“ABN AMRO cuts sector rating on Australian banks to Underweight from Neutral after a string of bad news from major banks in recent weeks.” With the macroeconomic outlook deteriorating, we believe bad debts could rise,” analyst says. “We believe the market is likely to wait until there is clarity on the level at which bad debts peak and when this is likely to occur before re-evaluating the sector.” Last week, analyst cut ratings on National Australia Bank (NAB.AU) and ANZ (ANZ.AU) to Hold from Buy, and St. George (SGB.AU) to Sell from Hold”
Source: Dow Jones Newswires 4th August 2008
Have you ever heard the saying that “The market is always right“? What does this mean?
In the above statement, the research analyst has downgraded the entire banking sector to “underweight’ from “neutral”. This highlights the inefficiencies in fundamental analysis. The analyst’s valuation has changed practically overnight! Should we then believe that the value of the entire banking sector has also then changed overnight? Of course not! Rather, what we have witnessed is the analyst has conceding that his/her previous perception of value is incorrect and that the market is actually right!
Regardless of what the experts think or say, the market will continue to move when and where the market pleases. Sure, you might say that the market moves to reflect the fundamental determinants of value, but where the market goes on any one day is not driven by value, it is driven by people. People tend to react in a similar way when presented with similar stimuli. Value isn’t always predictable, but alas, people often are. It seems we reserve the right as a species to never learn from our mistakes!
If traders need to understand one thing – it’s that you can’t fight the market. Whilst proponents of value will swear that over time the market will realise the value inherent in their stocks, if the price is heading south because nervous, fearful people are selling – who’s right and who’s wrong? Clearly, if you’re losing money you’re wrong!
“Ausenco (AAX.AU) target price cut to A$6.00 from A$12.08 by ABN AMRO, and despite downgrading net profit forecasts by 16% in both FY09 and FY10 as global funding issues continue to threaten mineral development projects, broker says: “We believe the impact on AAX has been exaggerated and has created a compelling long-term buying opportunity.” Retains Buy rating, noting even in worst-case scenario that Ausenco’s order book “capitulates”, it’s still trading on relatively cheap multiple of 5X FY09 EPS. AAX last down 3 cents at A$2.30.”
Source: Dow Jones Newswires 13th January 2009
In the above broker excerpt the analyst has halved his/her valuation of the company essentially overnight. They believe that the “impact on AAX has been exaggerated and has created a long-term buying opportunity.” Now, let’s get this straight: AAX is a compelling buying opportunity now? What about when it was trading at $12? Was it a compelling buying opportunity then when you were still recommending a buy? At the time the above excerpt was taken AAX was trading at just $2.30. At the nadir of the GFC-correction it reached a low point of $1.90. One has to wonder, is the analyst right or is the market right in this case?
Many would argue to the above scenario that they would simply hold onto their undervalued stocks until the market realises their value and marks up prices to a point where a profit is once again seen. “You don’t lose until you sell” as the case would be. This may well be true in theory, but what of all of the missed opportunities that will pass you by before the market eventually comes to its senses? Even worse, what if your stock doesn’t go back up? What if it goes bankrupt? None of these scenarios are going to deliver traders a healthy and sustainable recipe for long term trading success.
Rather, good traders agree that the market price is the sum of all fears and the sum of all hopes. They concede that the market does not care what our idea of value is – no matter how well researched, plausible, or obvious it might be! When you throw together everyone’s perceptions of value, the market price is what remains. Price is the reality. It’s there in black and white for all to see. Ignore it at your own peril.
“Investec Securities cuts its target price on BHP Billiton (BHP) to 2,200p from 2,900p as the market appears to de-rate the sector.” It will take some time, and empirical proof (in terms of stocks/import data), for the market to regain confidence in the commodity cycle.”
Source: Dow Jones Newswires 19th August 2008
It may not seem like it just yet, and you may feel that this discussion is not important, but understanding that the market is always right is perhaps the core of a belief system which is essential to becoming a successful trader. Value is a moving target, a perception, an opinion. Price is 100%. It’s there for everyone to see…