03/09/2008 - 22:00

Overcommitted in a world of pain

03/09/2008 - 22:00


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In the current market, making buy calls on any share is a tough task.

Overcommitted in a world of pain

In the current market, making buy calls on any share is a tough task. Despite the best financial position or the most impressive valuation compared with current stock price, selling pressure across the board from over leveraged funds and individuals, along with downward pressure from ex-dividend stocks, renders the buy side fraught with difficulty.

Briefcase suggests that investors now need to have the courage of their convictions, select stocks that are going to weather the next 12 months of difficult market conditions. Meanwhile, desperate sellers will continue to see any market strength as an opportunity to liquidate assets, which will be disheartening for buyers but also creates ongoing buying opportunities.

Briefcase is sure that smart money is now re-entering the market, but buying is being stagged so as to dollar cost average into selected stocks.

With the profit reporting season nearly ended, we can expect that the last results to be filed will include a few shockers.

The All Ords Index is presently finding support between 4,700 and 5,200 points, but Briefcase believes that the betting is getting stronger for a further 12 per cent decline to around 4,400 by the time the fat lady sings.

Last week, the market was well and truly Babcock'ed. It is interesting to see the flow-on effects from separate cohorts of people caught up in this debacle. Clients of Tricom, along with close associates and staff of the many Babcock & Brown vehicles, especially in Sydney, are now in a world of pain.

Real estate agents in Sydney's wealthy suburb of Mosman have become instant grief councillors as many who could once have counted several tens of millions of dollars worth of assets are now in a struggle for survival and facing bankruptcy with debts on housing and shares outweighing their underlying market value.

To top it off, about 450 of the Babcock crew have now just lost their jobs - a world of pain indeed.

Unsurprisingly, the number of multi-million dollar mansions, either officially on the market or unofficially offered in the leafy suburbs of Sydney and Melbourne, has skyrocketed. No doubt we will finally see some serious price deflation in the trophy home market in many capital cities as forced sellers and reluctant buyers readjust prices down by 30-40 per cent in many cases. In my judgement, what was previously traded for $5 million a year ago may well become $3 million by early 2009.

In Perth, the horror season of local AFL football team the Eagles may be as much about the financial position of many in its playing and training squad as it is the strategy of its coach and skills of its players.

Briefcase would not be surprised if many players and staff are finding it hard to focus on the game each week when behind the scenes their finances are being destroyed. Dud property deals, poor financial advice and too much debt, along with a falling local housing market, has left many in that cohort scrambling to sell surplus property at discount rates while loans are recalled. My advice is to pick up their game and play on, because they don't want to join their compatriots on the dole queue at this time.

Our market is vulnerable to further selling by this type of damaged market player. Many people are being forced to sell at any price. These are desperate sellers and the underlying value of an investment is not even an issue. They need to sell anything that is not nailed down to raise cash for survival. When I joined the finance industry 25 years ago, one of the most sensible things I learned was that there is always someone who has to sell a share but never someone who has to buy.

Compounding this selling mayhem in the small to medium sized company end of the market is a lack of market liquidity. Turnover has dried up at the more speculative end of the market, with many smaller companies not trading before lunchtime and after that, only by appointment.

In a situation like this, a single desperate seller can push down the share price just to escape the bailiff, which of course offers huge opportunity to cashed-up buyers. Remember those folks about which Briefcase spoke who 'let the market work for them', as opposed to those 'trying to work the market'? Well now you can see what I was talking about when I said that the folks trying to make money by working the market ultimately lose out.

A final factor in the market is the ongoing and punishing redemptions from major funds. Many loyal fund managers, who remain faithful to their investment decisions, are now being forced to trim their equity holdings on a daily basis just to keep up with the need for cash to meet redemptions. Having paid out all their cash, they face a dismal daily routine of trimming holdings across their portfolio to keep up with demands from investors for the withdrawal of funds. In the current illiquid markets, this action is having a major and ongoing negative impact. Again, this sort of action throws down the junk with the pearls. The trick is to have cash at a time like this to pick up the pearls.


The Western Australian state election this Saturday has taken an unexpected twist, with the Liberal opposition now looking like a real chance for victory, which would put uranium mining back on the agenda.

Briefcase has previously been scathing of the quality of candidates on both sides of the parliament, but believed that the Liberals were so hopelessly led and completely outclassed by the ruling Labor Party, that there was no chance of a change in government for a decade or more. However, if the polls are correct, the upcoming election is becoming a closer contest. The betting agencies are still not convinced however, with Labor a clear favourite, but widening from $1.12 to $1.25 while the Liberals have shortened from $4.50 to $3.80.

Labor's anti-uranium mining policy has put some very good uranium deposits firmly on the backburner, and so Briefcase has been disregarding any uranium exploration in WA, believing that there was little chance of a change in government that would bring those prospects forward. In what at the time seemed like a gutsy move, Canada's Cameco and Japan's Mitsubishi thought otherwise when, last month they agreed to buy the Kintyre deposit for an effective price of $US6.42/lb, or roughly 10 per cent of the prevailing uranium price. They will be laughing by September 7 if the Carpenter government is thrown out.

Likewise, the LNG industry will be backing a Liberal win, since the Labor mob in Canberra has stated its intention to claw back royalty concessions on condensate produced in association with natural gas, bound for LNG production. These powerful industry groupings, along with disaffected teachers, nurses and police, combined with a weakening housing construction industry, underpin a difficult climate for the Laborites to reclaim the task of running Australia's fastest growing and most dynamic state economy.

Big winners in the uranium sector would include Energy and Metals, which has the 13Kt, lignite hosted Mulga Rock project, Paladin Energy, with the 12Kt Manyingee deposit, Uranium Equities with several calcrete exploration plays and Venture Minerals, just the name a few obvious candidates.

There is no doubt that the bubbly would be flowing if the Liberals win in WA, but the outcome is still far from certain. What is certain is that if there is a change in government, many of the production-ready and advanced uranium project owners will see substantial share price rises on the back of a favourable outcome.


- Peter Strachan is the author of subscription-based analyst brief StockAnalysis, further information can be found at Stockanalysis.com.au


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