Some days back I addressed the first of many risks – a simple concept to understand – “Overvaluation”. A very obvious risks considering that market cap is close to a billion dollars for a stock with no income, in sector where the smart money might have left, and where SYR aims to produce 3.5 million tonnes while only having offtakes for 240000 tonnes. This is a glaring inconsistency which deserves attention and questions have to be asked whether the valuation is just based on “trust” and faith that SYR will somehow get offtakes for 3.5 million tonnes.
Most people think in simple terms of just stock level FA and stock level TA. There is much more to investing. SYR is a stock which is part of super pits which is part of graphite stocks which is part of commodity stocks which is part of Australian stocks which is ultimately part of all stocks globally. The recent GFC showed us how different asset classes globally are intricately connected. We thus cannot analyse SYR in isolation without considering super pits, the broader graphite and broader macro.A risk of being super pit is obviously that some people believe that the market is not ready for super pits. A risk of being a graphite stock is the potential massive oversupply due in years to come. A risk of being a commodity stock is effect of the commodity bust. Today I’m going to talk of the last one- a risk of simply being a potentially overvalued stock when global macro conditions are terribly weak.
2) Stampede of elephants and booking of profits
@tobyjack has in the past illustrated the risk of instos suddenly departing en masse.
“Think of a stock as a swimming pool. The water level is analogous to the stock price, and elephants represent institutional investors. If the elephants suddenly start stepping into the pool (buy the stock), the water level (the price of the stock) will rise very quickly. However, if the elephants get spooked and leap out of that pool (or sell the stock), then the water level (price of the stock) will fall rapidly.” – Extract from the article linked by TJ and highlighted by her http://hotcopper.com.au/threads/vw-...-towards-evs.2602298/page-32?post_id=16082190
We have seen that happening to some stocks in the iron and oil sectors over the last 2 years where instos left en masse. A well known energy stock where investors had massive profits over the last year was reduced from all time high of AUD 4.90—AUD 5 on May 1 to 68.5 cents today.
A well known iron stock was reduced from all time high of AUD 5.41 on 14/2/14 to 11.2 cents today.
A key thing to be learnt here is that in the event of a massive fall, investors could rush for the exits and all at the same time. Many investors in SYR might be sitting from the early days of 3 cents and 10 cents. If SYR ever starts having a sharp fall,then at some time, could they all rush off exacerbating the fall. This must be kept in mind.
3) US rate hike
Over the last year, I have on HC accurately predicted things as diverse as the iron ore sector collapse, oil sector collapse and decline of property. But this was only possible due to my broader macro fears.
My response to @Prime1 was “So how do you explain the fact that BHP, WOW, entire Oil sector, entire iron sector, indeed the entire commodity sector, retail sector, etc. are collapsing Prime and have gone at or below GFC levels? I eagerly await your answer as to why you consider rising US interest rate a good indication of a booming global economy. IF you had followed my comments however, you would have known that I’ve warned about all this much before.” http://hotcopper.com.au/threads/risk-management-syr.2664574/page-13?post_id=16640347
Well my question is why did the Dow Jones have a massive fall if the global macro conditions are so strong and the markets were ready for a rate hike.
“The Dow Jones industrial average had its worst day since Sept. 1, closing nearly 370 points lower as selling accelerated into the close.
"I think the fear is (the Fed) is starting to tighten in an economy that's starting to weaken,"said Ben Pace, chief investment officer at HPM Partners.”
- extracts from article http://www.cnbc.com/2015/12/18/us-markets.html
Note now that I am not saying that a crisis is going to start tomorrow. I am however saying that a crisis is eventually inevitable IMO. Anyone who has been following my comments knows that I have been warning of bubbles everywhere over the last year, and I have been far more right than wrong.
4) SYR moving with global market conditions
SYR is part of the ASX 200 which also leads to buying and selling by index ETFs. SYR has in the past also shown some correlation with broader macro conditions
Notice again that with improving of DJIA (one of the most well know global index) coincided with improving of SYR price. Note that I am not suggesting that this should hold true in all cases. What I am suggesting however is that it is naïve to assume that SYR is just doing well because of good fundamentals. There are broader macro factors at play.
