11/28/2012

A coalition of forces or an independent attack



When Nick Leeson tried to corner the Nikkei with the war chest of his bank, he believed that his bank was big enough to bank roll him against the small investors. He was successful initially as the rest of the investors were acting alone and lack the fire power to contest him. But when the stakes got too high, the Japanese investors got worried of his position. A crash of Nikkei could bring about a series of events that were difficult to control. The zaibatsu and the big guys gathered together to deal a deadly blow to this young turk acting alone. In unison, they took position against Leeson and the rest is history.

An almost similar picture happened during the Asian financial crisis when the big funds from the west formed an informal coalition to sell down the Hongkong market. HK stock exchange and its financial sector could be ruined if not stopped. The taipans, the HK Govt and the Chinese Govt got together with a bigger war chest to defend the onslaught and the victors were obvious. The western big funds took a rubbing and went back to lick their wounds.

In the local market we are seeing a smaller scale onslaught of a single stock, Olam International. The modus operandi is different. There is a report on the accounting and business practices of Olam put up by Muddy Waters to justify the sell down. The shorting of the stock has been going on for weeks. Olam is resisting and defending its management and business decisions. These have become side issues. The main thrust is the shorting of the stock in the market. At this point in time Olam appears to be losing ground as there is no let up in the selling.

It was reported that 12% of Olam scripts were on loan, probably to parties that were shorting the stocks. Who is going to win this battle of wits or is it a matter of war chest? Muddy Waters on its own could do just so much damage. Could it still be shorting and keep exposing itself to bigger position, alone? Or is it working in coalition with other parties to short down the stock?

At the other side, is Olam buying and supporting its stock value? If Olam is defending its position just by clarifying its management decisions and not buying back its stocks, it is going to be a losing proposition. And working alone to defend a stock without knowing how many parties are in cahoot with Muddy Waters to press down the value of Olam is not going to work.

What are the big funds here doing? Are they shorting the stocks as well or just standing on the sideline waiting to see what happens? How would the crash of Olam, if the shorting continues, affect the general well being of the stock market and the financial system?

The other issues to note, is Olam deserving to be sold down? If there are fraudulent practices, the fate of Olam is as good as sealed. If it is just a management decision, a fair practice, would any party think it is good to prevent a viable company from being destroyed by short sellers?

No one in the market is any wiser except the insiders. Are the local funds and big wigs willing to join force to defend Olam, if they could think of a reason? Or would the big shareholders of Olam get together to defend their investment? Or would they join force with the short sellers and sell down the stock in the quiet hoping to buy back with big profits at lower prices?

Who are the players, the short sellers in this game? In any situation of such a nature, the wolf pack or hyenas would often strike in unison, as a coalition, and the victim would be defenceless on its own. This is the precarious nature of the stock market when funds can move quickly, in tandem to cause destruction of stocks, stock markets or the financial system of a country, particularly the small ones. It is rare to have a repeat of the defence against Nick Leeson or the onslaught of the HKSE by the taipans and the Chinese Govt. Is it fair game, market forces?

30 comments:

dan ng said...

Nick Leeson was long the index and not short. He was killed because of the Kobe earth quake.

Chua Chin Leng aka redbean said...

Hi dan ng, welcome to the blog. Thanks for the correction. It was also reported that the Japanese took position against him.

I better amend the short/long position.

The said...

redbean - as I tried to hint to you in the previous post, it should be scrips (if you are talking about stocks and shares) and not scripts. Am pointing this out to you so that the anonymous ignoramus will not think I am a PAP troll.

Just like chicken feat and chicken feed.

Chua Chin Leng aka redbean said...

Thanks, The, thought you were playing on the pun. Ok will get it amended. These few days making a lot of mistakes. Must be suffering from dementia: )

The said...

Shorting stocks is unlikely to cause the kind of damage that Nick Leeson did by his short straddle and long-long future arbitrage. Derivatives are much, much, much more highly geared than plain vanilla stocks.

Anonymous said...

Hi rb,

It is assymetrical to say that short selling is a bad thing. Concerted buying is also manipulation in a way. It is no different to say that it is internal interference if you criticize. But, not if you heap praises.

