14/08/2007 - 22:00

'Sell' tip conspicuously absent

14/08/2007 - 22:00

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‘Conspicuous by his absence’ is an old expression normally reserved for someone who fails to turn up at a meeting. But it’s equally true when applied to pieces of paper, and professional advice, such as the conspicuous absence over the past few months of stockbroker sell tips.

The reason Briefcase raises this as an issue is that most of us have noticed that the stock market has been a bit jittery recently – (with “jittery” defined as share price falls of 20 per cent and more).

In the good old days, when Briefcase was just a satchel, a fall of that magnitude was called a crash.

Jubilee Mines, once a darling of Perth investors because of its larger-than-life executive chairman, Kerry Harmanis, is a case study for this week’s dispatch.

On June 6, just 10 fun-filled weeks ago, some poor sausage paid $18.44 for a parcel of Jubilee shares, the 12-month (and all-time) high for the stock. That same parcel today would fetch around $13, or close to 30 per cent less than the purchase price.

•••

The cause of Jubilee’s share price collapse is the sharp fall in the price of nickel, an event over which Jubilee has no control. It takes the best price it can get.

But, if you look at the price of nickel and the price of Jubilee shares you can see that the two disconnected some time in May when the nickel price started to fall sharply, and Jubilee shares continued to rise.

Since peaking at around $US24 a pound in mid-May, nickel has plummeted to around $US12/lb, a 50 per cent fall probably best described as a catastrophe rather than a crash. People in the nickel industry say $US12/lb is still a good price, but Briefcase reckons they would still take $US24 over $US12 any day.

Now comes the interesting bit. As the price of nickel plunged (and remember nickel is simply a proxy for more widespread events in the market), Australian stockbrokers seem to have been looking somewhere else – perhaps at the new Porsche in their driveway.

Whatever they were doing, the fact is that no-one appears to have been telling clients that it was time to sell shares rather than to buy them.

There are many explanations for this medical condition known as “stockbroker blindness” but the most plausible explanation is that most of the young guns running the advisory desks in stockbroking firms have never seen a market correction.

To them it’s been one-way traffic of perpetually rising share prices, meaning that all they have had to say for the past five years is ‘buy’ and they’re an instant hero – whether they actually knew what they were talking about or not.

Now, as the market goes through a routine correction, caused largely by tighter global credit conditions, the ignorance of the young guns has been exposed – and clients are paying the price.

Briefcase takes no joy in delivering this message (well, just a little actually), but anyone with a modicum of common sense could see months ago that market conditions had changed. It was clear the risk side of the risk-reward equation was over-heated and that bizarre events such as the private equity phenomena and the sub-prime phenomena (lending good money to the wrong people) would end in tragedy – as it has.

•••

It is, of course, one thing to make wild accusations about stockbrokers, but it’s another to prove the point about an absence of sell notes.

Goldman Sachs JBWere, to be fair, did hang a sell note around Jubilee’s neck a few weeks ago, and probably saved its clients a bit of money.

But, while the old hands at Goldman could see what has happening, an equal number of hyperactive enthusiasts were still saying ‘buy’.

To demonstrate this point, Briefcase fell back on the excellent spadework done by a mob called FN Arena (www.fnarena.com). Its business is based on trawling through research reports to see who’s recommending what to whom.

In the case of Jubilee, FN has tips from four brokers, including two big name firms that issued their ‘buy’ advice on the stock on July 30 when Jubilee closed the day at $15.15.

One firm said Jubilee would outperform and investors could look forward to a price target of $17.50. The other described the stock as high risk, but worth buying, with a target price of $19.20.

Perhaps they will both be right, one day. But in both cases, clients have been stung badly as the stock has sagged to around $13 – along with the price of nickel, which is all that Jubilee sells.

It beggars belief that a big-name broking firm (or two) could be watching the price of nickel fall (it was down to $16/lb on July 31) and actually expect the share price of a nickel miner to rise.

•••

Jubilee is not an isolated example. Saying ‘sell’ to some brokers appears to be as difficult as getting a three-year-old (or a 23 year-old) to say please and thank you.

To test that sweeping statement, Briefcase trawled deeper into FN’s service to conduct a very simple analysis of how many times brokers can bring themselves to utter the magic ‘sell’ word.

The answer, as expected is not very often; to which you might say, “prove it”.

Alright, here’s the proof. In FN’s latest Super Stock Report it analysed the buy, sell and hold tips issued by Australian brokers on 479 stocks.

In the interest of its own sanity, Briefcase did not count the lot, preferring a sample of about 25 per cent, or 114 stocks.

In that universe of 114 stocks, as at the end of July (when the market had started slipping lower) there were 207 buy tips (multiple tips per stock), 231 hold, and 58 sell – roughly a ratio of 3.5 buys to one sell, or 7.5 buy/holds to each sell.

Briefcase doesn’t claim to be the smartest observer of the market, but it was pretty obvious to most sensible people months ago that the market was heading for a correction. Warning signs included the collapse of credit for private equity deals, the slide in metal prices, and rising interest rates – but still your friendly stockbroker couldn’t bring himself to say sell.

Perhaps, now that the market has fallen, we might see a few more sell tips.

•••

“Don’t gamble. Take all your savings and buy some good stock and hold it till it goes up. If it don’t go up, don’t buy it”. Will Rogers

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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