Market Muggers and Bullies

Bullying is to be abhorred on every occasion. So whether it is in the playground or in the
world of business, the same attitudes must apply. Smaller companies are forever at the
mercy of their stronger and larger counterparts - but such is the world of capitalism. To
try and mitigate against this, the rules on monopolies and unfair contracts are there to
try and provide at least some element of balance to help the smaller participants and
allow for healthier competition. However, my concern is rather with the area of market
manipulation - where share prices of companies can be adversely affected, not
necessarily by larger brothers, but by teams of feral share muggers who seek to beat up
share prices for their own benefit, irrespective of the damage they cause.

We all know that once outside the FTSE350, we are in a dry and arid world of limited
trading and rarefied price liquidity. In this world the actions and influence of a few
mutters from the gutter can have a disproportionate effect on prices and valuations.
With smaller companies this is not just a technical issue but one which can materially
affect the survival of businesses - especially if their share prices are being forced down.
The style of “let me on the board or I will dump your stock” is, in my view, little more
than blackmail and whether legitimate or technically allowable, it goes against the ethic
and intent of an investing market - namely to primarily provide finance to an
investment market and secondarily to provide a healthy open trading ability behind it.

For some companies, short selling can have a disproportionate impact and here the
strange practices seem to apply whereby certain people announce their intentions to
sell in advance through public publications and chat rooms, to thus in effect adversely
influence the market and make their intentions a self fulfilling prophesy - and profit. Is
this investment or market abuse?

This is especially difficult for often smaller companies to fight against and particularly
dangerous for them if the modest share price is adversely hit. This can potentially
impact upon bank covenants and value obligations, which could even endanger the
company itself.

In the institutional world of investment management, short selling is an important tool
to manage client money and to aid proper and open price formation. However, for
smaller companies it can prove very destructive and unfair to the company concerned.

I take this further in my annoyance at hearing certain “internationally regarded market
experts” talking a particular investment angle - such as talking down Sterling for
example - without disclosing that they have a significant bet on it occurring. Is that a
market view or abusing the media for your own profit?

***

The next time you hear a commentator say that they have just been through a bank’s
Report and Accounts, either be very impressed at their wonderful diligence, or be very
sceptical that they have not actually gone beyond an overall summary. My colleague
Peter Sleep brought to my attention that the 2007 HSBC annual report weighed 1.47kg -
that’s about the size of a medium sized chicken. Well at least you can eat a chicken -
although I suppose you can cook the books. However, don’t worry about 2008 as this
year’s only runs to a mere 472 pages - pages that most don’t read, most can’t
understand and can be barely delivered by post.

Banks have become so large and so complicated that you need a range of experts to
fully understand them. Now with the “integrated” banking leviathans, their businesses
are so diverse that appreciating and understanding their true risks must be almost
impossible. Thus, despite the good intentions of the regulators aiming to prevent any
further recurrence of a banking crisis, it is going to be very difficult to have a clear
method of evaluating the potential holes in these groups, and especially as to whether
they actually have sufficient capital and funds to sustain their position.

***

There are times when history doesn’t have that glow of warm wistful memories. Last
week, sitting in sullen silence during a London tube strike, hearing about the Labour
party ructions over a sub-prime minister and reading about further weakening of our
economy on the back of poor retail sales, all felt like being back in one of those currently
popular retro time television programmes about the 1970’s. David Bowie’s lyric of
“Ashes to ashes, dust to dust” might be the signature of the last few months of this
Prime Minister’s tenure. All I need now is to put on one of my old stripey tank-tops and I
will be back there again.

***

And finally...

What's not to like about a tree? Apparently plenty, if you live in one New
York City neighbourhood.

The New York Daily News says some residents in the Bronx are fuming over the city's
plans to plant trees on their block. They say the roots will eventually crack the sidewalks
- and they'll be stuck with the repair bills. Opponents also fear that fully grown trees will
damage their homes, clog sewer drains and entangle power lines in the borough's Mott
Haven neighbourhood.

Who wants to go green anyway when you can have some fresh paving slabs and
concrete!

Have a good week,

Justin Urquhart Stewart
Director
Seven Investment Management Limited

For previous editions of our Weekly Update, please click here

This article represents a personal and light-hearted view from Director, Justin Urquhart Stewart of Seven Investment Management Limited, and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision. Seven Investment Management Limited is authorised and regulated by the Financial Services Authority. Member of the London Stock Exchange. Head office: 23 Austin Friars, London EC2N 2QP. Telephone 020 7760 8777. Registered in England and Wales number 4092911. Registered office: 3 More London Riverside, London SE1 2AQ.