A dangerous level of opportunism

Wednesday, 27 November 2019
Adelaide, Australia
By Bernd Struben

  • Markets
  • Bin Laden, Epstein…and Hartzer?

Steer clear of Westpac, bargain hunters. This story has a long way to run.

Crisis & Opportunity’s Greg Canavan

We’re firmly in the middle phase of a great bank unbundling.’

Exponential Stock Investor’s Ryan Dinse

I’ve tried.

I really have. But I can hold out no more…

It’s been a week now since the sensational story of Westpac’s 23 million compliance breeches led headlines across every media outlet in Australia. And it’s gotten top billing every day since.

For seven days I’ve resisted the urge to pile in. Perhaps because I was taught not to kick someone when they’re down. (Apparently that’s fine if they’re still standing.) And Westpac’s been down on the mat, curled in the foetal position all week.

Here’s a sample headline box I just pulled off the internet:



chart image
Source: Business Insider
Click to enlarge

You see what I mean. Too easy a target…

And the stock is taking a battering.

At time of writing, Westpac’s share price is down 1.4% in intraday trading. It’s now down 15.1% over the past month. Remarkably, it’s still up for the calendar year. Though the 0.16% year-to-date gain makes the bank’s term deposit rate look almost generous.

And with the threat of a potential multi-billion dollar fine hanging over the bank’s head, the share price is likely to come under further pressure. Don’t forget Commonwealth Bank copped a whopping $700 million fine last year for breaching far fewer than 23 million money laundering rules.

Hence my colleague Greg Canavan’s warning to would-be bargain hunters to steer clear for the time being.

More, after a look at the markets…

Markets

Overnight, the Dow Jones Industrial Average closed up 55.21 points, or 0.20%.

The S&P 500 closed up 6.68 points, or 0.22%. That’s another new record high.

In Europe the Euro Stoxx 50 index closed down 2.13 points, or 0.06%. Meanwhile, the FTSE 100 gained 0.09% and Germany’s DAX closed down 10.03 points, or 0.08%.

In Asian markets Japan’s Nikkei 225 is up 107.09 points, or 0.46%. China’s CSI 300 is down 0.11%.

The S&P/ASX 200 is up 55.47 points, or 0.82%.

West Texas Intermediate crude oil is US$58.28 per barrel. Brent crude is US$64.27 per barrel.

Turning to gold, the yellow metal is trading for US$1,460.40 (AU$2,152.08) per troy ounce. Silver is US$17.09 (AU$25.18) per troy ounce.

One bitcoin is worth US$7,135.73.

The Aussie dollar is worth 67.86 US cents.

Bin Laden, Epstein…and Hartzer?

Until my defences gave out this morning, I managed five instalments of the Port Phillip Insider, with not one swipe at the bank’s astounding alleged oversight failures. Failures that include extraordinary accusations of lax management enabling money laundering, paedophile rings, and terrorist plots.

The soundbites are enough to make you think ousted CEO Brian Hartzer is some devious amalgam of Osama bin Laden and Jeffrey Epstein.

He’s not, of course.

But when sharks smell blood you can expect a feeding frenzy.

Or, as colleague Ryan Dinse wrote in yesterday’s Money Morning:

The psychology of witch hunts is still with us today. The mob mentality, the presumption of guilt, and the hysterical baying for blood are alive and well.

Now if you follow Ryan’s work, you’ll be as surprised as I was to hear him step up in defence of Westpac. Or any of the big banks.

Ryan’s spent a lot of time this year exposing the emerging weaknesses in the big banks’ long standing oligopoly. One which sees the top five banks with roughly 80% of market share. 

He calls it the ‘great bank unbundling’. And he’s had his eye on a collection of smaller, tech savvy competitors coming to ‘steal their lunch’.

(You can find Ryan’s top small-cap fintech plays here.)

Here’s what Ryan thinks of the big banks:

A bunch of rent seekers, devoid of innovation and imagination. They’re the opposite of all that free markets stand for, while simultaneously pretending to be bedrocks of such a system.

Ouch.

But he couldn’t swallow the mob’s bloodlust in the wake of the allegations against Westpac.

And — like your editor — Ryan thinks it’s a stretch of the imagination to believe Hartzer or employees at Westpac knowingly allowed funds to flow into terrorist organisations or paedophilia rings.

Here’s Ryan again:

The more likely answer is that Westpac set up a sophisticated system — probably on the advice of some highly paid consultants — to attract the kinds of companies who might’ve wanted to minimise their taxes. The other stuff was collateral damage.

We’ll get back to this ‘sophisticated system’ in a moment. It lies at the heart of many of the big banks’ list of crises.

But first, I want to echo the warning Ryan sounded on the near hysterical reaction to Westpac’s breeches currently playing out in government and the media.

Here’s that warning:

There’s a dangerous level of opportunism at play here. And the unintended consequences of knee-jerk reactions might punish everyone.’

Those unintended consequences involve further government intrusions into our lives. Into how and where we spend our money. With an end goal being total control of that money. A cashless society where every transaction you make is duly noted, analysed and stored away.

Hence Peter Dutton’s ‘free pass to paedophiles’ comment in parliament. It’s the oldest trick in the dirty debate book. Either you’re pro-paedophiles, or you’ll support any push for more government power and oversight.

Having sounded that libertarian clarion call, back to Ryan’s assessment. Namely that Westpac may have set up a sophisticated system to bring aboard big companies looking to minimise their taxes.

If that’s the case, this system backfired badly. But that should come as no surprise.

The big banks have long been stingy in the R&D department. And why not? They’ve enjoyed years of oligopolistic market dominance. Surely last year’s technology will keep them humming along for a few more years.

Or not…

From the AFR:

Hyperion Asset Management chief investment officer Mark Arnold concluded that Westpac hasn’t spent enough on technology, and asserted “that’s at the root of why they have problems”…

Mr Arnold suggested that all of the big banks have underspent on technology for decades to chase near-term profits. The banks have tried to “squeeze out as much short-term profit as possible.”

Now “there’s probably more bad news to come” from the sector, he said.

I’d say Mark’s spot on here.

Only I’d say more bad news ahead for the big banks isn’t just probable…but a virtual certainty.

And most of that stems from their own hubris. A decades’ long overconfidence that’s left the biggest institutions wide open for disruption.

Here’s how Ryan puts it in his research report into the Aussie banking system:

A swarm of sly little upstarts are coming to cut the Big Four’s lunch.

Unlike our Big Four, they’re not stuck with dated 1970’s technology, costly branches and old-fashioned notions of customer service.

They’re at the cutting edge of technology.

And they’re ready to explode onto the market and disrupt every single aspect of Australian finance.

Back on 5 March Ryan recommended one of these ‘sly little upstarts’ to subscribers of Exponential Stock Investor. That stock was Wisr. And it’s currently up 114.4% since he tipped it.

I can reveal the name of that stock because it’s now trading above Ryan’s buy-up-to limit. Meaning he’s placed it as a ‘hold’.

But Ryan’s identified three other stocks — and one cryptocurrency — he believes could match or even beat Wisr’s performance over the next months.

He explains why here.

Cheers,
Bernd