Press the Ignore Button!

I found more and more media and analysts/brokers spurting a lot of garbage in this time of financial uncertainty. Well, maybe I am a little harsh, or probably I should just say that they need to go to their training again.  

  

I suppose I have to realise that media make their money from a 'fantastic' breath taking stories and brokers make their money by encouraging frequent trades. But I have to say again for my peace of mind: Brokers or Stock Analyst recommendations and their price targets are useless! (Ok, I feel better now *smile*)

Another thing for us to put in our mind is that majority of analysts are highly compromise by the companies they cover, make them reluctant to report a 'sell' recommendation for fear of their access to the companies info and documents being revoked.  It is said that 'hold' is a new 'sell', because the company will react badly if analysts produce sell recommendation.  

We, as investors, have to realise that everyone has motivation when they're making recommendation, and part of our job is to determine or understand just what that  motivation might be.  Investor can listen, but we have to filter. 

In Australia, the actions of financial analysts came under scrutiny after a Citigroup analyst downgraded the target share of Asciano from $6.08 to a meagre $0.82. This is the same analysts who had issued 20 reports of 'buy' recommendation before, with target price as high as $13.79a few months ago.  How, why, had they have compromise before?

Another case worth mentioning is the one involved BrisConnections (please see my earlier post). Shares in the company slide rapidly from $1 on July IPO price to 0.1c, the lowest value a share can trade on the ASX.  There are three analysts covering the company; Credit Suisse, JP Morgan, and Macquarie.  In the week when BrisConnections fell to $0.05, those analyst posted target prices of $1.91, $2.10 and $0.93.  What can we make of that? And of course the research houses claimed that they're completely independent of their broking arm. 

So why we would read and listen to Broker or Analyst at all? 

It's always a good thing to listen to any individual who have knowledge of a particular industry or company.  It will increase our understanding of the business.  But make sure you shield yourself from the 'buy/hold/sell' recommendation, or even from their number when they make their calculation.  Instead, investor should get a good understanding of the long term picture of the company, their profitability and their position in the industry. 

Is It Worth the Paper It's Written On?

Just came across this Unit Trust recently.  

Brisconnections Unit Trust (BCSCA) was listed on the mid of 2008 at $3.00 per stappled unit (payable in 3 instalments of $1.00). The first day of the listing saw it dropped to $0.41 cents. It is currently the cheapest share on the ASX at the lowest price possible, 0.1 cent.  

Source: ASX website

According to Brisconnection website, Brisconnection is dedicated to the successful delivery of Airport Link, Australia's largest infrastructure project. When completed in June 2012 it will be the first major motorway linking Brisbane CBD to the northers suburbs, the Airport and the Australia Trade Coast, a project that was valued at $4.8 billion.

It's certainly tempting for many investor to buy a stock at 0.1c and doubling their investment if it goes up even just 0.1 cent. However, here's the catcth.  As I mention at the start, BCSCA is a $3.00 stappled stock.  Anyone who purchase the share will also be buying a liability of $1 per share due to April 2009, and another $1 on January 29, 2010 for the shares to become fully paid. This is to say that for every $1 worth of shares an investor is buying now, she or he will be liable for $1000 repayment in April 2009 and another $1000 on January 2010.

An Australian housewife from Victoria, recently become a second largest shareholder (Queensland Investment Corporation is the largest with 10% stake) for a mere AUD 32,300. However, for this purchase, she has to cover a huge $64.6 millions in installment payments.  

I suppose investor can always sell the stake before the installment due, asuming there are buyers. This is what I can see from the market depth this morning:

Source: Suncorp Share Trade website 

There are currently NO buyers on the screen, and around 84 million shares are offered by 172 sellers at 0.1 cent. From 390 million shares on issue, that's accounted for more that 20%.

What happen if you can not pay your installment? Any investor who fails to pay the installment will be charged daily interest until the full sum is paid.  If the company determines this amount can never be paid, it can retake and sell the shares.  

