Tuesday, April 08, 2008

Rumour share-trading

One of the hallmarks of a bear/bull market these days is that rumours become an important component of your stock trading. You have to understand when a rumour is driving the market; which way is it driving the market; what is the rumour; who is the source of the rumour; and more importantly why the rumour?
In Kenya, rumours fall into three types: rumours that will lead to increased number of shares; rumours about merger activity and bankrupt/corruption-type rumours:

  • Increased number of shares via bonus issue: usually done before results announcement, tends to get very giddy response and only happens when the stock is doing exceptionally profitability-wise. These are the rarest because they don’t happen often and tend to be credible. Secondly, they also have a very short-window i.e. will usually happen just before the results are announced. This is the best bull to ride, but requires a lot of analysis of the motives from the stock’s point of view.
  • Increased number of shares via stock spilt: very popular rumour and will usually affect a share with a price above Ksh200. KPLC is probably in a class of its own on this one.
  • Increased number of shares via rights: also popular, but as investors become more savvy, they’re waiting for firm details (especially on pricing), and thus lacks the bull-ride it had in 2006 or early 2007
  • Merger activity: usually focused on banking and cement sectors. Last year was about NBK and later on about Equity. Rarely get any reaction unless it’s tangible.
  • Bankruptcy/liquidity/corruption sagas: usually coincide with a bearish market and may occasionally have political undertones. Equity has been the main victim (of both of them) even after Hellios entry. After benefitting from the 1-2&3 above, EA Cables also became victim early this year of a politically-driven rumour about its inability to meet loan repayments and pending bankruptcy proceedings.

Outside of Kenya, rumours tend to be intelligently targeted but don’t defer too much from above apart from those on profitability. Barclays, HBOS and Lehman Brothers have all been recent victims of the liquidity/bankruptcy-type rumours some very targeted by short-sellers. During the bull market era aka leverage era, Barclays used to be linked to every bank merger and Lehman to UBS’ investment banking ones.

Bottom-line though, the old line of buy on fundamentals sell on rumours, no longer suffices.

In other news, the best one line on credit crunch comes from a certain Omaha stock trader by the name Warren Buffet “You only learn who has been swimming naked when the tide goes out”.
Finally, my commiserations in advance of tonight’s Champions League game to Arsenal fans. Good wine takes a long-time to mature. Your time will come, but not tonight.


Ssembonge said...

As of 31st march the short ratio for LEH was something like 800 days! Hedge funds are circling over LEH like vultures. The SEC has opened investigations into these rumours.

Most of the ibanks 'earnings' are non-cash resulting from write-downs in their liabilities. As the credit market softens, they will have to give up this write-downs. And now WaMu is being readied for slaughter.

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