I can present to you a global bank, Credit Suisse, which says Australian rates are going to fall.  One of them is wrong.

Different opinions make the world go ‘round of course and I think that the rates will rise opinion is probably correct, the only question is when and I’d say possibly not until 2019.  I mean I think we could go through all of 2018 with the cash rate at 1.5%.

Yeah.  You’re talking a Bill Evans playbook, at Westpac, who says no rate rises this year or next year.

Yeah, that’s right.

And he has been saying that all year, to give him credit.

And I reckon of all of the economists we listen to and quote Bill’s probably one of the best.

Yeah, he is certainly the most sober…

The others are drunk.

No, I don’t mean they’re drunk but I do mean that they fall prey to attempts at publicising themselves and I think some of the extreme views from economists, sometimes, are actually to get themselves back into the public debate.

Well that’s right but I mean just on that subject Credit Suisse, how to get yourself noticed, predict a rate cut.

Yeah, exactly, I know.  Really, sure, you can get yourself noticed in all sorts of ways.

That’s right.  But the other big story perhaps is that Gerry Harvey got off and ASIC is having a bad run, tell me what’s going on there?

It is, ASIC is having a really bad run.  Actually, before we talk about Gerry Harvey, I know everyone knows Gerry Harvey, but most people may not know the other story this week which was about Prime Trust, the retirement village company where, just to try and put it as simply as possible – some great work done on this, I must say, in the ABC by Stephen Long who did a Four Corners on this.  Anyway, ASIC took these guys to court, a fellow called Bill Lewski and also Michael Wooldridge who was on the board of a retirement home group.

This is the ex-politician?

Yeah.  Now, the essential part of the story here was that Bill Lewski was given a payment of $30 million and certainly most people didn’t notice that, didn’t realise that, and then the whole company went down.  It went under $500 million into liquidation.  So, a terrible story and 9,000 investors lost all of their money.  ASIC went to court and had some success in that Lewski was banned for so many years and charged $200,000.  A couple of appeals and then yesterday, you won’t believe what happened, ASIC got their case thrown out of the court on the basis they didn’t file their charges on time.  They left it too late, the six years before you make your move.

Is this a case to try to get the money back?

Yeah.

The $30 million that Lewski got paid, they wanted to get it back, and they were too late?

Yeah.

Well that is egg on face.

It is the worst thing I’ve heard about ASIC for a long time, it’s really bad.  It’s terrible for those shareholders.  Also this week a much less mean story, and it doesn’t hurt as many people.  Gerry Harvey who has been under attack by the shorting hordes, Gerry calls them criminals as only he can, but Harvey Norman has been shorted heavily all year and ASIC cleared it yesterday of how it was treating its franchisees.  There was this thing that there was a billion dollars of liabilities that weren’t consolidated and Gerry basically has this thing if the franchisees get into trouble he’ll bail them out, or Harvey Norman will bail them out.  He’s always run like that, he’s run like that for 35 years.  ASIC went in and had a look and said it’s okay, and he’s immediately had a lift on the share market today.  So, a win for Gerry Harvey and I think that’s pretty okay.  The Prime Trust thing is just dreadful.

I’ll tell you another retailer that’s been heavily shorted this year is Myer and that’s been a big win for the shorters. 

It has because it keeps going down.

It keeps going down, they keep winning.

How far down can they go, another 70 cents I suppose down to zero, thereabouts.

Well retailers have been known to go to zero.

I know, well they can disappear on us, they can actually go under.

Dick Smith went to zero.

Dick Smith went under and many others, and many others overseas.  I’ll tell you something interesting about that whole story, and obviously listeners would know that it’s all about Solomon Lew, it was 10% of the stock trying to take over the company one way or another, take control of the company.  Solomon Lew has been releasing sort of little slivers of propaganda everyday, how bad are Myer, they’re so bad, everything they do is bad.  He put out a thing the other day and it got very little attention.  He said that un-marketable parcels of shares, at the average company they’re 2% or 3% and Premier, his own company, is 3%.  At Myer it’s 30%, it’s 30%.

