$300 million

January 11th, 2013

Continuing on silly claims about the Whitehaven hoax, the figure of $300 million is being bandied about as the cost to Australia’s Mums and Dads. I haven’t checked, but I assume that this is the change in market capitalization of Whitehaven from the opening to the point at which the hoax was exposed. That is, it’s the amount that would have been lost if all the shares in the company had been sold at the bottom, assuming this was feasible, which it isn’t. Of course, an equal amount would have been gained by the buyers.

But, ever vigilant on behalf of Australia’s Mums and Dads (I’d like extra bonus sympathy as a Grandad!), I thought I would check to see if any such outrages are continuing. It turns out that the All Ordinaries index has fallen 16 points, or about 0.4 per cent, since 10am. Assuming a market capitalization of 1.2 trillion, that’s nearly $5 billion ripped from our parental pockets in the course of a single morning. Almost certainly, some of this due to spurious rumors, some of which may have been deliberately spread.

Can’t something be done about this? Won’t somebody think of the children?

PS: I see in comments that Alison Parkes has made a similar point

Categories: Boneheaded stupidity, Oz Politics Tags:
  1. Mr Denmore
    January 11th, 2013 at 13:35 | #1

    Hear hear. The nonsense in the media about short-term movements in share prices betrays either wilful ignorance, stupidity or both. The only people who might have lost money out of the Whitehaven blip were day traders. And they’re speculators, not investors.

    The market cap of the share market and that of individual companies changes every second of every day and for any one of for thousands of potential reasons – some technical, some fundamental and some due to hearsay, rumour and misinformation.

    Day traders, brokers and investment bankers routinely seek to manipulate the market for their own profit. No-one jumps up and down and weeps blood about poor mum and dad with their super when that happens.

    High frequency traders take advantage of ultra short-term price movements for profit. No-one is thinking of the children in that case.

    And for all that, for the vast majority of people, short-term price movements are meaningless. Most of us stick our money away and don’t realise the outcome till we retire.

    What a load of tripe.

  2. January 11th, 2013 at 13:37 | #2

    I’m flat chat trying to get a figure of $3million – that $300m is bullshit by 2 orders of magnitude.

    http://resources.news.com.au/files/2013/01/07/1226549/180529-130108-whitehaven.pdf
    http://www.asx.com.au/asx/research/companyInfo.do?by=asxCode&asxCode=WHC

    According to ASX, 2nd link, total trades for 7Jan13 was 9million.
    Lets assume all of those happened in the 20minutes between prices going down and trading halt $3.50 to $3.21 – ~30cent drop, lets round up to 1/3 of a dollar per share – 1/3 of 9mill is 3

    The media is beyond fact checking of any sort. One must assume what one reads in a paper must be independently verified as it’s fair to assume its been made up.

  3. Katz
    January 11th, 2013 at 13:38 | #3

    Yeah, mostly those rumours are spread by touts trying to cheat each other rather than by idealists trying to save the world. But should idealists behave like touts?

    The WHC hoax was also different because the hoaxer left a paper trail that could easily be sourced back to the perpetrator.

    The plods from ASIC can therefore get an easy result on this one, leavened by the outrage against idealists who make the mistake of behaving like corporate heavyweights.

  4. Ernestine Gross
    January 11th, 2013 at 13:42 | #4

    Your boneheaded stupidity threads are priceless. .

  5. canberra boy
    January 11th, 2013 at 13:50 | #5

    Alison Parkes is probably right. Without access to the ASX website (blocked by employer), the best I can come up with is that Whitehaven shares closed at $3.50 on 7 January, two cents down on the day before. Shares dropped 8.8% following the hoax media release. Turnover was approximately 10 million shares that day – a spike induced by the startling ‘news’. So a simple calculation of $3.52 times 0.088 times 10 million gives maximum theoretical ‘losses’ of just under $3.1 million, which would be possible if all 10 million shares were traded at the bottom price. Given course-of-sales details of the price and timing of all transactions that day we could come up with an accurate figure: possibly what Alison Parkes did to arrive at her figures of $80,000 to $300,000.