And the Management isn't going to help either, here's some excerpts from Allan Kohler's interview with Brisconnection Chairman Trevor Rowe, on ABC's Inside Business: 

ALAN KOHLER: And so you’ll sue them next April if they don’t pay, is that right?

TREVOR ROWE: We will if they don’t pay in April we have an obligation under the underwriting agreement that we need to pursue the collection of any outstanding instalments, but we get the money anyway because it’s underwritten by Deutsche Bank and Macquarie Bank.

ALAN KOHLER: But you are obliged to pursue the people.

TREVOR ROWE: We are obliged to pursue people.

ALAN KOHLER: And so are you going to do that? Is in there any alternative that you’re looking at? Is there any possible alternative?

TREVOR ROWE: We have an obligation to use best efforts to recover those funds. So in a balanced way we will have to do that.

ALAN KOHLER: What will that involve? Will you put the debt collectors on to them?

TREVOR ROWE: We’ll probably have debt collectors go out and endeavour to collect it, yes.

The Cycle of Market Emotions

It is fascinating to watch the cycle of market emotions, and as any other investors, I certainly can relate it to my own experiences. 

Basically, we start at optimism, which builds in bull markets to Euphoria, then turn all the way down through anxiety and denial to fear and panic before capitulation and despondency set in. And then, after the storms clearing up, there will be some hope and relief, hence optimism starts again once more.

But as the ASX has now officially fallen 51% since it reached a closing all time high of 6828.7 in November last year, the question is: where are we now in the cycle?

The good news is, I do think we passed anxiety, denial, fear, desperation, or even panic. From my own experience, I guess not many things in the market could shock me anymore. We are possibly somewhere between capitulation, despondency and depression.  For a contrarian, probably the bottom is very near, if it's not in. We are nearing the point of maximum financial opportunity!!

Sympathy does not seem appropriate

Interesting article, I guess it served the hedge funds and short seller their right, please enjoy:

BY PHILIP DELVES BROUGHTON

FIRST POSTED NOVEMBER 5, 2008

The geniuses at Porsche have just done what half the civilised world has been thinking of doing these past few weeks and stuffed it to hedge funds and banks. The numbers are still all over the place as people try to unravel the great Stuttgart Sting. But what appears to have happened is this.

Porsche had been itching to buy Volkswagen for years. But it was struggling to raise the money. So instead of getting a traditional bank loan or issuing equity, it decided to pick the pockets of British and American hedge funds, the very funds, in fact, which have belittled stodgy old German enterprise and called it out of date. The funds which one leading German politician called "locusts" for preying on businesses while adding no value.

These funds thought VW was overpriced and reckoned Porsche was insane trying to buy it. It was nothing but a quixotic fantasy of Ferdinand Piech, the grandson of Porsche's founder and a former chief executive of VW. Porsche, after all, had annual revenues of just £5.2bn to VW's £83bn. Its market cap was around a third of its takeover target.

British and American hedge funds have belittled stodgy old German enterprise and called it out of date

But Piech's intimate knowledge of VW had allowed Porsche to make enormous profits trading options on VW stock. What occurred over the weekend was the climax of this strategy. Hedge funds such as SAC and Greenlight in the US and Odey and Marshall Wace in London were eagerly shorting VW stock; borrowing, selling it and promising to return it later. They reckoned the stock price would fall and they could buy it back cheaply and pocket the difference.

What Porsche appears to have known, however, is that the volume of available shares was quickly dwindling. They knew this because they had been quietly building their own position in VW, through shares and derivatives, to 74 per cent of the firm. A further 20 per cent was owned by the government of Lower Saxony, and another five per cent owned by index tracking funds, leaving a tiny number of shares floating freely on the market.

It is conceivable that Porsche and its banks were the ones lending the hedge funds the shares and then buying them back through proxies. So while the hedge funds thought there was a large and liquid market in VW shares, Porsche knew otherwise.