I didn’t know that.

Yeah, it’s almost one in three shareholders in Myer couldn’t sell their shares if they wanted to because it’s gone under the marketable parcel which is $500.

Well, there you go.

See they probably put $1,000 or $2,000 into the stock when they bought it.

Well I was in Sydney yesterday and I was standing in the news control booth near the studio waiting to do my little spot on the news and the woman, Elysse Morgan, was interviewing Solly Lew about Myer while I was waiting.  I’m watching this interview and of course Solly is sinking the slipper in and saying what terrible retailers they all are, and he walks through the store and he looks around, and they don’t walk through the stores and all this stuff.  I’m shouting – I was in this control room and I’m shouting, “Ask him what he would do?” and she didn’t bloody ask him.

Yes, that’s it.  But I wonder what can he do.

What would he do?  And the other thing is, the point that I would say to Solly if I got him is it’s all very well, Smiggle and Peter Alexander in Premier are going great guns but Just Jeans, Portmans, Jacquie E – those three and I think he’s got another one, they’re all going backwards.

Yeah, and he can’t turn them.

He can’t turn them around.

And he owns them, yeah.

He owns them.  So, it’s all very well, and I think probably Solly is a better retailer than everyone at Myer but…

Well, if you were a shareholder you would say well hey, listen, if he can bring the stock up back over a dollar I’d be happy, I bought it at 4, it’s 70 cents, if he can do 10% a year for me compared to these guys…

Yeah, but he’s not offering to do that he’s just hopping into them and saying how terrible and stupid they are.

Yeah, that’s a good point actually.

So he is not saying what to do.

So, Solomon Lew, if you’re listening…

He would be listening, I’m sure.  Hey Solly!

…let’s hear your manifesto for turning around Myer.

What would you do?  And also tell us how you’re going to turnaround Portmans and Jacquie E and Just Jeans while you’re at it. 

True.  Except to say he has winners as well as losers.  I mean Smiggle is global now.  You’ve got to say that’s really impressive.

Sure, that’s a fantastic effort but these are particular – I mean department stores are hard.

Yeah, they are.  Why don’t we look at some other corporate stories around that’s on the agenda.

Have you looked at the NAB result?

I had a quick look and it’s very interesting.  The profit is up about – they’re coming up on 3% and that’s at $6 billion.  He has announced, that is Andrew Thorburn has announced – there’s about 33,000 people employed by NAB still.  Imagine that, 33,000 people in NAB which seems to be the same forever.  He has announced that 6,000 people are going to go but he’s also going to employ 2,000 people in new positions that are like this digital force.

I reckon that’s a microcosm of the world.  X number goes out of traditional jobs, one third of them pick up jobs in digital or robotics or artificial intelligence.

That’s exactly what he said he was putting the money into.

Yeah well there you go.

Artificial Intelligence, Robotics, all to do with finance.

The question is what’s going to happen to those 4,000 people, what are they going to do?

Well I’ll tell you – well I won’t tell you, but I noticed also because they’ve got 33,000 staff their attrition rate is about 3,000 a year.  So, actually if he didn’t hire anyone, if you didn’t hire anyone…

Yeah, it’d take him two years to get rid of 6,000.

He could actually get rid of 6,000 people without actually having empty buildings or anytthing like that.

Yeah.

He won’t do it that way though, I think there will be job losses at NAB and it’s tough to see that but also it looks like they have to do it.  Their cost to income ratio which I always think is a real key – well, there are two things in banks, return on equity is about 14% for an industry standard now, and cost to income ratio is 47% and it’s unchanged year on year with the bank.  So, he’s got to do something.

What I never understand is with these outfits, why do they bother announcing that 6,000 people are going.

Yeah, the market doesn’t like it, you know, I don’t mean people I mean the market doesn’t like it.  The stock fell today.

Yeah, well I can’t see the point of announcing it, just get on with it, just do it.  Just quietly shove them out the door, nobody has to know.

