Market Muggers and Bullies
Bullying is to be abhorred on every occasion. So whether it is in the playground or in the world of business, the same attitudes must apply. Smaller companies are forever at the mercy of their stronger and larger counterparts – but such is the world of capitalism. To try and mitigate against this, the rules on monopolies and unfair contracts are there to try and provide at least some element of balance to help the smaller participants and allow for healthier competition. However, my concern is rather with the area of market manipulation - where share prices of companies can be adversely affected, not necessarily by larger brothers, but by teams of feral share muggers who seek to beat up share prices for their own benefit, irrespective of the damage they cause.
We all know that once outside the FTSE350, we are in a dry and arid world of limited trading and rarefied price liquidity. In this world the actions and influence of a few mutters from the gutter can have a disproportionate effect on prices and valuations. With smaller companies this is not just a technical issue but one which can materially affect the survival of businesses - especially if their share prices are being forced down. The style of “let me on the board or I will dump your stock” is, in my view, little more than blackmail and whether legitimate or technically allowable, it goes against the ethic and intent of an investing market – namely to primarily provide finance to an investment market and secondarily to provide a healthy open trading ability behind it.
For some companies, short selling can have a disproportionate impact and here the strange practices seem to apply whereby certain people announce their intentions to sell in advance through public publications and chat rooms, to thus in effect adversely influence the market and make their intentions a self fulfilling prophesy - and profit. Is this investment or market abuse?
This is especially difficult for often smaller companies to fight against and particularly dangerous for them if the modest share price is adversely hit. This can potentially impact upon bank covenants and value obligations, which could even endanger the company itself.
In the institutional world of investment management, short selling is an important tool to manage client money and to aid proper and open price formation. However, for smaller companies it can prove very destructive and unfair to the company concerned.
I take this further in my annoyance at hearing certain "internationally regarded market experts" talking a particular investment angle – such as talking down Sterling for example – without disclosing that they have a significant bet on it occurring. Is that a market view or abusing the media for your own profit?
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The next time you hear a commentator say that they have just been through a bank’s Report and Accounts, either be very impressed at their wonderful diligence, or be very sceptical that they have not actually gone beyond an overall summary. My colleague Peter Sleep brought to my attention that the 2007 HSBC annual report weighed 1.47kg – that’s about the size of a medium sized chicken. Well at least you can eat a chicken - although I suppose you can cook the books. However, don’t worry about 2008 as this year’s only runs to a mere 472 pages – pages that most don’t read, most can’t understand and can be barely delivered by post.
Banks have become so large and so complicated that you need a range of experts to fully understand them. Now with the "integrated" banking leviathans, their businesses are so diverse that appreciating and understanding their true risks must be almost impossible. Thus, despite the good intentions of the regulators aiming to prevent any further recurrence of a banking crisis, it is going to be very difficult to have a clear method of evaluating the potential holes in these groups, and especially as to whether they actually have sufficient capital and funds to sustain their position.
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There are times when history doesn’t have that glow of warm wistful memories. Last week, sitting in sullen silence during a London tube strike, hearing about the Labour party ructions over a sub-prime minister and reading about further weakening of our economy on the back of poor retail sales, all felt like being back in one of those currently popular retro time television programmes about the 1970’s. David Bowie’s lyric of “Ashes to ashes, dust to dust” might be the signature of the last few months of this Prime Minister’s tenure. All I need now is to put on one of my old stripey tank-tops and I will be back there again.
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And finally...... What's not to like about a tree? Apparently plenty, if you live in one New York City neighbourhood.
The New York Daily News says some residents in the Bronx are fuming over the city's plans to plant trees on their block. They say the roots will eventually crack the sidewalks - and they'll be stuck with the repair bills. Opponents also fear that fully grown trees will damage their homes, clog sewer drains and entangle power lines in the borough's Mott Haven neighbourhood.
Who wants to go green anyway when you can have some fresh paving slabs and concrete!
Have a good week,
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited
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