On Sunday afternoon, Porsche played its hand. It announced that it controlled 74.1 per cent of VW. German law had not required it to disclose this information beforehand. The hedge funds did their calculations and freaked out. They had borrowed 15 per cent of VW and now it turned out Porsche may have lent them most of that.

They immediately began scrambling for what little stock was out there to close out their short position. Some were reported to be sobbing on the phone to their brokers. Too many traders chasing too little stock sent the price of VW soaring, pushing the company at one point on Monday past Exxon to make it the most valuable in the world. All Porsche needed to do at this point was sit back and smile. It had made billions in paper profits.

‘The chaos around VW overwhelmingly hit professional gamblers. Sympathy does not seem appropriate’

Then came the reckoning. On Wednesday Porsche announced it would release five per cent of VW's stock to ease pressure on the short sellers. The share price of VW is still around two-and-a-half times where it was last week and Porsche could make around £5bn on this portion of its manoeuvre alone.

But even better, Porsche owned cash-settlement call options on 31.5 per cent of VW which, according to the New York Times, matured yesterday. If true, this earned them the difference in cash between 31.5 per cent of VW valued around last Friday's closing price of 210 Euros per share and yesterday’s price of 517 Euros, an astonishing return. When VW's price returns to normal, Porsche should have more than enough cash to buy control.

Germany seems to be on Porsche's side in all this. Die Tageszeitung, a liberal newspaper, wrote on Wednesday: "As opposed to previous speculative bubbles that cost a lot of small investors their money in the stock exchange casino, the chaos around VW shares overwhelmingly hits professional gamblers. Sympathy does not seem appropriate." 

http://www.thefirstpost.co.uk/45766,features,how-porsche-stung-the-hedge-funds-philip-delves-broughton

Naked short selling

In a move to restore confidence into the market, the Australian government yesterday moved to ban naked short selling and require that other short sales be adequately disclosed.  

Australian regulators banned covered and naked short selling in September in an immediate response to the global financial meltdown, and this ban is due to expire on Tuesday, with the exception for financial stocks, which run unti January 27 next year.

According to wikipedia, naked short selling or naked shorting is the practice of selling a stock short, without first borrowing the shares or ensuring that the shares can be borrowed as is done in a conventional short sale.  When the seller does not obtain the shares within the required time frame, the result is known as a 'fail to deliver'.  Naked short selling can be used to manipulate the stock price by bringing it down.

Critics for short selling have savaged short selling for hurting the value of the companies/share prices. However, supporters argue that short selling facilitates better price recovery, deeper markets, closer bid/ask spreads, and over time, less volatility.

John Templeton

If you have some cash laying around somewhere, not earning interest money (really, I don't like interest based financial - read my old posts), and inflation is killing you, you might want to consider investing in the ASX now.  Share price has never been this cheap for some years, some might even consider to rename ASX as Crazy Clark! 

Talking about investing cash in a crunch time, one might take lesson from John Templeton, one of the greatest investor known.

John Templeton was most famous for buying $100 of every stock trading below $1 on the New York and American Stock Exchanges.  That was in 1939. His trade got him a junk pile of some 104 companies, 34 of which were bankrupt, for a total investment of roughly $10,400.  Four years later he sold these stock for more that $40,000. In 1999, Money Magazine called him 'arguably the greatest global stock picker in the century'. 

This is his investment style, for a 'John Simpleton' like me to learn: 

• He is one of the past century's top contrarian.
• Looking for value investments, he called it 'bargain hunting'
• Search for companies that offered low prices and an excellent long term outlook.
• As a value-contrarian investor, he believed that the best bargains were in stocks that were completely neglected, those that other investors were not even studying.

Valuation of Stocks

What is a value of a stock?

Accounting wise, apparently it depends on how you calculate it. All the hype about the ‘Mark to market accounting’, which is the accused culprit of our current financial crisis.  Well again, of course nobody made a mistake in dealing their business.  It’s all about accounting. Right? Wrong!

