11/04/2006 - 22:00

DIY speculators rife in bull market

11/04/2006 - 22:00


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Tell a boy (of any age) to not do something and everyone knows the result. He does it, whether he’s a boy of five or 55. What the real world knows, government is yet to discover, as demonstrated by the failure of anti-smoking campaigns, the widespread use of mobile phones by car drivers  ... and investing in speculative mining stocks during a boom market.

How does Briefcase know this is true? Easy, just follow the bouncing ball (also known as stock exchange sales data) from the time the government’s chief regulator blew his warning whistle.

The chap doing the blowing was Geoff Lucy, chairman of the Australian Securities and Investments Commission (ASIC). On April 5 he told a Perth audience that many people were not factoring in the risks associated with speculative investment. That remark was followed with headlines the following day about the “watchdog” saying “beware the boom”.

Briefcase agrees absolutely with Mr Lucy’s views. The small end of town is over-heated to a ludicrous level in what smacks of a direct re-run of the nickel boom in 1969, and the dot.com boom of 1999, times when paper fortunes were made, and lost, in the blink of an eye, but very little long-term wealth was created.

But, even if sensible people like Mr Lucy reckon the market is bonkers, there is no stopping a determined speculator from having a flutter on the latest tip picked up from a mate in the pub.

Testing the reaction to Mr Lucy’s warning was easy. Immediately after his comments were publicised, share prices of most small speculative stocks went even higher, and most stock market indices also rose. At best, and for future ‘no-one warned me’ bleats from the sheep (sorry, latecomers to the boom), Mr Lucy can at least mark April 5 as the day he issued his ‘I told you so’ warning.

On the measures of market movement in the post-Lucy era, the all ordinaries rose 0.6 per cent (the one-day rise on April 6), the materials index (which includes most miners) was up 2 per cent, and the energy index (which has a number of uranium explorers, was up 1 per cent.

At the micro level it is best to look at the ultimate froth-and-bubble market, the uranium hopefuls. Here we found Hindmarsh Resources rising from $1.26 to $1.45 on April 6, despite Mr Lucy’s clear warning. Summit Resources was up from $1.26 to $1.31, and Sally Malay Nickel, which said it was joining the uranium hunt, rose from $1 to $1.10. There were also some declines on the day, with Paladin Resources slipping from $4.86 to $4.73 and Valhalla down from $1.31 to $1.27.

There are several lessons to be learned from this latest example of how a rampant bull market works; some old, some new. First, there is no point standing in front of a charging bull and saying stop. Second, this particular bull seems to be feeding off a new source of energy, the do-it-yourself share trader who buys and sells from his home computer with minimal understanding of the market.

Where will it go and when will it end? Who knows? Briefcase certainly doesn’t; it’s just enjoying the fireworks, writing stories about what’s going up, and waiting for the day when it can write stories about what’s going down.

However, as a final comment there is something Mr Lucy could do with his next warning, which might produce more clear-cut evidence of the level of hype in the speculative end of the market.

He could actually name some stocks he reckons are over-valued – and then we could sit back and watch them go up; further proving the point that boys will be boys.


On the matter of boom-time stocks there is one well-known WA company doing everything possible to avoid being caught up in the irrational exuberance infecting so much of the market.

Wesfarmers, a darling for much of the past decade, has been a stand-out under-performer over the past year – as shown in the graph which plots the percentage movement in the all ordinaries index against the percentage movement in Wesfarmers.

The all ords, over the 12 months to early April, was up around 25.1 per cent. Wesfarmers was down around 12.7 per cent. In raw numbers, the situation showed the all ords up from 4148.5 points to 5190.3 points, and Wesfarmers down from $41.40 to $36.12.

To be fair, a number of issues affect this comparison. Wesfarmers runs a generous dividend policy, and makes frequent returns of capital, especially after selling assets, which have the effect of shrinking the business and, therefore, its share price.

There is also the problem of Wesfarmers not being fully plugged into the resources boom with stocks such as BHP Billiton and Rio Tinto playing a major role in driving the overall market higher.

On the flipside (read nasty side) there are two other factors at work. Last July, Wesfarmers swapped chief executive, with Richard Goyder replacing Michael Chaney. There is also a concern in the market that some of Wesfarmers’ operations are not performing well, especially fertiliser, which looks like being next cab on the ‘for sale’ rank – potentially further shrinking the parent company further.


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