  6. moz does nothing
    January 11th, 2013 at 13:55 | #6

    It would make a great headline either way. “Day traders lose $300,000 on silly rumour” vs “hoax makes (extremely rich) mum and dad investors panic and sell Whitehaven for $300M loss”.

  7. BilB
    January 11th, 2013 at 14:08 | #7

    At the end of the decade, JQ, I’d be interested in your estimate of the cost to Australia of Tony Abbott’s anti climate change hoax on the public.

  8. Mr Denmore
    January 11th, 2013 at 14:09 | #8

    Whitehaven Coal closed at $3.52 last Friday – dropped to $3.30 in intraday trade on Monday after the hoax fax was received – then recovered to close that day at $3.50 in line with a slightly weaker market. I cannot believe the fuss that is being made about this. Well, actually I can, but that’s another issue.

  9. January 11th, 2013 at 15:01 | #9

    According to the free marketers, the markets are always efficient (this means no information asymmetry). According to the New Classicals’ ‘rational expectational’, which means that economic agents are aware of the probability of future events that may happen, and the agent’s prediction about relevant economic variables are not economically wrong.

    Given this is how the Right understand the economy, how they can ever claim there were loses made by the hoax?

  10. January 11th, 2013 at 15:02 | #10

    “are not economically wrong.”

    Ops, it’s not systemically wrong.

  11. Hermit
    January 11th, 2013 at 15:07 | #11

    That $0.3 bn is a paper transaction. What about the ~$1.0 bn the brown coal generators got from taxpayers as hard cash as a result of faulty Treasury modelling?
    http://www.abc.net.au/news/2012-09-06/coal-fired-stations-1b-better-off-under-carbon-tax/4246100

    The PM should send them a short note along the lines ‘we’d like our money back please’.

  12. DCG
    January 11th, 2013 at 15:09 | #12

    As a day trader I should point out that there is an important distinction between trend trading and fundamentals trading. Trend is “what happened?”, fundamentals is “why did that happen?”, and the intention of both is to discover what *will* happen.

    Fundamental analysis will not and cannot show up this sort of thing. A hoax announcement, whether or not it was intended to move the market, is not predictable in any way. In fact it’s definitionally *anti*-predictable, because if the announcement was predictable, it wouldn’t be a hoax.

    Trend analysis won’t show any specific spike in advance, but spikes happen *all the time*, and it’s pretty much irrelevant, from a day trading point of view, whether these spikes were caused by legitimate response to factual matters, or the color of the US President’s tie. What normally happens, is a few folks get the information–factual or not–early, and start taking market positions because of it. Others see that market positions are being taken, and either amplify (by joining) or dampen (by resisting) the movement. Obviously, the more people who see a given stimulus, and react in the same manner, the greater the resultant trend will be.

    For day traders who are good at what they do, *any* volatility for *any* reason is a good thing. If the market is going up, the day traders want to be long. If the market is going down, the day traders want to be short. My particular teacher specifically teaches us to *not* pay attention to “news”, and to avoid trading either side of planned announcements. The reason why that is, at the heart of it, is that a day trader who forms a pre-existing opinion as to what direction the market *should* move in, will have inferior results to a day trader who simply watches what direction the market *does* move in.

    Another important point: Whitehaven is an individual stock. Arguably, trend traders should not be trading individual stocks, as they move far too unpredictably even *without* random hoax announcements. It is much safer to trade an index, or a currency, and do that through a leverage system such as futures contracts.

    Fundamentals traders will be somewhat annoyed by this hoax, as deliberate bad information is like spit in their sandwiches. However, most fundamentals traders favor long positions, and retain these positions for multiple days, even for years, and rely on the general overall upward movement of the stock market to bring them their profits. Movement in Whitehaven that is reversed within the course of a day or two is irrelevant to those who intended to keep the position long-term. If a fundamentals trader were uninformed enough to take the hoax press release seriously, and silly enough to sell at the bottom of the curve, that trader has been *rightfully* punished for their arrant stupidity, and should *thank* the hoaxer for the lesson.

