Market Chaos

The markets are dropping like a stone. Witness Cisco’s chart.

I heard on the radio this morning that the Dow was fluctuating by 1000 points. Now, when you consider that the Dow in the last few days dropped below 10,000, that’s more than a tenth of the market.

I believe it’s going to get worse though. People are going to loose all faith at some point, and this market is going to take years to recover to the constantly-over-priced state that it has been in in recent years. That’s good for many currently outside the market, but very bad for some.

Kiwisaver participants sit in the middle of those two extremes for the most part.

Good Times on the Stock Market

As a net purchaser of stock, I am feeling quite pleased at what happened yesterday on the markets.

You see, every generation goes through the same cycle. They think the market is finally going up forever, and after it doesn’t, they loose faith completely.

This generation is about to loose all faith in the markets, and it’s high time. Now the sophisticated investors who aren’t solely driven by good feelings can pick up the bargains.

Maybe I can persuade one to tell me what stocks to bug. ;D

Stock Markets

The stock market is back up. Durn it, I was hoping for some more bargains.

Ever wondered though, why the market jumps up or down at the opening, and why so much money changes hands in the first few minutes?

Well, the hour before the market actually begins trading, the market is in what is called “pre open”. What this means is that there are two auctions going on for each stock, one to bid (offer to buy) and one to offer (stocks to sell).

Sort of like the America’s Cup start… lots of maneuvering gos on at this time. Depending on market news, operators may out bid each other up or down on desirable stocks.

It’s a lot like Trade Me, but with one difference. To prevent people changing their bid or offer at the last minute, the market open is random, and could be a few minutes before or after the official 10am start.

When the market opens, trades where a bid matches an offer officially close, and the trade is sent back to the broker to be processed. Often, this is a significant proportion of the day’s trading volume. Once the market has opened, trading (usually) get quieter. It doesn’t always – the unbundling news forced Telecom down over the course of days.

So next time you hear reporters gasp about the volume and price changes you know why.

Stock Market Down

Just setup a watchlist to keep an eye on some key stocks.

Everything is down by double digits – Telecom has lost 18c, NZX (the company) has lost 40.

Not a bad morning to buy, but you’d have to be brave.

Warren Buffett Swoops

Heh, when there’s a credit crunch it’s great to be a guy who’s been hoarding cash for the past few years.

I guess that prudence pay off if you wait long enough. It’s pretty hard to put one over on a guy who stared stock trading in the wake of the ’29 crash.

Warren Buffett took advantage of the credit crunch yesterday as Mars announced an agreed $23 billion (£11.5 billion) takeover of Wrigley in a deal that the world’s richest man helped to finance in return for a cut-price stake in the chewing gum group.

Mr Buffett’s Berkshire Hathaway investment vehicle, which has $40 billion of cash to spend at a time when deal financing has largely dried up, has contributed $4.4 billion of the funds Mars needed to purchase the world’s biggest chewing gum company.

In return, Mr Buffett, who is already profiting from bond insurers’ woes after setting up a rival securities underwriter to take new business away from the cash-strapped traditional players, will acquire a 19 per cent stake in Wrigley for a discounted $2.1 billion.

Bill Wrigley Jr, the chairman and chief executive of Wrigley and the founder’s great grandson, said that he had invited Mr Buffett into the deal for his “wisdom, experience and endorsement”, but conceded that the billionaire was also there because of his deep pockets.

Airport Investments and “Speculation”

I’d love to be on the left. You can write posts with no reference to the real world. I bet that makes blogging a lot more fun.

With shareholders in Auckland International Airport happy to have the Canadian Pension Plan in control, the deal is now in the hands of the government.

“Control”?  Since when is 25% voting rights “control”?

But it’s hard to see it succeeding at that stage. The criteria in the Overseas Investment Regulations 2005 include:

• Whether the investment is beneficial to New Zealand (no; it’s speculation, not productive investment, and brings nothing to the table other than a threat of asset stripping);

How exactly the pension fund is going to “strip assets” with only 25% voting rights, or how come they never mentioned this when they talked about investing for the long term (as pension funds do) is not explained…

• Whether refusal will adversely harm our international reputation or breach international obligations (no; most countries protect strategic assets such as airports, and our reputation can only be enhanced by refusing to play host to a dodgy tax scam);

I think on this one we can differ on a point of view (rather than point of fact in the previous point). If we refuse this very benign investment in an asset that can’t be moved and is already heavily regulated, our international reputation will be (and already has been) hit.

