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Reading between the lines

By Peter V O'Brien

Friday 21st February 2003

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The mental agility of sharebrokers and their investment analyst staff when commenting on share price shifts for the daily press has been an amusing phenomenon of worldwide markets.

A daily press summary on Tuesday had an expert explaining Monday's 23.7-point rise in the NZSE40 capital index (only 1.1%) related to bargain hunters buying apparent oversold stocks, although total trading was quiet.

Maybe, but let's look at the facts.

The NZSE40 capital index was 1944.79 on Monday. It closed at 2002 at 1945.39, with a 2003 high of 2015.27 on January 15, so allowing for the disproportionate effect of a few companies on index movements.

Those who reckon the small companies index is a better guide to New Zealander's investment patterns, as opposed to overseas money inflows and the activities of local institutions, had little joy.

The small companies index closed last year at 5642.07 and was 5632.1 on Monday, hardly a spectacular performance.

Then we turn to the apparent "oversold" stocks.

We were given The Warehouse, Briscoe Group, Fletcher Building and Restaurant Brands as rebounds. They could be bargains at current prices, but some investors might think otherwise.

The Warehouse was $5.87 on Monday, compared with $7.32 on December 31, a fall of 19.8%.

Briscoe went from $2.75 at the end of 2002 to $2.44 on Monday, down 11.3%, while Fletcher Building moved from last year's $3.35 to Monday's $3.66, a gain of 9.25%. Buyers that day would have to base a "bargain" on another solid profit increase in the second half of the current financial year.

Telecom's place as the biggest listed company is often cited as the major influence on the NZSE40. It had no effect from December 31 to February 17, being $4.53 at each date.

Fast goods retailer Restaurant Brands was supposed to have rebounded with a 7c gain on Monday to $1.55 but, unfortunately, it was $1.56 on December 31 and what was "oversold" at $1.48 this week came up only to end-2002's position.

A 4.7% gain in a day is a normal market movement, given the relatively low base from which the gain is calculated.

Steel & Tube gained 14c on Monday to close at $3.25, on the back of a good result for the six months ended December 31.

Hold on here: brokers and their analysts are regularly touted as being on the ball.

A December 31 share price of $3.17 went to $3.11 on February 14, before reaching Monday's price.

Advisers were either wrong about Steel & Tube projections or unable to persuade clients the stock was undervalued before the half-year announcement.

Media inability gets worse when we look at regular "commentaries" and "opinion" in daily outlets related to the sharemarket.

The lack of analytical capacity among fulltime staff (excluding three individuals and contractors) is appalling.

Brokers' newsletters are used as a basis for "informed comment." That technique is akin to accepting Saddam Hussein's assurances about weapons of mass destruction.

Brokers have no aim other than maximising commission income through buying brokerage, selling, underwriting or placements. Research departments are tolerated to the extent their output generates income.

A "sell" recommendation is rarely seen in any New Zealand broking firm's assessment. They often say "reduce," "hold" and so on.

Media people who rely on this stuff when relaying copy to their extra-curricular overseas outlets diminish themselves and the country.

Individual investors have probably built up solid resistance to broker-generated, or media reliance on, "analysis," given the record.

They should maintain that attitude.

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