Spotting The Facts Amid The Rumours

Posted on: 06 January 2009 by Gareth Hargreaves

Independent Financial Adviser Peter McGahan advises on how to ignore the rumour mongers.

I am often asked what I think of an individual share or marketplace/sector.

‘What do you think of the banking sector, Northern Rock, China’ is a typical one. It will often be followed by a recital of some news they have read elsewhere. Some of it can be from good sources, others can be from well, anywhere else.

I have attended a number of forums where clearly IQ challenged wannabe investment rampers are allowed to wander freely with their thoughts. If you want a laugh, go to Google and search for something like ‘northern rock forum tips’ and you will see what I mean.

The area we are moving into is a dangerous one and we all need to be careful when following tips or noise as I refer to it.

Let’s take this year for example. First we had a leading fund manager saying that banks had probably hit their low. I might consider that to be ‘noise’ i.e. someone trying to talk up a sector, or I might investigate that further to consider the impact future legislation will have on banks in terms of their leveraging and realising they are indeed in trouble.

I chose the latter as I also knew the journalist who interviewed him and didn’t trust the source. Many such interviews can be created with an outcome in mind rather than the approach of investigation and debate.

In April 2008 he excused bank’s falls as being down to the sector’s savage de-rating! So they must be cheap at that point having already plummeted in value? Hardly. That’s another bit of noise.

For every buyer there is a seller and noise like this creates more buyers, and sellers take the opportunity to dump their ‘duff’ stocks. Whilst I am not saying it’s the case with this manager, it was clearly noisy information.

He had core positions at that point in RBS, HBOS, Bradford & Bingley, Barclays and Lloyds. Their high and low points for the last 52 weeks are RBS: 373.89p / 41.70p HBOS:722p/59p B&B 251p /16p Barclays 526p/127p Lloyds 448p/115p.

Most concerning is that much of that loss arrived after the thoughts commented above were published so it’s easy to see why people can lose a lot of money following noise. Lloyds down 64% in last six months, HBOS 78%, Barclays 56% and the less said about the other two the better.

Let’s look at some more noise: ‘Gas to soar in price after leaks concern’. ‘Oil soars as investors dump the dollar after US financial stimulus is announced’.

You could believe that behind much of this is true information, or indeed it is the press releases from institutions with a vested interest. ‘New 'super-spike' might mean $200 a barrel oil - Goldman's projections foretell persistent turbulence in energy prices’ was another pile of nonsense flung at us this year.

Sure enough, Goldman Sachs were also neutral on most of their oil stocks at the point when they made this infamous quote, which of course every newspaper reported on.

Everything since then has reported oil, gas and natural resources to relate to supply and demand. It has also said that oil was rising because the dollar was falling and no-one wanted it.

Why is the dollar falling? U.S. financial stimulus is one reason, and plummeting interest rates are the other. We now have interest rates in the U.S. at zero yet the dollar is fine and oil has nose-dived by over $100 in the last five months. Explain that.

And to finish a glorious year of noise and noisy tips, we have the president of OPEC telling us he is likely to decrease oil production to support the oil price. I might take this opportunity to quote Mr Khelil, who when asked about increasing oil production in June this year to keep prices under control said: "To ask the oil producers to increase their output is illogical and irrational... just because computer or car prices were high, would one ask their producers to make more?"

I am only glad I can see through them.

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