In fact, it’s thanks to the government kicking those small local investors in the guts that this deal got off the ground.

• whether the investment will “assist New Zealand to maintain New Zealand control” (well, duh).

Actually, we don’t know how many of the shareholders were foreign already. So there’s actually a theoretical possibility that this gives “New Zealand” more control. It certainly doesn’t mean that “New Zealand” looses it, that’s for sure.

In addition, there’s the basic test laid out in the Act itself of whether the investment will create or retain jobs, introduce new technology, increase exports or competition, or increase development investment. The answer to all of these questions is again “no” (again, its pure speculative investment, people buying an asset with the hope of screwing monopoly rents from it.

Sometimes I read posts, and I wonder if the writer was on drugs, or with some sort of logic death wish.

While I’ll grant that you can strip assets, at Auckland airport the money is made from  having aircraft land, and charging fees for that. Those fees are heavily regulated.

IS is obsessed with the failings of capitalism, and clearly hates speculators. Trouble is, he has no concept that you can invest, but not be a speculator. He has no idea how long-term investors invest for a steady stream of income over the long term. Boring, safe investment – the polar opposite of speculation. No, if some foreign people are coming in, they want to strip assets. There is no other possible explanation, so roll out the conspiracy theory.

In this case, the monopoly is only good for as long as it is not exploited, since there is another airport possibility opening up at Whenuapai. Charge high fees, and suddenly you find yourself with completion and your income cut by a third or more, and with fixed costs, that third is your profit and then some.

This is simply not the sort of “investment” we need, and it provides nothing beneficial to New Zealand).

Clearly handing money to New Zealanders in exchange for shares is not beneficial in Palmerston North, even if the money is more than shares are currently worth. We should note that those shares are worth less thanks to our Mr Cullen, does that count as “beneficial to New Zealand”?

Hard as it might be to imagine, but those dollars paid over will now be freed up to invest in other New Zealand ventures. (Or even better, buying overseas assets that will actually gain significantly in value over the long term. Then, we can bring all that lovely money back here and be a rich country for a change.)

Given the legal criteria, it’s hard to see how the CPP’s application can succeed. But I’m sure the worshippers of the free market will kick and scream when they are inevitably told to piss off.

Oh, now I get it. He’s screaming now because he expects us to scream later.

Pumpkin Patch Hit By Downturn

The trouble with investing in New Zealand is that by the time companies are big enough to list on the NZX, they usually have become so large that they are have no room to grow. Contrast this with the US, where companies like Wal Mart can list then grow many times over, and deliver the best rewards to early stockholders.

Then you have companies that have plans to expand overseas, but often those plans fall to naught. Witness The Warehouse fiasco.

So the trick is to find companies that are listed here, but that have well established operations in countries where there is still lots of room to expand.

Pumpkin Patch is one such company.  They have operations in the UK and the US, and have done quite well.

However, there’s a always been a catch in my view. I can’t think of a more recession sensitive business than luxury children’s clothes. Young kids tend to outgrow their clothes before they wear them out, so parents tend to trade clothes that are often in very good condition. In a downturn, most parents are not going to buy brand new stuff when good clothes can be obtained for nothing.

That’s proven to be the case.

Children’s clothing retailer Pumpkin Patch is slowing its previously rapid rate of expansion in the United States as the global credit crunch starts biting operations there.

Chief executive Maurice Prendergast said yesterday the US environment was tough and the company’s stores there had “suffered”. “It doesn’t take a genius to work out that the credit crunch has hit retailing,” he said.

The company was on schedule to open 16 stores there this financial year, but next year would call for more caution and “bedding down” existing operations. He expected some “strategic” store openings.

“We are going to monitor the environment up there. We realise in a tough environment it is even harder for a new entrant to get a foothold.”

