I am aware of stocks that are significantly over-valued, with current carry-forward prices that will never be met by the realities of their business models or future earnings capacities.
They are generally over-valued due to falsely inflated expectations and positive market perceptions, chiefly driven by certain interest groups, their supporting broking houses and the media spin-doctors.
It is a well oiled network designed to shear the retail sheep of their winter wool...over and over.
Fortunately, these are the minority, but do demonstrate how easy "prices" can be set to suit a particular goal.
I am also aware of significantly under-valued stocks trading at well below carry-forward price realities; they are virtually the polar-opposite of the above mentioned over-inflated group.
These undervalued stocks are also impacted by market perception, once again driven by certain interest groups, their supporting broking houses and the media spin-doctors.
I guess this scenario is simply the reality of any publically traded market, which means it falls back on us to decide for ourselves what to believe, or not!
But how do we do this?
Are retail investors really expected to understand the complexities of forward pricing models for the materials sector, or how to account for carry-forward PE ratios for cyclical industrials?
Of course not...which is why all manner of ASX sanctioned and licensed groups are available to advise both retail and sophisticated investors alike.
But who regulates this advise?
How does one even regulate "advice" in the first place, when for all intents and purposes, this "advice" is really just an opinion?
The ASX appears to be asleep at so many wheels (blatantly so), that one must question why they exist at all; is it just to give the impression we have a regulated market?
One might suggest the ASX, and the network of suits that hold the strings to it, are not only complicit, but actively engaged in one of the biggest retail rip-offs that the markets have ever seen.
Someone is making a lot of money from directing the sheep to run this way and that...which is perhaps nothing new...but more recently, it appears those doing the shearing are cutting deep into the meat, and we all know when you do that, the wool doesn't grow back!
One can only assume this is a fall-out of the GFC and significant losses endured by many of the string pullers. Problem is; they are simply engaging in the same sort of activity that bought on the demise of the global markets in the first place.
Allowing the markets to be collectively stripped of wealth for the benefit of a select few, is counter-productive, especially in difficult times. It is about time our governments and regulating authorities recognised what is going on, and put a stop to it for the sake of the bigger picture.
So, who is making money from this? It's not the retail investor, nor the various funds most of us indirectly have shares in, and it certainly isn't the health and welfare of the companies being targeted, nor the Australian economy at large; no, it is only a very small connected group that is actually making money!
One of the most popular ways they do this is via shorting, which is something really only available in large scale to a select group within the market. When well managed, they collectively make millions by "facilitating" falls in certain stocks, or the wider market in general, but in doing so generate losses in the 10's of millions for shareholders via market cap demise on a stock-by-stock basis.
They do this by borrowing your stock, selling it into the market with the intent of pushing the price down and in the process, reduce the value of your investment and the health and capacity of your company to raise funds, grow and prosper.
By example; let's say a group shorts 5% ($10m worth of stock), of Company XYZ (with a $200m market cap), using the usual tactics including generating a spike, net-exit selling as many shares as possible at the highs, then dumping on market followed by algorithmic settings designed to press a stock downwards (used towards the end of the cycle)...all of which is supported off-market via various "Sell Recommendations", negative media spin, even the flooding of chat sites like HC with negative rhetoric.
As I said previously, it is a pretty well oiled machine.
Anyway...they eventually net themselves a 12% profit on their eventual buy-back price and they have just made themselves $1.2m dollars profit. The Company however is now only worth $176m and collectively, all shareholders have individually lost 12%, or $24m.
The short sellers have made $1.2m, but everyone else has lost $24m
The argument the ASX offer in support of this behaviour is that shorting facilitates "price discovery" within the market...and that any stock short-sold will have to be bought back at a later date, in effect re-balancing the negative effect of the initial short selling pressure.
Whilst some Companies hate to see shorting in their stock, others appear to embrace it, which is something I have never been able to get my head around...that is until I took a closer look...
A strange phenomena occurs when many companies are targeted in this way; they suddenly feel the need to issue new shares at the bottom of these apparent shorting induced cycles. This became especially prevalent during the recent GFC sell-off. Now, if the new shares being issued go to those who initially shorted the stock (ie, off-market replacement of on-market short-sold stock), this completely short-circuits any argument the ASX might offer, that the effects of short-sold stock will eventually be balanced when it is bought back on market?
The simple fact is, it isn't!
Could it be that some companies are even complicit in this regard?
The simple fact short-selling was banned towards the end of the recent GFC collapse, is perhaps all the evidence we need that short selling constantly eats away at the market's capacity to generate value (or simply to hold on to it), and that short selling does in fact erode value of our markets on a day-to-day basis. It is obviously the ASX's view that, when the market is healthy, it can cope with the negative pressures of short-selling...but when not, it causes too much damage so is banned.
In my view, no level of falsely generated downwards pressure is acceptable when a nation's wealth is at stake!
At first glance, it appears we have all the makings of a market-wide ponzi scheme here; all you need to do is identify a stock that needs to raise funds at some point in the near future, which is fairly typical of most growth stocks mind you, and short-sell away!
Guaranteed profits for a few...at the expense of everyone else!
It goes like this...borrow stock from existing shareholders, typically via a large fund (you are never asked permission to use your stock by the way), and short-sell that stock into the market, over and over, with the view to putting the targeted company under pressure. As previously mentioned, the well-oiled machine goes into over-drive, with broker sell recommendations, negative media, chat-site rhetoric, etc....all called in to help the cause. Eventually, the targeted company reaches the point in its life they need to raise funds, but instead of doing so at $8, they are forced to do so at $5 (or less), due to the "market valuation" of the stock.
So, the Company eventually approaches a broker to book-build for a placement and the initial short-seller whacks his name on the list.
Short position closed out!
In essence, the short-seller is able to replace the short-sold stock off-market via a placement (which increases dilution to existing shareholders due to the lower price)...and manages to pocket the difference as profit. In the process, he has avoided the re-balancing effect of being forced to buy the stock back on-market.
The net-effect is for a generally depressed market, on average, as stock after stock is targeted in a similar way across the bourse. There are many versions of this too, from targeting margin-call levels, to banking covenant default levels, to convertible note blow-out conversions...there are many ways to skin a cat!
This sort of cancer eating away at our stocks is not conducive to a healthy, robust and competitive local market, which impacts our capacity as a nation to compete globally and often results in higher levels of foreign ownership.
The interesting aspect here of course is that, if shorting were more severely regulated and completely transparent (not banned, just restricted), and by extension its negative impacts negated somewhat, we could probably expect to see a wider increase in the value of most stocks on the ASX, both micro-cap and blue-chip alike.
If valuations increased by just 5% on average across the exchange (I think it would actually be closer to 15% myself), this would represent a permanent market wide increase of wealth, for all participants in shares collectively, in the order of $100billion...potentially representing a windfall, once-off tax realisation to the government of some $15-20billion!
Further, the ongoing increase in health and capacity for all Australian companies on the exchange to flourish and become more competitive in a global sense, would result in similar growth benefits continuing well into the future.
Instead, we are forced to collectively loose out as a nation, all because a small group make billions for themselves, at the cost of 100's of billions to the rest of the country!