Mark to market accounting, or also known as fair value accounting requires a close look at the risks in order to assess value. Did the trouble banks and financial institution looking closely at the risks? If institutions were accurately marking the books, they would have seen the problems they were experiencing months in advance and could have made the necessary adjustments, and we could have avoided the current crisis

Anyway, on the new development of this issue, Accounting bodies in the US and Europe responded by changing a few rules.

The International Accounting Standards Board (IASB) has confirmed a change to its rules allowing some assets to be reclassified and avoid be subject to a fair value calculation. The changes allow some assets to be moved from ‘held for sale’ or trade, which means using a fair value calculation, to ‘held for investment’ which does not. Deutsche Bank took advantage of new accounting rules, and shifted the income statement into a profit instead of a loss

SEC and the Financial Accounting Standards Board issued a clarification of the rules to say that “when an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable.” It added that “the results of disorderly transactions are not determinative when measuring fair value,” which could mollify concerns about assets being marked down to fire-sale prices.

Whatever the accounting bodies decide, I hope it’s for the interest of everybody, especially investor, and I am not going into detail about the issue in this post.

Now, Back to the question: What is a value of the stock?

In accounting, there are several alternative in valuing the stock: It might be slightly different in some textbook, but basically one of the well known methods is a discounted cash flow (DCF)..

How does DCF analysis work? In simple terms a business is worth the present value of the cash flows that it will generate into the future. Those are the after tax cash flows available to shareholders – from today to forever. To calculate the after tax cash flows available to shareholders you will start with the revenues a business generates and deduct all the cash-based expenses that are incurred in obtaining those revenues (including taxes and capital expenditures).

Most corporate finance professionals are using this method.

However, apparently, Citigroup analysts have recently shifted from a discounted cash flow model of valuation to an enterprise value model. 

The Enterprise value (EV) represents a company's economic value -- the MINIMUM amount someone would have to pay to buy it outright. An enterprise value model adds up the market cap and debt a company has, and then subtracts cash and cash equivalents.

It's an important number to consider when you're valuing a stock, because although it’s not quite the liquidation value of a firm, it basically is.

This valuation model could suggest a much lower share price than the other, if a company has a big debt. Yes, the D word.

Using an enterprise value model for a company shares could means, well, the end of the business itself. It means the analysts thinks that the company has a zero earning power, hence kaput!!

Lorenzo

IBA Health Ltd launched Lorenzo in Sydney today.  It is said that its revenue will increase more than double after the launch of the new healthcare IT platform. LORENZO is a unique solution that will revolutionise the way healthcare is deliveered around the individual.

IBA Chief Executive, Gary Cohen said that the market for Lorenzo is in the billions of dollars.

Lorenzo is an iSoft product, a UK based company that was taken over by IBA a few years ago. There was always some concern about this takeover and the ability of IBA -iSoft to launch Lorenzo succesfully.

Well, I gues they made it!

A Glance on IBA:

IBA aims to become a global provider of healyh IT solutions.  The acquisition of iSOFT saw it expanding its scope to 35 countries.  Healthcare spending is driven by the increased demand for access to healthcare services and an ageing population.

Five analysts are covering IBA at this moment (FORESIGHT SECURITIES, ABN AMRO, BBY LTD., MACQUARIE RESEARCH EQUITIES),  two of them recommended 'strong buy' and three others recommended 'hold'.  If only their recommendation worth anything these days.

 

China Story

Can we still buy China story? Great trading partner or a ruthless one? We know how much cash the chinese hold, but do we know their ethics of doing business? Living in Malaysia and dealing a fair bit with chinese businessmen, I found most of them are very tough and a lot of times annoyingly crafty. 

Recent incident with Mount Gibson Iron, was a very interesting bad experience.  First, the Chinese customers reneging the sale contracts with MGX,  forced MGX into a tight situation, and then having another chinese group 'rescuing' Mount Gibson by offering a very low price that MGX could not refuse.  If this happen to MGX, do you think the chinese will let other junior iron producers away? I have the feeling that chinese central authorities support this kind of practice.