    A day trader who for whatever reason traded Whitehaven on trend only, and did not maintain unmonitored positions, and managed to react in time to the movement of the market would be pleased that this occurred, as it has caused significant volatility. Our day trader would be even more pleased if they happened to be in the market at the time the hoax was exposed, as the immediate reaction of the market was to go back up.

    The owners of trading algorithms probably suffered the most, but again, they deserve to suffer, and this type of thing is an illustration of the major vulnerability of an algorithm: unpredictable news.

  13. January 11th, 2013 at 15:37 | #13

    DCG, yours is world I have no idea off, ta for the insight.

    Thanks Canberra Boy. I got same max figure – nice to have the confirmation.

    I can’t believe our media mob and I didn’t have a high opinion of them anyways.

  14. Jim Rose
    January 11th, 2013 at 17:43 | #14

    What did Richo say: your real mates vote for you when you are wrong!

    I am sure you would be most upset if someone spread false information about your credit rating or impersonated your bank. The fact that the fraud was done by your political opponents does not matter to the rule of law either way.

    Rawls was good on civil disobedience.

    • civil disobedients address themselves to the majority to show that, in their considered opinion, the principles of justice governing cooperation amongst free and equal persons have not been respected.

    • Rawls argues that civil disobedience is never covert or secretive: it is only ever committed in public, openly, and with fair notice to legal authorities and done in a situation where arrest and punishment are expected and accepted without resistance.

    • The intent to bring about a change in the policies or laws of the government. The intent is not to impose your will on others.

    • For Rawls, violent acts likely to injure are incompatible with civil disobedience. ‘Indeed’, says Rawls, ‘any interference with the civil liberties of others tends to obscure the civilly disobedient quality of one’s act.

  15. Uncle Milton
    January 11th, 2013 at 17:55 | #15

    John Roskam’s effort in today’s Fin is particularly poor, writing as he does of $314 million being wiped from the company’s value, without mentioning that the value was restored soon afterward. If he wants to make to case that the hoax caused damaging volatility to the share price and market value that would be one thing, but he is treating his readers as mugs by implying that it caused a permanent loss of value. I’m surprised that Joanne Gray, the Fin opinion editor, let him get away with it.

  16. John Quiggin
    January 11th, 2013 at 18:32 | #16

    @Uncle Milton

    I’m inclined to think he is one of the mugs – working at IPA requires unthinking acceptance of loony claims, must become a habit in the end

  17. Ikonoclast
    January 12th, 2013 at 06:11 | #17

    Am I out of touch? I haven’t even heard of this Whitehaven saga.

    I am intrigued why it has been corporately badged “Whitehaven Coal Limited”. It is associated with the NSW Gunnedah basin and there seems to be no town or region called Whitehaven. Correct me if I am wrong.

    Therefore, I can only conclude that the title “Whitehaven” is piece of typical corporate whitewashing double-speak for one of the most long-term dangerous product we know.

    It would be more appropriately know as “Blackhell Coal Limited”. If I ever again refer to it I will call it that.

  18. January 12th, 2013 at 09:12 | #18

    Fairfax is repeating the $300million figure today in a piece about online media not being as dilligent (!!!!) as its print cousin in checking facts.

    Leaving everything else to one side, it is very telling to compare the “Shock! Outrage! Fury!” media response to this event with the “ho hum” reaction to last year’s David Jones takeover “hoax”.

    In that case it wasn’t activism but had all the appearance of an outright deliberate fraud from which some people would have profited very handsomely. The media ran with the hoax for several days which helped to ensure someone’s ill-gotten gains and the reaction was more like “tut, tut, tut”.