In what chairman Greg Muir described as a “tale of two hemispheres”, Pumpkin Patch yesterday announced that profits for the six months to January 31 had fallen 22.3 per cent to $12.05 million.

The share price slumped 11 cents, or 5.7 per cent, to $1.83. Its shares have dropped 30 per cent so far this year, while the overall market is down about 11 per cent.

Bruce Sheppard on Finance Companies

Bruce Sheppard is the Chairman of the Investor’s Association – they’re the guys who represent small shareholders in this country.

But that doesn’t stop him telling it straight.

On every measure that is significantly less than our own problem with subprime debt. New Zealand’s position is four times worse than the American situation which has brought on a global confidence crisis. Work out for yourself what that means for our domestic economic outlook.

How did we let this sector get so big and so badly run?

While this sounds brutal, the investors themselves are to blame. For the past 15 years investors have poured money into this sector without demanding compensation for the risks they are taking – and worse, having no desire to understand the risk.

Ouch.  Not often in this country does the man sticking up for the little guy actually tell the little guy he’s got faults – and that’s to our detriment. Good column, worth a read.

Burger Fuel

Looks like the latest kid on the NZAX block is not very liquid – the first trade drove the price down by 20%! I’m picking that the 35,000 sitting at the original listing price on the market will keep that stock from giving a return for some time.

The Dominion Post has a good article on the debacle:

The initial public offer (IPO) of Burger Fuel shares was a failure. The company raised only a third of what it wanted, and listed only because the promoters were prepared to write cheques to make up the difference between the amount raised from the public and the minimum amount needed to list, being half of the amount wanted.

The company listed at the end of last week with almost 90 per cent of the shares in the hands of the promoters, rather than the two- thirds they had been hoping for.

There have been a number of examples over the years of companies that have “failed” in the IPO but have still listed. For those with longer memories, CBD New Zealand springs to mind.

The problem for the investors in Burger Fuel is that the company tried to raise money without really using the broker network. Media reports indicate the company is now aware that raising money directly from the public is harder than it looks, even with a snappy tag line, “Would you like shares with that?”

Brokers also blanched at the idea that people could buy shares using their credit cards. It’s anathema to use debt to buy equity unless the risks can be properly measured and the outcomes known; contracts for difference are all about using debt wisely to manage an equity position.

Some might argue that buying shares with a credit card is okay because the shares may double in value and the 18 per cent or 20 per cent interest rate on the card won’t be a problem.

Sure, the shares could double in value. But they could also lose 90 per cent, and the cost of interest would be crippling. Who knows where Burger Fuel is going to go as a listed company.

And this is where Burger Fuel failed. The food is pretty good as far as burgers go, the franchise model works fine and is common in the fast-food industry. The problem was that the IPO was taken over by the marketing department; the belief was that smart marketing, which works for selling burgers, would work the same for selling shares.

Simply put, Burger Fuel and its adviser, Grant Samuel, didn’t understand investors and, in return, investors couldn’t understand the company. As a result, investors stayed away in droves and the promoters had to dig into their own pockets to get the company listed.

It always pays to examine the “usual way” closely if you’re going to try something different. Chances are good that there’s a reason for things being done the way they are done.

The Motley Fool has some advice, as always. Worth a read.

Burger Fuel IPO not met – Really, how very surprising!

Not.

You’d have to be thick to have bought shares in the Burger Fuel IPO.

Let’s see…

1. Massive, and very expensive advertising. I mean, who advertises an IPO on TV? The Herald estimates this cost $600,000. The best companies don’t need advertising at all – people fight over themselves to buy shares.
2. The company was vastly over valued. Yes, you’re going to expand, but don’t expect people to fork out big dollars for future dreams. $60,000,000 for a company that sold $1,500,000 burgers last year is just ridiculous. And it’s not as if the majority of the company was being sold either.
3. An NZAX listing. A solid company would have listed on the real exchange, the NZX.
4. Extending the IPO. Who was surprised when that happened?

So they’ve on only sold $5.25m of shares. Ouch. Wouldn’t want to be their broker, who’ll have to buy $2.75m worth themselves to keep up their guarantee.

Would you like fries with you disaster?