Seems like Chinese contracts are not worth the paper they are written on.

Directors Buy - Runge LTd (RUL)

Post Note: Ian Runge bought some more shares, 25000 on market on November 5 for $17500.  

Runge director Ian Charles Runge indirectly bought 93,000 shares for $68,064 on-market on October 31. He indirectly holds 15,903,389 shares. 

Ian was one of three or four Runge Directors who bought more into the company recently. Since October 2008, there are five notices of change in the directors ownership. 

Among them were Anthony Kinnane who directly and indirectly bought 25000 shares for $18000 on market on 24 October 2008, Christian Larsen (bought 100000 shares worth $93500 on September 1, and Vince Gauci

Good sign and a vote of confidence.

RUL's vision is to be the leading global supplier of mine technical and business planning products and services. The company continues to strengthen its position globally, with demand for projects in new regions of the world. Demand from regions such as Russia, Brazil and China provide a solid foundation for the growth of its business globally. In terms of products and services, the company has been working on increasing the scope and size of the training business to handle a higher volume of recruits, and secondly, to reduce the complexity of its software products.

Runge reported NPAT up 6.2% to $5.94m for the year ended 30 June 2008. Revenues from ordinary activities were $63.41m, up 62.8% from last year. Basic EPS was 5.3 cents compared to 3.3 cents last year. Net operating cash flow was $5.9m compared to $6.35m last year. The final dividend declared was 1.5 cents.

Stock Chart

I found a great stock chart site for TA newbies like me:

http://stockcharts.com/school/doku.php?id=chart_school

Investing Tip 1: Don't Try to Catch a Falling Knife

Start looking for value plays
Tomas J. O'Loughlin, CFA, of Investment Portfolio Management, suggests that the best investment decisions in hard economic times are counterintuitive.

"Sectors or companies that you liked in good times but have been hit in today's markets may represent buying opportunities."

Buying the best of breed in these sectors can position investors to take advantage of the next bull market.

His checklist in evaluating these firms includes:

• Are they going to go out of business in the next three to five years? • Does the company have a strong management team? • Does the company have both strong financials and access to capital? • Is the company expected to continue to lead in its field?

An investor can't be in a hurry to buy or sell, says O'Laughlin.

"Don't try to catch falling knives," says O'Laughlin, and "try to get a measure of the firm's downside risk."

By looking at the downside risk of firms and by taking an investor's perspective, looking over a three- to five-year investment horizon, versus a trader's point of view, the investor can identify firms with value, O'Laughlin says.

From: http://www.bankrate.com/cnbc/news/investingadvice/tips-for-investing-a3.asp?caret=2a

White Knight Vs Red Dragon

This is from The Daily Reckoning in its newsletter yesterday:

The West Australian reports that Mt. Gibson Iron ore (ASX:MGX) is entertaining an offer from China's Shougang Concord and China's APAC Resources which would see those firms raise their equity stakes in MGX to 40.5% AND secure discounted ore for the life of the mine. Now that is a deal you could only make from a position of strength.

Are these Chinese firms white knights or red dragons? Does it really make a difference? We're back to the same question of who benefits the most from the long-term demand for the ore. The Chinese steel producers have the chance of a lifetime to secure off-take from Australian mines at bottom-of-the-barrel prices. But what does it mean for current or future shareholders in the juniors?

Here's what Al says, "In short, the steel sector will huddle together for warmth over the next six months. We're going to see demand for steel and steel-making ingredients move down slowly. Then the recovery will come from developing countries later in 2009."

"But right now, the balance of power has definitely shifted. You'll see more of these iron-steel project equity agreements in late 2008 and early 2009. It's a way for both parties to get some security. It's a way to wring some risk out of the contracts. And it's yet another step towards where we see the iron industry inevitably heading: Chinese firms owning a lot more of Australia's iron mines."

