10/10/2012 - 10:53

Grass not greener as risk meter glows hot

10/10/2012 - 10:53

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Seemingly ambitious broker ‘targets’ indicate a degree of desperation that should raise a red flag for investors.

Seemingly ambitious broker ‘targets’ indicate a degree of desperation that should raise a red flag for investors.

IF Greenland Minerals and Energy is a company worth up to $7 a share why is it trading at 31 cents?

It’s a question that cuts to the heart of an issue worrying every investor in Australia.

In fact, it goes further; the Greenland example is part of a problem affecting every aspect of the global economy, from governments down to households.

More on Greenland later, but an early clue as to why it is important can be found in the heavy losses being posted by Australia’s stock broking community, and the desperate games brokers are playing to boost business.

The big worry for everyone is risk, and right now the risk meter (if there was such a thing) would be glowing red hot, sidelining cautious investors and slowing retail spending to a crawl.

Issues on the ‘worry’ list include:

• Europe’s descent into economic turmoil, an event which has historically led to damaging social unrest;

• China becoming the biggest victim of Europe’s shrinking economy;

• Australia’s resources sector being hit by the slowdown;

• government debts around the world continuing to balloon even as households rein in their spending and retire personal debts; and

• low interest rates causing investors to chase higher returns, disregarding the primary investment lesson that, the higher the return the greater the risk.

There are other problems but they all stem from the GFC of 2008, which exposed the high costs associated with excess use of debt and insufficient focus on genuine wealth creation.

Payback time has arrived. Even if governments do not get it yet, they will as tax revenue shrinks as a result of reduced economic activity and households squirrel away savings in preference to the rampant (debt fuelled) spending of the pre-2008 period.

This combination of factors leads to a prediction that it really doesn’t matter how far interest rates in Australia fall, it is not going to trigger a sudden economic revival because in most cases reduced mortgage repayments will be used to pay debt.

Now for the Greenland question, because it too is related to people avoiding risk, no matter how tempting.

During the past few weeks, the Perth-based uranium and rare earths explorer has reported solid progress at its Kvanefjeld project on the North Atlantic island of Greenland.

In theory, Kvanefjeld might one day become a uranium and rare earths mine, but there are many hurdles to clear, such as raising the capital to fund any development, overcoming a depressed uranium price and, last but not least, overturning the Greenland government’s anti-uranium stance.

It’s quite a list, which is why recent research generated by a number of financial advisory firms raised eyebrows with their inclusion of extremely ambitious share-price ‘targets’, a practice permitted by Australia’s corporate regulators but one which is revealing a wide gap between the market and brokers.

Here are some examples of Greenland share price ‘targets’.

• Shaw Stockbroking last May (when the stock was 41 cents) increasing its price target of $1.80 to $2.25.

• Bell Potter, on September 24, tipping Greenland as a speculative buy with a price ‘target of $2.32.

• RM Research (on September 20)  providing three price ‘targets’, short term at 90 cents, medium term at $5, and $7 on what it terms a fully-diluted basis.

Perhaps, one day, those targets will be reached but there are two questions that should be asked.

Firstly, is there a connection between falling profits in the broking industry and increasingly optimistic price ‘targets’ in broker tips?

Secondly, how many investors are aware that the RM Research report and its suggestion of a $7 price target, was paid for by Greenland itself with RM collecting $17,500 “for the compilation and distribution of two research reports”?

For investors with a high-risk tolerance, Greenland might be just the stock for their portfolio, but what those ‘targets’ really signal is that stockbrokers are desperately scrambling to generate business in any way they can – and that’s risky.

Cup takes the cake

TO be fair to Shaw Stockbroking, Bell Potter, and RM Research they are not alone. The publishing of what look to be optimistic price targets at a time of great economic uncertainty is widespread practice.

Here are a few more examples of optimistic price ‘targets’, which might shake a few shekels out of investors’ pockets.

• Foster Stockbroking telling clients that Elemental Minerals has a ‘target’ of $1. It is trading at around 61 cents.

• A British broker, N+1 Brewin, suggesting a target of $2.25 for Pura Vida. It is 77 cents, but was 94 cents when Brewin’s suggestion was circulated by Pura Vida’s public relations consultants.

• Foster again with a 60 cents ‘target’ for Altona Mining, which is trading at 27.5 cents.

It is possible that fortunes will be made by investing in the stocks mentioned, especially as they generally imply a double-or-triple your money opportunity.

On the other hand, the Melbourne Cup is just a few weeks away and that will provide a similar opportunity to make a fortune in a matter of minutes – or not.

Bad advice

ON a more serious matter, though one related to the quality of advice, there is a worldwide problem with the information being provided to governments by allegedly competent civil servants and specialist consultants.

The best recent Australian example was the legal advice that caused the Australian Securities and Investments Commission to prosecute Fortescue Metals Group boss Andrew Forrest, leading to a six-year rabbit hunt that ended with the hunter in the hole rather than the rabbit.

In London there is a far worse example of botched advice to government, which led last week to a decision to scrap a railway services tender, a decision that could cost taxpayers more than $60 million.

What happened is that government staff failed to accurately calculate the financial structure of competing bids, leading to a syndicate led by Sir Richard Branson losing the bid.

Sir Richard pointed out a few simple errors in how the civil servants had added the numbers and threatened to sue, forcing the government to take a fresh look and then abandon the bid, but not before promising to repay the costs of all bidders.

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“I am a gentleman. I live by robbing the poor. ” 

George Bernard Shaw

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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