All Ords Report 07 July 2015
Following the GFC we saw a rise in the number of Class Actions in Australia launched by shareholders claiming compensation against listed companies. So, can we blame shareholders who question whether they can trust the people who run Australian listed companies to do the right thing?
One example was Sigma Pharmaceuticals (SIP), who settled in the Federal Court in late 2012, paying $57.5 million to shareholders following a Class Action launched by disgruntled shareholders. SIP had reportedly forecast for growth in 2009, but then posted a loss of $389 million some months later. On Wednesday 24th February 2010 SIP shares closed at $0.90 and then opened at around $0.40. The share price had fallen by more than 50 per cent.
Nothing upsets shareholders more than being told one thing about a financial forecast and then the company reports a very different reality. If you are a trader, who has, or is currently studying my Diploma of Share Trading and Investment, you will be able to open Market Analyst, the software package you were supplied with the course, to see the fall.
So take a look at a chart of SIP and see exactly what occurred. Remember, Market Analyst provides adjusted data, however you can switch back to view the actual prices traded by removing adjustments temporarily (do this by selecting in Properties, ‘Filters’, and tick ‘Ignore Dilutions’). Adjustments occur when a company has a corporate action like a share split, or a rights issue – if you are a shareholder you need to familiarise yourself with terms like these.
The reason the story about SIP has again come to the forefront of investors’ minds is because of an investigation by the Australian Securities and Investments Commission (ASIC), which revealed two SIP executives Elmo De Alwis and Mark Smith had falsified the company’s accounts in financial year 2010. Court action on the matter occurred this week and the two pleaded guilty to the charges.
As an investor, it’s impossible for you to know whether or not something like this will occur in the future, however, what you can do is learn how to read a chart as this will show whether or not you should hold a stock. When I look at my chart of SIP I can see many technical reasons to sell SIP long before the negative announcement and the significant drop in the share price.
Let’s think back for a minute to the GFC. When it hit in around 2007 so many stocks turned down strongly, including SIP, which fell by around 70 per cent into 2008. In 2009, SIP did rise, however the move was short lived and was followed by a fall back towards the 2008 low. At the time, educated traders were exiting, or shorting the stock, which is about making a profit from a fall rather than a rise in price – how that works is a story for another week.
If you entered in 2009 and you had rules to assist you to manage your risk, like Dow Theory, which I teach in my basic ten lesson course Trading Mentor, you would have in all likelihood, exited any holding in SIP before the announcement about the profit downgrade and the dramatic fall in the share price occurred.
Another rule that was likely to preserve your capital in a situation like this, is an initial stop loss. You hear me talking about them regularly, but how many of you use them?
I teach traders and investors in my book, and in all of my courses, how important having a stop loss is to preserve your capital in the event a share falls below the price you paid. What this means is that you can exit and still have most of your capital to trade something else that is lower risk and has a much greater probability of rising.
So what do we expect in the market?
Following a very turbulent trading session the Friday before last, when the market fell by around 105 points, there was a continuation of the sell-off into early trade on Tuesday last week, which took the market below support at 5400 points, to 5383 points.
These three days down, Friday 26th June through to Tuesday 30th June, unnerved many inexperienced investors. However, by Tuesday afternoon the market had reversed back up, and by Thursday afternoon the All Ordinaries Index (XAO) had closed strongly up at 5588 points, recovering most of what it had lost over the three days. So you may have wondered what that fall was all about?
Typically, the Australian share market experiences a fall of this degree each year and with the situation in Greece coming to the boil this week, higher volatility is to be expected. It was also the end of the financial year, which often sees many institutions shuffling portfolios, as well as a sell-off by investors who tend to leave it to the end of the financial year to clean out the dead wood in their portfolios.
When there is uncertainty, there is fear and the situation with Greece and the Eurozone has many wondering about what could be the scenario if there was a Greek exit from the zone, what would be the ramifications for the creditors, and just how far does this go? My view for some time is that the matter would be contained.
Creditors and central banks have had a few years to work out the possible scenarios. The IMF reportedly indicated recently that creditors may need to write down anything up to around 50 per cent of the debt. So, this may have been a sign that creditors would have to compromise and make a deal with Greece about the Greek budget and austerity measures, rather than taking a huge haircut.
Previous estimates had indicated that Greek GDP would fall by a small percentage following the austerity measures introduced in 2012, however, Greek GDP fell by around 25 per cent. So, the debt blew out and there was less tax coming in.
The vote last weekend in Greece is an important juncture in the road, with the Greek people voting 61 per cent in favour of a ‘No’ vote, against the Austerity measures the creditors want to impose on Greece. However, this doesn’t mean anything has been resolved as now we await further discussions between the Greek Prime Minister Alexis Tsipras and the creditors.
As mentioned in my market wrap last week, following the emotional fall two weeks ago, my analysis indicated that the market may come back to test the recent low, being 5463 points, before the low can be confirmed. This is typical of what a market does when it is attempting to test support, with or without a Greek crisis.
Last week the market closed at around 5528 points, and given the market is still waiting for some certainty overseas it lost a little ground yesterday to be hovering below this level. Right now, the market is attempting to confirm the low and all the while, prices of many quality stocks have fallen, so smart investors will be watching for opportunities.
Dale Gillham is Chief Analyst at Wealth Within