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Technically Speaking: 1987 crash won't go away while Fletcher Challenge blunders on

Friday 21st July 2000

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Fletcher Forests

Fletcher Building

Fletcher Energy

Fletcher Paper

It is a sad commentary on the New Zealand sharemarket when, to paraphrase a saying from the Vietnam war, the only way to save a major listed company is to destroy it.

The Americans had communism to battle, whereas for Fletcher Challenge bosses it is diversified debt.

The ignominious death knell of the FCL empire, combined with the bloody demise of Brierley Investments, probably marks the end for diversified conglomerates in New Zealand.

Since the 1987 sharemarket crash, listed companies have been expected to specialise their activities rather than dabbling across sectors.

Thirteen years on, corporate New Zealand is still cleaning up from the crash, which indicates how isolated and incestuous the sharemarket really is.

FCL's letter stock or target share structure has been a disaster. It has merely served to expose the weaknesses of each arm of the company without playing to any of their strengths.

It is hard to see the hasty advent of the letter stock structure as anything other than a poison pill strategy to ward off the risk of takeover when the earlier consolidated shares had hit such low prices the evening television news of the day ran a story on resulting takeover risk.

When television gives free publicity to a company's plight, it might seem prudent for the firm's board to take remedial action, even if bitter medicine is resorted to.

However, the major blunder with the pill was that it poisoned Fletcher in the end. The shares had the stuffing knocked out of them for want of takeover premium.

The only thing to lift letter stock prices together recently has been news that FCL has gone into liquidation mode, a savage indictment of former leadership and must pose a question over the merit of Hugh Fletcher's officially mandated lucubrations on regulating the telecommunications industry.

His stint at the top of the FCL empire coincided with poor sharemarket performance for the firm, which is paying the price today for decisions it warmly attributed to Mr Fletcher when they were made. All in all, not a good advertisement for consultancy services, one would think.

Although the letter stocks have stripped buy-and-hold investors of their wealth, they have nonetheless been useful for traders. In the charts this week monthly graphs are shown of each letter stock since listing.

Forests was the first to list, being dubbed a "dirty float" by The National Business Review at the time because the firm was effectively sold twice to investors who had previously owned it under consolidated shares.

The first letter stock set the tone for what was to follow with the others by plunging into its own grisly bear market which will terminate, it seems, only when Forests gets the flick. Its litigious Chinese partner, Citic, must be unimpressed and remains a daunting consideration for any would-be buyer.

The other letter stocks have had a chequered life. Building was an early darling that soon jilted its admirers.

Today it is the subject of break-up talk because its motley business portfolio lacks internal logic.

Energy was beloved of foreign oil sector analysts, who doggedly kept tipping the company for prices above $10 that have never emerged despite its supposedly gold-plated assets.

Paper was an absolute dud like Forests and was rescued only when Norske Skog found a value in it that no one else could perceive. By the time the Norwegians declared their intentions it was too late for anyone else to make much of a Paper profit.

The charts illustrate a technical analysis technique called "Bollinger bands" after their American inventor, John Bollinger.

The bands are plotted at standard deviations from a moving average of share price. In the graphs shown, which are monthly bar charts, the moving average has a period of 12 months and the bands are plotted at 1.5 standard deviations from it.

The idea of Bollinger bands is that shares are oversold when the price is tracking around the lower band and overbought when price is ranging about the upper band.

The method is not infallible, as can be seen from the charts. There have been times, for example, when a share price was moving around a lower Bollinger band and then fell even further.

As with other technical indicators, price leads and indicators follow.

However, as a general rule, accumulating Fletcher letter stocks when the share price coincided with the lower Bollinger band would have worked out profitably overall, even if only because of the great Fletcher fire sale that has since emerged.

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