I’m thinking out loud here; I think they do it to impress the market, that they’re tough.

But the market is not impressed.

The market actually isn’t impressed.

No.

And I’ve seen it before with other companies.

And it just upsets everybody inside.

I imagine from a moral point of view it’s absolutely terrible.  Now, how about looking overseas at Facebook.  Were you looking at them this week?

Just that they increased their results a lot.  To be perfectly honest I was going to look at it more than I did before coming here and I didn’t get around to it.

You didn’t do your homework, come on. 

I didn’t do my homework!

I see, well…

But I know that it went up a lot, how about that?

It went up a lot.  Hey everybody, it went up a lot!  And we mentioned last week…

Let’s just move along quietly to Bitcoin, what about that?

We will but before we do one thing about Facebook is it’s the cheapest of those FAANGs, it’s on 28 times PE.  Lots of Australian companies are on 28 times PE.

What a bargain.

While Amazon and the others are on you know, several numbers.

I compared the rises of Amazon, Apple and Facebook the other day over the past – I think it was four or five years.  Anyway, Amazon is up twentyfold.

If you’re a shareholder don’t you love that word, fold, yes.

Twentyfold.  Facebook is up fivefold.

Right, I see.

So that’s why it’s cheaper.

Fivefold would do me fine, I’d love to have some parts of portfolio up fivefold, it’d be really nice.

It would be nice, twentyfold is even better.

So maybe we come back to Facebook next week.

That’s right, what about Bitcoin?

Bitcoin.  Now, do you still think it’s a fraud and a whole pile of, you know, poo?

Did I say that?  Poo…

Leading question, rhetorical question.  I want to point out something very interesting that’s happened, really interesting.

Okay, you tell me and then I’ll tell you whether it’s poo or not.

Okay.  Well, so we’ve got people saying it’s a fraud like Jamie Dimon of [Citibank] and we’ve got people who are just as qualified as the head of Goldman Sachs saying I don’t know, it looks interesting, I’m not making a judgement on it.  The Chicago Board of Exchange announced this week, the Chicago Mercantile Exchange to be precise – it’s all the same, it’s the same operation, they’re derivatives players.  The biggest one in the world announced they’re going to have a derivative contract on Bitcoin.

But they would trade anything.

Sure, they’ll trade anything but it’s the heart of the American financial trading system and Bitcoin is inching its way in to the centre.

I don’t think you can conclude from that that it’s the stamp of approval for Bitcoin.  I reckon they would trade flies crawling up the wall.

They would, yes, I know.  But it’s the Chicago Mercantile Exchange…

Futures contracts on flies up the wall.

Is it, well is it any crazier than pork bellies?

Well there you go, that’s the point.  Pork bellies is bacon.

Well it’s infiltrated into the mainstream system.

Pork bellies is bacon.

I know what pork bellies is.

But I’m saying that it’s actually a real thing.  My point about Bitcoin is that it’s not ever going to be money really, it can’t be money.

No, but I just make the point that as the months pass little things happen and incrementally it gets closer and closer into the mainstream financial world.  To see the Chicago Mercantile Exchange taking out contracts on it is, for me at least anyway, one of the most interesting things I’ve seen.

And the price of Bitcoin has gone up again this week to $6,700 U.S. per bitcoin having only just gone through $6,000 about five minutes ago.

I had a question this week from a reader, this is the wealth section of The Australian, who asked could you buy Bitcoin in your SMSF.  That was very close to the other question which was can you have a racehorse in your SMSF.  The answer to both questions is yes, with considerable difficulty you can.

Yeah, of course, what’s the difficulty about Bitcoin?  Put it in your SMSF, why not.

Well it has to satisfy your sole purpose and your trust deed, and everything else.  But you can write trust deeds in a way that they cover just about anything you could possibly think of.

Yeah, I mean you can buy a painting and as long as you don’t put it on your wall…

As long as you don’t look at it you can buy a painting.

