but when the ducks are quacking

Stachan issues investor warning.

Robin Bromby From: The Australian December 22, 2010

WELL known Perth resources analyst Peter Strachan, in his final client note of the year, has raised the storm flags.
He sees the market as in danger of over-heating - an issue this column raised last Monday.

The report from his StockAnalysis says investors are not only more risk tolerant but also exhibiting what he calls "risk-seeking behaviour", evidenced in the steep price rises experienced by a growing number of small exploration and development companies whose share prices have responded to drilling news or expectations of corporate deals.

Signs of over-heating include a huge rush of initial public offerings and placements by smaller resource companies. After averaging about 10 new listings a month for most of 2010, over the past two months there have been 43 new ASX listings - and there are another 51 floats in the wings waiting to join them as we move into 2011.

"Subscribers should know that, when quantity rises, the overall quality falls. More dodgy companies arriving on the bourse means more chance for failure and higher risk overall", writes Strachan. "Not all the new listings will be of poor quality, but when the ducks are quacking the stockbrokers will feed them."

Investors are also getting tired as the pace of activity rises, he says. In these circumstances, less care is taken and errors of judgement will happen.

He thinks the market will motor on - pushed by its own momentum - until about May, and then "some exogenous event during 2011, most likely China-related, will trigger a serious Australian market correction."

Strachan advises clients to remain alert, keep debt levels low and cash holdings at a safe level.

And speaking of brokers, Strachan singles out one Perth firm as an example of a sign that the market may be running too fast - the decision by Patersons Securities to pay $1 million for naming rights to the Subiaco football oval. "This type of hubris is typical of overheated markets", he adds.

The bottom line: the market correction could come at any time. Global issues continue to cause concern and could develop into market moving events.

So, between Peter Strachan and Pure Speculation, don't say you weren't warned.

Last reminder for readers that in next Monday's print edition, Pure Speculation will be publishing a selection of readers investment hits and misses. Tell us your successes and stories of woe in resources stocks. No names used - anonymity is assured. Just email to the address below.
[email protected]

http://www.theaustralian.com.au/business/mining-energy/