"Shareholders in the juniors will be in for volatility. It still isn't clear in the long run who will control the Pilbara. But right now Australian iron ore shares are factoring in a global depression. The buyers are completely ignoring the growth in the developing world that'll come in the next decade. Better yet, our favourite iron play is still sitting on the sidelines - making cash every quarter regardless of who owns the mines."

Ansell Limited

Ansell's principle activities involve the development, manufacturing and sourcing, distribution and sale of gloves and protective products in the Professional Healthcare, Occupational Healthcare and Consumer Healthcare markets. Ansell is one of the companies in the Healthcare industries that has doing pretty well in the current financial crisis.

Ansell's share price today is $13.03, not far from it's 52 weeks high of $14.10 (52 weeks low was $9.16 - sometimes in June/July 2008)

Currently, there are 10 brokers covering the stocks. Out of 10, 2 recommended a strong buy, 2 moderate buy, and 6 Hold. The latest recommendation is from ABN AMRO. ABN Amro likes the look of Ansell (ANN) and reiterate Buy recommendation, saying it remains an excellent defensive stock. Target price increased from $13.45 to $14.84.

Telstra today - 5 Nov 2008

Citigroup maintain their HOLD recommendation on Telstra (TLS) and 465c target price saying they don’t expect any earnings upgrade at the TLS Investor Briefing tomorrow.

GSJBWere maintain their BUY recommendation and 545c target price say highlights at tomorrow’s Investor Day are likely to be: “(1) review and discussion of company strategy; (2) update on business transformation program; (3) imminent network/product launches and (4) September Q trading update”.

Fundamental Analisys (I)

Fundamental Analysis looks into the basic financial condition of the company or business. Usually, all the information we need to do the analysis are publicly available, because all the public companies are required to report their operation and financial condition to the market/investors.

There are different of aspects that we can look into, but there are few basic things that we can start to look into:

1. Earning,

• Arguably one of the most important aspect of any business. Stock investors are focus on the future earning. However, since future is difficult to predict, they use the historical earning as a gauge to predict the future.
• Although looking at earning figures seems to be relatively easy, unfortunately there are few of different ways to look at a company's earning. This include the time of earning and the quality of earning. We will go into more detail of this earning in another post.

2. R/E Ratio

• P/E Ratio is calculated by dividing a stock price by its per share earning for a given years. Usually, we calculated the P/E based on a company expected earning ( this is what is called Forward P/E).
• It is a good place to start to determine the value of a stock, and it certainly most helpful to compare it against other P/E Ratios
• We might first compare it with the company's P/E ratio in the past, how high and how low it could go. Other than that we can also compare it with other similar company in the industry or the stock market index.
• Just because a stock has a relatively low P/E ratio, does not always mean it's worth purchasing. Others maybe aware of a looming problems and discounted the stock price accordingly. It can either good or a bad sign, always do your reasearch first.

3. to be continued...

What a Misjudgement!

Or should we call it a fiasco?

Mount Gibson Iron (MGX) is back on the trade floor today, ending a week long suspension. It announced an offtake agreement, right issue and placement of 110m shares at 60c.

At least the company did not go to the darker place, but this is the same (or not the same) company who fought against the bought out at $3+ few months ago. The same predator is now getting 110 million shares at a 90% discount!!

I suppose this is as good as you can hope for.

Bank and the Borrowed Money!

I detest the interest based financial system, making money on money is not the best way for the society. For that reason, I keep my stock portfolio clean of financial institutes or banks. I am still suffer from the decrease of the stock price and asset, but at least I hold on to what I believe, and it will safe me.

Debt or borrowed money, became a huge industry around the world. The world turn away from manufacturing and toward an economy based on moving and managing money.

In the US itself, the sectors of finance, insurance and real estate sector swelled to 20% of GDP, ahead of manufacturing at 12%. Banks and insurers are dealing with obsecure instruments, debt papers, CDO. What a nightmare!