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This is a topic about which I wrote some time ago in this column and SharesBulletin but I feel further mention is warranted here in the Trading Tutors Newsletter.
At the moment we are seeing an unprecedented number and amount of capital raisings. We have witnessed over the last several months a virtual ‘bank lending lock down’ and corporates have no option than to raise money away from the banking system. Some companies need to keep the wolf away from the door, others contemplate that the wolf may come to their door over the coming year or so and many face ratings downgrades if they don’t pull in more cash. So it is not with great pleasure they go to the market cap in hand.
You see the corporates have no clue – no more than you or I – as to where the bottom of this trough is and so whilst still things are not too disastrous – relatively as it is a matter of perspective – they should squirrel away some cash whilst you folks have money in your pockets.
The truth is that the Instos are the seemingly favoured ones when cash is needed quickly but maybe there is a hidden blessing in you not being asked to stump up cash now along with the Instos.
My view is that in a bull market companies only have to offer a small discount to market to get you to take up rights as you have the view that the party will go on forever. And we have generally seen prices recover and surpass the rights retracement price and power on to new highs.
But even the unwitting corporates forget that the reverse happens in a bear market. As soon as a rights issue is announced or rumoured the share price tanks. Now I hear you Fundies interjecting as I speak claiming there are reasons why you take up rights BUT take a look at the chart of most capital raisers in the last several weeks and you will see already your rights price is under water. Don’t you guys learn?
So count your lucky stars that the dubious honour of buying more shares in certain cash strapped companies is not bestowed upon you, the retail trader. There is quality out there for investors, you just have to be able to recognise shares that provide safe returns and those you can pick up a bit cheaper just a little down the track.
Enjoy the ride
Tom Scollon
Chief Analyst
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