15/08/2012 - 11:01

Small investors lost when dark pools emerge

15/08/2012 - 11:01


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Which is it ... an opportune time to invest or a widespread outbreak of broker anxiety?

Which is it ... an opportune time to invest or a widespread outbreak of broker anxiety?

IS the stock market undervalued by 50 per cent? That’s a question that should catch the attention of investors because either it is, and fat profits are waiting to be made, or it isn’t, and Australia’s stockbrokers are guilty of using desperate sales techniques.

There is no easy way of finding an answer to the undervalued question, and it is not fair to accuse all stockbrokers of risky over-promotion of companies they reckon are trading below their underlying value.

A trawl through recent advisory notes from a selection of stockbroking firms, however, shows there is either a widespread belief that now is an excellent time to get back into the market, or there is a widespread outbreak of anxiety in the broking community that some firms will go broke without more share trading.

Two of the best examples of the market ‘saying’ one thing, and stockbrokers ‘saying’ another, are the oil explorer, Pura Vida, and the newspaper publisher, Fairfax.

On the market, Pura Vida has been trading in a range of 25 cents to 35 cents since listing in February, roughly a quarter of the $1.13 Perth broking firm Hartleys reckons it will hit some time in the next 12 months.

Either the market is grossly undervaluing Pura Vida or Hartleys, which has a close, fee-earning relationship with the company, is seeing its client in a more optimistic light than outsiders.

Fairfax, best known for the way it has attracted the close attention of Australia’s richest person, Gina Rinehart, is more interesting because if two recent broker reports are correct there is the potential for a ‘double-your-money’ investment.

Morgan Stanley, one of the giants of the broking world, told clients last week that Fairfax shares were worth between $1 and $1.10 – not the 51 cents at which they were then trading.

Quite remarkably, another broking firm, CCZ Equities, put precisely the same values ($1 to $1.10) on Fairfax, with the two research notes being issued a day apart – CCZ on August 6, Morgan Stanley on August 7.

The gap between the market and the brokers in Fairfax shares goes to the point made earlier about the challenge for investors in assessing whether there is real value to be unlocked, or that the brokers need more business.

Before thinking the worst about stockbrokers and their unenviable job of flogging shares in a market that has been in the doldrums for the past five years, there is another school of thought about the fading appeal of shares – unfair treatment of smaller investors by broking firms.

In the US, a debate has started about the way big brokers manipulate share prices by using high-speed computer trading designed to beat the market, and by writing business off-market in so-called ‘dark pools’.

Computer, or algorithmic trading, and dark pools have quickly spread to Australia, with claims that 70 per cent of the business recorded by the ASX is taking place in specialised areas of the market that are beyond the reach of ordinary investors.

Having encouraged private trading and computer-driven business, the ASX will find it hard to lure back small investors who are feeling both alienated and displeased at being treated as second-class customers.

Whether brokers circulating investment notices like second-hand junk dealers (roll up, roll up, get ’em while they’re hot) will do any good remains to be seen.

Perhaps one day there will be a return to boom conditions, but when is the great unknown, and until then here are a few more ‘bargains’ spotted recently.

• Altona Mining, currently at 28.5 cents is said to be heading for 60 cents.

• Iron Ore Holdings, currently at 94.5 cents is said to be heading for $3.

• Westgold Resources, currently at 13.5 cents is said to be heading for 55 cents.

All three companies mentioned are well managed and should emerge from the current downturn in good condition, but to suggest a doubling, or tripling in price over the next 12 months is stretching credibility.

Target audience

INVESTMENT advice is a business tightly regulated by the Australian Securities & Investments Commission, but even ASIC-licensed advisers are expected to stick to a set of rules and to only provide prudent advice.

If that’s the case, it is hard to reconcile the practice of suggesting a 12-month share price ‘target’ for a stock and pretending that it’s not investment advice.

Semantics, the business of defining words, is what it probably comes down to, and brokers providing a ‘target’ will argue they’re not suggesting that the price mentioned is what a stock will get to; but there is a fine line being drawn here, and there are unquestionably many small investors who do not know the rules of the game.

The $1-to-$1.10 Fairfax share price targets published by Morgan Stanley and CCZ are merely the latest and most topical in a well-established practice of tipping a price, while not really tipping a price, and certainly not promising that the stock will get that high.

Both brokers argue that the prices they have arrived at are based on a fundamental assessment of the underlying assets in Fairfax, particularly The Australian Financial Review newspaper.

Morgan Stanley’s view is particularly interesting for its comparison of London’s Financial Times with the AFR, noting that the Times recently cleared an ‘inflection point’, the point at which digital subscribers passed print subscribers, a point the AFR is forecast to reach in the next two to three years.

But it’s questionable whether even careful analysis is sufficient justification for suggesting a price target double the current share price.

It might even be worthwhile for ASIC to start tracking ‘target tips’ and seeing how many hit the bullseye ... or miss the dart board altogether.

Power politics

PRIME Minister Julia Gillard’s attack on the states over electricity prices is pure politics, but it was also a reminder to investors that the best investment opportunities over the next 10 to 20 years will be power related because the world wants lots more of it, and governments are making it ever-harder to generate through mountains of regulation and the disincentive of higher taxes.


“Patriotism is your conviction that this country is superior to all other countries because you were born in it.” 

George Bernard Shaw


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