CTX is collapsing fast, page-20

@Value Snatcher,

(Apologies, I initially missed the question in your post.)

Here follows my attempt to answer it:

What you and I mere mortals, who invest and deal only in the physical stock, don't see are the many and varied markets that exist which cater for trade in all sorts of derivatives of the relationships between all the variables that are associated with listed securities.

What we don't see are the many, many very smart people sitting in the offices - not just in Sydney or Melbourne, but in Hong Kong, Singapore, Zurich, London, New York, Edinburgh, Boston, San Franscisco - of investment banks, hedge funds, pension funds, family offices of high net worth individuals, etc. etc. who are of both a mind (and, more importantly, are of an intellectual capability) to enhance their investment returns by doing all sorts of very clever things that you and I would consider to be most unconventional, such trading in synthetic derivative instruments (invariably designed by investment banks themselves) which are less efficiently priced than the boring old physical market in which we participate.

What I'll wager most people don't know is that derivatives markets are often many multiples larger than the market(s) that trade the physical stock. (By "derivatives", I'm not just talking about vanilla options relating to the physical share price, I'm talking about any instrument or synthetic security that is in some way "derived" from the share price.)

And I'll also wager that people don't know how very creative some financial minds can be when it comes to thinking about and designing exotic instruments.
(My lifelong experience has taught me that human greed knows no bounds when it comes to thinking out new ways from which to possibly turn a profit.)


And whenever you have an event like a structured off-market buyback like this one, or any other capital management or corporate transaction events, there are certain pricing markers that appear, which otherwise would never have existed.

For example, in this case, there are:

- the $2.01 deemed capital component
- the fully franked dividend component
- the effective buyback price (to be determined),

….and therefore, there is a perceived relationship between all of these and the current share price.

And the way the relationships between these “price markers” is perceived will differ from one individual to another. And when you have differing perceptions among people who are profit-seeking, well, then you have the makings of a market. All you then need is a facilitator (that’s where the rat-cunning investment bankers come in) and, viola, you have participants trading among one another, based on their differing perceptions.

In CTX’s case, people will have differing perceptions on the value to them of the franking credits that get expunged in this transaction, and the arising capital loss will be more important to some, than it will be to others.

So, for example, on the very reasonable expectation that they will be heavily scaled back in their application to participate in the buyback scheme, some institutional investors might seek to lock in the franking credits for all of their holdings. On a call to their local merchant banks, they might find that an instrument to do just that has been designed and a market is being made in such an instrument. So the investor buys the instrument to his perceived value of the franking credits. But this might result in him having increased his portfolio’s value-at-risk exposure to CTX, so he needs to sell some physical stock as a hedge.

Or, by way of another example (and this one is probably more relevant because someone last week actually e-mailed me a term sheet for this very instrument), people will have differing views on what the final buyback price will be. They will seek to trade the delta between the actual share price and the final buyback price and the position they take in this regard might require them to sell physical stock in order to not have increased their effective net exposure to movements in the stock price.

I think the point to be made is that there is so much off-market stuff that happens every day during the normal course of business (and more so when artificial “price markers” arise during technical events such as a structured off-market buyback), of which most people are blissfully unaware, which has the effect of moving the share price around from day-t0-day.

Which is why I am always so bemused by people who try to analyse the way the “buys and sells are stacking up” on their online share trading accounts. As an indicator at any given time of the motives all the market participants, this is absolutely a meaningless guide.

Best is to just ignore the share price and focus on analysing the fundamentals of the business.

Yet 99% of people seem to do exactly the opposite.