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Market manipulation
Margin lending

Special Market Update – 25th February 2008

JTB Studios
Private Client Adviser
25 Feb 2008

The market continues to be vulnerable to unrealistic sell-offs caused by short selling and Hedge Fund operators.

This in our view is tantamount to market manipulation and the potential destruction of quality companies for no reason other than the unwarranted sell-off of their listed shares for the profit motives of market manipulators.

Short selling entails the selling of shares that are not owned by the sellers. In cases where Directors or entities associated with the company concerned own shares which are subject to margin loans, forced selling further exacerbates the situation. This was what occurred with ABC Learning Centres yesterday and what brought Allco Finance Group to its knees. ABC directors were forced to sell $45 million of ABC shares which caused the share price to plummet. In the case of Allco, entities associated with the company had $55 million worth of shares sold from underneath it.

Margin lending is where shares are purchased with borrowed money secured against the shares themselves.

When the share price falls and the “margin” between the amount borrowed, and the value of the shares falls below a trigger point the lender makes a “margin call”. That is the borrower needs to deposit funds to replenish the margin between the amount borrowed and the market value of the shares. If the borrower doesn’t have sufficient funds, they are forced to sell shares.

In our view and the view of many, this is a fundamental problem with the market and needs to be addressed as a matter of urgency. Senator Nick Sherry has sent a “please explain” to the ASX and ASIC on the issues surrounding short selling and Directors margin loan positions in relation to their own company shares.

452 Capital director, Peter Morgan is quoted in today’s Financial Review as saying there are “gaping holes” in the regulation on short selling. “We’ve had an unregulated short selling marketplace,” he said “And without a doubt… when a hedge fund gets a whiff that there’s some pressure on a principal that’s got a margin loan, you may well get an enormous amount of scrip borrowed and shorted against it. And it becomes a self fulfilling prophesy”.

Respected commentator Terry McCrann writes in this mornings Herald Sun Business Daily “The Allco Finance Group and ABC Learning sagas demonstrate how the life and death rhythms of the African bush have come to Collins and Bridge Streets. It’s a new phenomenon on our local bourse. The classic African partnership of predator and vulture.”…” First the predators bring the prey down. The big cats of the capital city are the hedge funds ruthlessly selling and selling the stock down.” “Once the company’s share price cracks, for whatever reason, forced selling of those shares drives the price dramatically even lower, in a cascading effect.”

Both Allco and ABC are fundamentally good businesses. Allco has a net asset backing of $2.53 per share not including the $1.3 billion of goodwill on its balance sheet. Hardly justification for its closing share price of $1.03. No wonder the vultures are circling to try and pick value from the carcass. Hopefully Allco will be allowed to continue to run their business and defy the vultures. ABC has suffered by over expansion too quickly but does not have threatening debt or fundamental problems with their continuing business. But this absurd market manipulation may cause the company to undertake unscheduled restructure.

The regulator must act to protect the interests of millions of Australian investors, their savings, their superannuation and their retirement funding. The compromise of quality Australian companies through synthetic trading and market manipulation does not represent a “fair” market and must be stopped.

Download article Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.