  19. John Quiggin
  20. Mr. Eyesore
    January 13th, 2013 at 09:53 | #20

    One of the people most prominent in quoting that figure was Mark Vaile, chairman of Whitehaven’s board of directors and former Howard government Trade Minister. Now that’s the sort of hyperbole one would expect from a politician, but it’s pretty irresponsible coming from one of the company’s directors – frightening the horses and so on. Maybe he time-warped back to 2007 for a moment.

    I created a graph of Whitehaven’s share price since the start of last year, with the effect of Moylan’s hoax indicated: http://www.flickr.com/photos/16753625@N07/8374802736/in/set-72157632507346306/lightbox/

    The takeaway is that the market has wiped about $2.5 billion from the value of Whitehaven since April last year, probably permanently. This should be a greater concern for Vaile and the other directors than this hoax.

  21. Jim Rose
    January 13th, 2013 at 10:20 | #21

    The share market is a surprising efficient tool for discerning new knowledge

    After the challenger space shuttle disaster, the share market identified within the hour which component supplier made the faulty part and marked it down accurately as to damages and loss of business. The blue ribbon commission of inquiry took months.

    Prediction markets got 50 out of 50 states right in Electoral College 2012.

    Market manipulation and fraud distort a key social process for information processing and capital raising.

  22. rog
    January 13th, 2013 at 10:49 | #22

    Much of the movement in share prices is a result of traders or their algorithms reacting to what other traders or algorithms are doing. Frequently the traders have no idea what the stock is and have no need to understand the fundamentals, they are only interested in movement.

  23. Katz
    January 13th, 2013 at 11:27 | #23

    Few participants in equity markets or other credit markets, including the shadow banking system, foresaw the GFC meltdown. They all collapsed suddenly after Lehmans hit the wall.

    As the proximate cause of Lehman’s collapse was the property bubble, which was happening right under the noses of every American mom and pop, one might have expected a more orderly and staged retreat of participants from the relevant markets as the prudent and the cautious cashed out, followed by the more adventuresome and less attentive.

    Yet this didn’t happen. Instead the world watched an amusing and chaotic post-collapse rush for the exits.

    It’s all very well for markets to blame some dodgy shuttle component manufacturer after the event. That isn’t the primary function of markets. We have courts of law to punish incompetents and shysters.

    The market is supposed to discount efficiently for risk. Quite evidently, in the most significant test since the Great Depression, credit markets failed.

    I won’t even mention the fact that world markets would have become extinct but for enormous bail-outs funded by taxpayers.

  24. Ootz
    January 13th, 2013 at 11:33 | #24

    Perhaps if Mr Eyesore’s graph stands up, then Moylan and the shrill press have done all those naive mums and dads favor in pointing out the fickleness of and ultimate destiny for fossil investment. It also flushed out unscrupulous fossils such as Vale.

  25. Ootz
    January 13th, 2013 at 12:03 | #25

    JR, you force me to response to your baiting as you rubbishing the legacy (with the stockmarket of all things) of one of last centuries most outstanding scientist and visionary Richard P. Feynman Forgive me for being blunt, it would fastly improve the level of debate and entertainment value of this blogsite, if you would sit down and reflect on the the accuracy,as well as level of argument and critical anaysis of your contributions here, as I don’t think that even you believe in what you say, nor find it entertaining anymore. And while you are at it have a glimps at the pertinent conclusions of “What Do You Care What Other People Think?”, in particular about the disconnect between executives and scientists, and then think about their message in relation to the overall topic of the debate here.

  26. Jim Rose
    January 14th, 2013 at 15:42 | #26

    Katz, central to an efficient share market is no one knows what will happen next.
    • Foreseeing a recession or an economic collapse next week or year would bring forward the share price collapse to right otherwise there are arbitrage gains.
    • News is compounding into share prices in minutes so there are large share price rises and falls when there is news.

    Do you invest your retirement savings in an active fund to beat the market or do you buy and hold a diversified portfolio of shares and bonds as per the efficient markets hypothesis?