We all know that "buy" recommendations are not condemned. While "sell" recommendations are vilified. It says a lot that there are numerous "buy" calls on this coy. And we have not learned from the investment bank scandal in USA.

Share buy back just does not make sense here for a coy with increasing debt and gearing. It is a red flag. They need more equity, not reduce equity using more debt.

Its accounting methods and business model are being questioned. It would be stronger for it if it can survive this episode. If it falls, it is a failure deserving and losses huge but contained.

faber

Chua Chin Leng aka redbean said...

Hi faber, welcome to the blog.

That's very fair comment. I agree that both calls when exaggerated are equally destructive. There is a subtle difference in that buy calls not often ended in the destruction of a company. A sell call, a sudden drop of 20% or more could end up quite disastrous.

Agree that it is more important that the fundamentals of the company is sound. Here is a case of whether the accounting method is dubious or reasonable and if the former, it is going to be hit real hard. If the method is subjective and could be just a methodoly that is not too fraud to the point of cheating etc, the selling and probably destruction of the company may be over done.

The other point I raised is the one sided nature of an attack that can be both ways and the lack of a counter force to moderate the extreme impact. The big speculators tend to go in with much preparation and resources and could do big damage if there is no counter or moderating party to prevent them from going over board.

There was a talk of an Asean or Asian fund after the last financial crisis to step in when things turn too bad. Such fund is necessary to keep things on an even keel.

Anonymous said...

Red bean, when the news were out I was prepared to listen to company side of the story but when I read the detailed report, whether accurate or not, it seems compelling. Instead of waiting for the company response, I decided to take a $4000 loss so that I can sleep better.assuming that at the end may be the company is right but then I don't have the luxury as I am a small investor and I can not wait for months for the issue to clear out.

The last time I held on and believed in GM, I see my bond dropped from 50,000 to 6000. I decided I should not have that kind of faith in any company so once they are any bad news on any company, better bail out first.

Chua Chin Leng aka redbean said...

This is a good decision. Many traders and investors sell when there is uncertainty.

This saga can go either way, with people making a lot of money and those on the wrong side losing a lot. It is good for traders and risk takers.

Matilah_Singapura said...

I saw this on Bloomberg the other day. All the ex-spurts with their ex-spurt opinions, spurting all over the place like a bukkake party.

Come on. Relax. It is a long time since squeaky clean Singapore financial sector had a scandal.

It is amazing to me that the clever though marginally-and-flexibly-moral folks in the financial sector -- the people in-charge of the "capital" itself in the sexy-smokin' game of Capitalism -- these are some "unique" motherfuckers. Some of them are cosy with The State. This aids them in plotting their nefarious schemes...anything from outright fraud (Madoff) to embarrassing self-aggrandizement (Trump).

In my suspicious opinion, if there veiled accusations of impropriety and irresponsible corporate behaviour, there is usually some truth lurking around. But really...so what? You can't change human nature.

I'm not against any financial destruction. Creative destruction is necessary -- it gets rid of the weak and unsustainable. This sector is extremely Darwinian.

Anonymous said...

What is Temasek doing ? As a substantial shareholder of Olam, they should come out & say something. A lot of public money is at stake !!!!

Anonymous said...

Maybe selling also to buy back at lower price?

Anonymous said...

I am surprised that not a word from our SGX. If a remisier is the one , they would have taken him/her to task. Muddy Water comes out with a damming report and shorted the shares, Isnt it conflict of interest. So what have our almighty SGX has to say , heh????

Anonymous said...

Why we care so much about Olam?
It's not as if they have a pro-Singaporean HR policy?

We die is our business.
They die it's their business.

Anonymous said...

Yah, Maybe SGX is been blurred by the muddy water created by Carson Block and cant see clearly or maybe they are busy boiling water, no time for this!!!!!!

Anonymous said...

Hi rb,

Please bear with me.

If the authorities get the macro correct, the micro parts should be easier to manage. But, the macro is transplanted wholesale (buyers beware system), absent proper micro mechanisms (investor protections), we have a lopsided playing field.

Is it wrong to profit from shorting, while it is fine for coy to engage in shareholder wealth destruction through unsustainable business model? "Buy" calls endorsed by coy do have wealth destruction negatives in the not so short term through the coy's failure. Successful class action lawsuits against investment banks in USA attest to this point.

