Wednesday, November 21, 2012

Olam: Like a bridge over Muddy Waters

Olam International's stock plunged on Tuesday after a negative report by Muddy Waters Research, a company known for not so positive reports as well as shorting them. Now, Olam International has threatened to "take appropriate legal action against" Muddy Waters. I do not own shares in Olam but this is the second time that a research company has issued something negative on it, specifically its accounting practices. And apparently, the analyst that wrote it is no longer with CLSA, although it is not clear whether he/she left as a result of that report.

Companies with biological assets are always tricky to evaluate as there is a significant amount of discretion involved in assessing their current and future values for by their very nature, are hugely affected by the weather. Recall the case of Oceanus.

And if you are the CEO of a listed company or a major shareholder, you will be most likely  irritated if there is a report circulating around that casts aspersions on your company. As the CEO, you are of course expected to "enhance shareholder returns". Moreover, there is a huge chunk of your personal wealth that is tied to the price of the shares. Therein lies the hypocrisy of this episode, which closely approximates reality. Listed companies do not take action against optimistic reports but threaten to do so against pessimistic ones. 

My own thoughts are that can it be in the Internet age, that the court of opinion must lie wholly in your favour? That there is no room for critical thought? If this is the case, I really wonder what purpose or utility  research reports from securities firms have, other than to induce their clients to buy and never to sell only when it is too late. As a retail investor, we have to innoculate ourselves against this form of advertising because there is little or no recourse if stocks do not hit their target price. 

I also do not think that short selling is as long as there are shares to back them up (non-naked). It is important that there is both buying and selling of shares to prevent excessive euphoria which can be equally bad as panic in the market.

No comments:

Post a Comment