    BART HOBIJN AND BOYAN JOVANOVIC showed that the IT revolution led to a share price collapse in the 1970s because the share market anticipated that much of existing capital is now obsolete so dividends will fall. The new capital destroys the old capital but with a decade-long lag. The prospect of this creative destruction causes the value of the old capital to fall right away.

    See also http://www.econlib.org/library/Enc/EfficientCapitalMarkets.html

    p.s. the actual cause of Lerhman’s collapse was it invest on a too-big-to-fail basis.

    In the Kareken and Wallace model of banking, deposit insurance and lender-of-last-resort are purely a social bad because moral hazard encourages risk taking unless there is regulation of the insured portfolios or there is proper surveillance and pricing of the insurance.

    Government actions and interventions caused, prolonged, and worsened the global financial crisis.

  27. Mr Denmore
    January 14th, 2013 at 19:42 | #27

    i have to agree with Jim Rose here. The destruction of capital in the GFC is proof of market efficiency, not the opposite. The problems originated in lilliquid and over-the-counter derivative markets where pricing was opaque. When the equity market contemplated the virtual insolvency of the banking system, the judgement was swift. That’s efficient.

    People mistake the idea of market efficiency as orderliness. It is anything but. It just means markets are unpredictable and it is hard to profit comsistently from mistakes, or perceived mistakes, in prices.

    Misinformation, rumour and outright manipulation move prices everyday – investment bankers routinely ramp IPOs for short-term gains – which is why the degree of outrage from the corporate media over Moylan’s meagre stunt is hard to swallow.

    But prices never stay ‘wrong’ for long and equilibrium always reasserts itself. And that’s why you are better off holding a diversified portfolio, not taking stock-specific or sector-specific bets and changing hour asset mix only according to your own initially stated risk appetites and goals.

    In short, while Moylan’s actions were illegal, people who trade off short term noise are taking unnecessary risk and really are speculating, not investing. This is a world away from mum, dad and their suoer. To portray it otherwise is just a cheap shot by those more angry at the identity of the hoaxer than the hoax itself.

  28. Jim Rose
    January 15th, 2013 at 10:32 | #28

    Ootz, Many of the issues raised in your the presentation are also discussed at http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4526 An Interview with Thomas Sargent nearly two years ago, where he says that:

    1. It is just wrong to say that this financial crisis caught modern macroeconomists by surprise: Allen and Gale’s 2007 book Understanding Financial Crises collects many of the dynamic models of the causes of financial crises and government policies that can arrest them or ignite them.

    2. Stern and Feldman’s Too Big to Fail doesn’t have an equation in it, but wisely uses insights gleaned from the formal literature to frame warnings in 2004 about the time bomb for a financial crisis set by regulations and government promises.

    3. Two polar models of bank crises and what government lender-of-last-resort and deposit insurance do to arrest them or promote them. In the Diamond-Dybvig and Bryant model, deposit insurance is purely a good thing; in the Kareken and Wallace model, it is purely bad.

    4. Bryant-Diamond-Dybvig model has been very influential generally, and in particular that it was very influential in 2008 among policymakers. Many policy authorities correctly noticed that a Bryant-Diamond-Dybvig bank is not just something that has “B A N K” written on its front door. It’s any institution that executes liquidity transformation and maturity transformation.

    5. Policy makers saw Bryant-Diamond-Dybvig bank runs all over the place. The logic of the Bryant-Diamond-Dybvig model persuaded them that if they could arrest runs by effectively convincing creditors that their loans to these “banks” were insured, that could be done at little or no eventual cost to the taxpayers.

    6. The Kareken and Wallace model’s prediction is that if a government sets up deposit insurance and doesn’t regulate bank portfolios to prevent them from taking too much risk, the government is setting the stage for a financial crisis.

    7. The Kareken-Wallace model makes you very cautious about lender-of-last-resort facilities and very sensitive to the risk-taking activities of banks.

    8. The Diamond-Dybvig and Bryant model makes you very sensitive to runs and very optimistic about the ability of insurance to cure them.

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