I would have more sympathy if this coy is a small one. But, with billions in borrowings and in equity it would be wrong to underestimate the resources at its disposal. It would be very revealing what it does with these resources in this current saga.

The coy's strongest defence should be its strong accounting regime and solid business model/strategy. Not pushing the envelope further when questions are raised. Not more monies from deep pocketed shareholders or lenders.

Any attack, criticism, etc. is a test and a time to review, pause, reflect, regroup , etc. This is good thing if your premise is sound. Fatal if not. No different whether this is about a coy, currency, country, politics, etc.

faber

Chua Chin Leng aka redbean said...

Hi faber,

Let me reply to you on two points. One, the macro problem. Yes this is a very serious problem to copy a western model that is flawed. Some may still insist that the system is fundamentally sound. There is no point to argue which way but those in the business know that the system is in a critical phase and can kaput any time. Let that day be the confirmation of the truth and goodness of this system.

A fundamentally flawed and unsound system is unsustainable and must break down.

The other point is that this Olam issue is not just a revelation of some short comings. It is done with pecuniary interest, to benefit from it in very substantial way. Also, Olam has published a 45 page report as a proper response to the allegations, and the investors should be the judge, or let time be the judge.

Anonymous said...

Anon 12:52, you got a point. If a brokerage were to short a market and follow up by a damning report, it is likely to be hauled up for manipulating the market or taking advantage of the information it had.

The SGX is likely to question the proper conduct of such actions. Why is there no action against Muddy Waters?

Anonymous said...

Hi Faber, your comments are fair and I agree with you on authorities not getting their macro correct and that we have not learned not from the investment banks scandal in USA. Thank you

TwoGreenBeans

Anonymous said...

Anon 2.02pm, I think muddy is overseas mah so sgx can't do much. What they can do is to disallow short selling.

Anonymous said...

It's hard to tell where the truth lies sometime so when in doubt, best strategy is to offload

Chua Chin Leng aka redbean said...

Hi TwoGreenBeans, welcome to the blog. ya, faber has touched on some valid points.

Anonymous said...

Matilah, good post and keep it clean so again I won't say knn to u

The said...

/// Matilah_Singapura said...
I'm not against any financial destruction. Creative destruction is necessary -- it gets rid of the weak and unsustainable. This sector is extremely Darwinian. ///

Agree with your post, except the last bit. It is not Darwinian at all. It is the survival of the fattest. Those fat cats using other people's money are still around after losing billions...

Destructive creative shenanigans...

Matilah_Singapura said...

@The:

>> It is not Darwinian at all. It is the survival of the fattest.<

It is very much "Darwinism" (my bad..I didn't clarify what I meant)

Darwin's Theory: Evolution By Natural Selection. "Survival of the fittest" is often misunderstood, as in this case.

What is often neglected in Darwin's Theory is the role of selection pressures. Also, your unstated assumption is that somehow you believe that Darwinism ought to be "moral".

There is no requirement for morality as a prerequisite for natural selection to work. "Morality' however is an emergent property of Darwinism (and a whole lot of other influential mechanisms as well).

Note the observation: "Bad boys get the hottest girls". When you understand why that is from an evolutionary perspective, you will understand Darwin's Theory Of Evolution By Natural Selection.

There's always going to be shenanigans in any activity which involves fast, big money. That's not going to stop anytime soon. ;-)

Anonymous said...

Forgot to explain:

re: selection Pressure:

Those species which are able to adapt to the selection pressures imposed on it by the environment get an advantage over those who cannot adapt to selection pressures in the environment.

Being amoral, cunning and ruthless might confer an survival advantage in certain already corrupt environments.

Matilah_Singapura

Anonymous said...

Congratulations Matilah. You are coming in clean now without the use of foul language. keep it up.

TwoGreenBeans

Matilah_Singapura said...

Fuck you two hairy balls. I don't need your "congratulations". Shove it up your arse.

Anonymous said...

You are forgiven because it looks like you have Tourrette's Syndrome.

TwoGreenBeans

Anonymous said...

HKSE published daily the short positions of shortist in the name of transparency. Why is this not done in SGX? Is it to protect shortist position? Why no transparency?