Exactly. That’s right.

Now we have a question.

Yeah, what’s the question?

It’s from Steph in Canberra.  Hi Steph.  Steph wants to know – this is interesting and actually this, I think Alan, should be the Mega Trend of the week from BT Financial Group.  BT Financial Group is, of course, our sponsor on The Money Café and we’re delighted to have them.  Now she is bringing up an issue which I think has come up before but it hasn’t been articulated so well.  She says; my question is what is the future of shopping malls?  Myer in Belconnen – that’s in Canberra, isn’t it – will be shutting down in a few years.  What’s going to fill up the space?  Is this the beginning and will other retailers follow?  What if retail never picks up and people keep spending on experiences and coffee not to mention online shopping?  Are businesses better off in a mall?  That’s a really good question.  Thank you, Steph.  It brings up that whole issue and I think the Mega Trend I’m referring to is the future of the shopping mall, which has – you know, we think it’s been there forever but it hasn’t really.  It was created in the 60s, here we are 50 years later and do you think they have a future as an investment now?  Because she’s talking about Myer, which is listed, but there’s also Westfield and everything.

I was brought up not very far from Chadstone and I still go there a bit.  When I was a kid I used to go to Chadstone and it was basically Myers with a couple of other shops.  Chadstone was Myers basically.  Now Chadstone is Uniqlo and H&M and everything but Myers.

Yeah, it’s extraordinary.

So, I go to Chadstone sometimes and it is packed with people.

It is, it’s amazing isn’t it?

It is amazing.  So, I don’t know about Belconnen.  I noticed that Steph is saying that Myer is shutting down in Belconnen but the mall, Belconnen Mall, is not shutting – well she’s not saying that and I presume…

No, but she’s equating Myer – I mean once upon a time all shopping centres had to have an anchor tenant and the anchor tenant was a department store, you had to have it.

It was usually Myer.

You had to have Myer or David Jones or you couldn’t get going.

And that’s no longer the case but people are still going to the shopping malls.  I think that they probably at some point there’ll be problems but it’ll take longer than you think.  I mean it took longer than we thought for newspapers to decline, they’ve declined slowly, but they’re all still going.  The Australian, thankfully for you and me, is still going.

Indeed.  Still paying our salaries, yes that’s right.

But as a print publication we all might have thought 20 years ago, and probably did think – in fact I did think 20 years ago, that they’d be out of business in 10 years.  But that’s not the case. 

Yeah, there’s considerable resilience.

So, I think that shopping malls will last longer than you think.

What about property trusts that own shopping malls like Westfield?

I think maybe they’ll start to lose tenants, maybe the occupancy ratio will start to decline.  So as an investor I would not invest in retail REITs.

But what about Steph’s point that they may actually become sort of malls of experience, cinemas and…

Well that’s what they’re trying to do now, they are already doing that and they’re all kind of on about the food courts and the cinemas, and that sort of thing.  Good luck to them I say.  I mean people want to go out and do something on the weekend.

But it would mean the retailer inside them could be in trouble as opposed to the mall.

Sure, but the malls depend on the retail turnover.

Yeah, they’re the anchor tenants.

They really do.

It’s interesting, isn’t it?  It’s a really interesting question.  Of course, they’ve always been one of the great income producers, income stocks.

So, there you go, Steph, we have no idea really but…

But thank you for your question, Steph.  Look forward to other questions in the weeks ahead.  We’d love to have some questions from everybody so do send them in and I think we might leave it there for today, Alan.  But we must mention where to send the questions to.  The address is hello@theconstantinvestor.com and don’t forget you can subscribe to The Money Café on Apple Podcasts or your app of choice.  While you’re there it’s very helpful if you could leave a review or a rating.  It helps listeners to find the show.  Thanks very much.  Until next week I’m James Kirby, Wealth Editor of The Australian.

You are indeed, and you can also subscribe to The Constant Investor any time you like, and I am Alan Kohler, Publisher of The Constant Investor.

Until next week, thank you.