artical money weekend

Money Weekend
Sunday, 15 June 2008
Melbourne, Australia


You Don’t See the Press Raving About These ‘Real’ Fundamentals…
By Kris Sayce

Who’s to blame? Is it the evil short-sellers, made up of both private investors and so-called ‘hedge’ funds? Or is it the company itself for putting all its eggs in one basket?

Not surprisingly, for the second week running we find ourselves writing to you about Babcock & Brown. This time it’s not just Babcock’s funds under fire. Contagion has spread to the company itself.

On Thursday, shares in Babcock & Brown fell by a massive 27%. For investors that owned B&B shares that’s a fairly tough whack around the head. For those that were short, well, it was party time.

But do we blame the short-sellers for the fall in the share price? Not really. We don’t blame buyers of shares if the price rises.

Then, of course, there’s the argument that short selling is unnatural. It involves people borrowing shares they don’t already own.

That argument doesn’t hold much water. Compare it to margin lending on the long side. After all, what is margin lending? Answer: using money that isn’t yours to buy shares that you wouldn’t have been able to buy if you hadn’t borrowed the money. It’s the same principle. Margin lenders don’t receive criticism for manipulating the market though. Nobody gets too huffed if

The other argument we heard yesterday was that the “fundamentals” of B&B and their funds are strong.

Well…excuse me, but they clearly aren’t. And here’s what we’re getting at today, dear reader.

Maybe the assets are strong. But that’s only one half of the balance sheet, isn’t it? If we only ever looked at the left hand side of the balance sheet then every company in the world would be “fundamentally strong.” Insolvent businesses, train-wrecks like Centro…pretty much every company would look like a winner.

Yes, the word ‘fundamental’ encompasses all aspects of the company’s finances and investments. Debt, equity and assets.

Of course, no-one in your daily paper uttered a word about the right-hand side of the balance sheet until a few right-hand sides exploded last year. Isn’t that useless? As the credit crunch loomed like a teetering skyscraper, analysts were chanting ‘buy the banks’.

The lame “strong fundamentals” argument also hides the very reason B&B is in such strife. It borrowed a massive amount of money in a low interest rate environment. Now that interest rates have risen the firm is up a certain creek sans a certain paddle.

It’s time that the financial press and analysts stop looking for scapegoats. Instead, look at the REAL fundamentals.