SYR recently had a rise over some days and I suggested before the opening of Friday that we could have some profit booking, and SYR did fall. Could we have more profit booking now considering the weak global conditions, and hammering of US markets on Friday night?
5) Summary of global risks
I’m bearish on most sectors in general at the macro level, as I’ve got a lot of macro level fears, and IMO there are many more bubbles yet to burst like possible shale bubble, Aussie property bubble, financial institutions/bank share price bubble, global property bubble, tech bubble, start - up bubble, education bubble, overall broader equity bubbles, emerging market bubbles, bond bubble, junk bond bubble, USD bubble, derivatives bubble, etc. among others.
So, yes, I have very strong reasons to believe that an eventual crisis is inevitable. Keep in mind though that I cannot predict the time. I thought the fundamentals (or rather the lack of it) were in place 2 years back but 2 years have already passed. But maybe a crisis has already happened in terms of complete decimation of commodities of which graphite is obviously a part of.
I expect the years to come will see the world alternating between recession/depression, stagflation and hyperinflation or at least 2 of the 3. How central banks respond to the crisis will determine which of them come about.
6) SYR’s positives with some disclaimers
SYR has positives to cope up with the weak macro conditions like good cash position, good insto and good management. But how long will the cash last – remember SYR has big plant plans. How long will the insto support last? See TJ’s elephant stampede article linked above. Will management themselves hang on? I praised Tolga and Askew in my earlier comment and full credit to them. Will they at some point of time wonder whether SYR could affect their legacy? http://hotcopper.com.au/threads/risk-management-syr.2664574/page-54?post_id=16651240
As TJ pointed out – “The unexplained departure of both Kehoe and Eadie, and particularly the dumping of Kehoe's total shareholding is still a red flag for me. Not unlike the recent dumping of the shareholding by the neighbours CEO”
Past directors of SYR have protected their legacies by being associated with SYR in its great times and made a killing on their SYR shares. Will similar thoughts be going through the minds of Tolga and Askew who are also legends (full credit to them) in their own right?
7) Conclusion
SYR has its positives but there are risks which need to be highlighted. If SYR can overcome those risks, then SYR deserves its valuation.
I well and truly believe that in the years to come, we will end up having one of the worst (if not the single worst) financial crisis in history – one that might be remembered for generations to come. Please note that this is consistent with stuff I have been saying on HC all through last year and I’ve not really been wrongas even ASX legends like BHP and WOW, iron, oil sectors, etc. have not been spared from bloodbaths. So please remember that before wanting to lash out at me.
My earlier points on SYR must be seen in conjunction to understand the risk. SYR is aiming to flood a non existent market with 3.5 million tonnes despite having offtakes for only 80000 tonnes. The elephant in the room is that SYR cannot get customers for its graphite and still has a billion dollar valuation. This must be seen in conjunction with weak global macro, possible even more weaker macro in time, possible rush for exit with booking of past massive profits, and present commodity bust to truly appreciate the risks ahead.
TJ was spot on with linking that article on elephants stampede earlier. For how long will instos continue to prop up SYR? Wouldn’t they question themselves whether the risk is worth it considering there are so many risks? Would past early investors start to ask themselves if it finally time to book profits? Could we have risk of all investors exiting at the same time?
Please do not flame and bait me for telling the truth. Anyone who has read my comments on HC would know that I am generally far more bearish than bullish, and have also highligted these fears on stocks where I have been bullish. I will not respond to any flaming and baiting. Also please do not talk about some "other" stock. This is the SYR forum and I am here purely to talk about SYR.
Also I will not spam your forum and will try to limit myself to 1 post a day (this might be it in all probability) in most cases.
Cheers and have a good Sunday ahead
SYR Price at posting:
$3.50 Sentiment: None Disclosure: Not Held
(20min delay)