stock prices can “talk”

not for everyone

I look at the prices of the stocks I hold every day.  Sometimes, but not always, I’ll look several times intra-day.  The advent of smartphones has made this possible for everyone to do, both for US and foreign stocks.  This is so, almost no matter where you are.

It takes a substantial amount of self-control and emotional discipline to do this productively.  I’ve seen almost every professional investor I’ve worked with, including myself, at one time or another mesmerized–and paralyzed into inaction–by staring at random fluctuations of stocks marching across the screen that’s virtually always on your desk.  The only short-term cure is to turn the machine off.  Otherwise, it’s kind of like watching a trashy TV show.  You know it’s a waste of time but you’re sucked in.

With TV, this compulsion to watch may come when you have other, unpleasant, stuff to do.  For investors, it’s typically when plans have gone awry and you’re hoping against hope that a miracle will happen and you’ll see the situation reversing itself on your computer.  It never works.

Still, there’s sometimes information to be gleaned from stock prices.  Sometimes, the movements are unusual in that they’re not random.  The only way you can tell is by checking them regularly.

how I learned

My first international portfolio job, managing holdings in smaller (that is, non-Japan) Pacific Basin markets, was also my first time working in non-US markets.  Every morning my boss would call me into her office.  She always had a report showing prices and volumes for all the major stocks–whether we held them or not–in all the areas I was responsible for.

She would name a stock.  I had to tell her the stock price change, in dollars and cents and in percentage terms, the trading volume and who the major brokers were who were active in the stock–both on the buy and sell side.  I also had to say how the trading in this stock compared with the trading in similar stocks in the same industry.

This grilling went on for 15-30 minutes, every day for several months.  I stopped having to do this, I think, when I started to give my boss significant information that she didn’t already have.  Although I wouldn’t have described the process as pleasant, my boss forced me over a period of time to try to distinguish between random and information-laden price/volume data and to think about and improve my analytic/intuitive capabilities in this area.  Otherwise, I might still be in that room!

an (obvious) example

A number of years ago, I owned a Canadian energy royalty trust.  The stocks were primarily owned by Americans attracted by high income.  I bought after they collapsed when Canada announced the payouts were going to become subject to Canadian income tax.  The stock I bought had a 14% dividend yield that was slated to be gradually reduced to 8% as the new income tax was phased in.

One afternoon, very close to 4pm, someone placed a million share order, at the market, in the stock.  The US$20 million that the order represented amounted to about half a day’s volume and was maybe 100x the size of the typical order.  The broker who got the order seemed to do the minimum legally required to find stock away from his in-house market maker and then filled the order, pushing the stock price up about 5% in the process.

This trade screamed that something unusual was going on.  Maybe you should  think twice before saying someone with $20 million to spend on a single stock is a total idiot, but this trade was done in a way that would humiliate any professional trader.  So either the buyer was an idiot by entering a huge order with no price sensitivity, or he knew something that the market wasn’t yet aware of.  The “something” also had to be such that even waiting until the next day was an unacceptable risk.

A few weeks later, the stock was bid for by a Middle Eastern sovereign wealth fund at a 25% premium.

why I’m writing about this today

As regular readers of this blog will know, I like the casino industry–because it’s simple to analyze–and I own both WYNN and 1128 (Wynn Macau).  Overnight, 1128 was up 8.7% to HK$15.98, after hitting an intra-day high of HK$16.40.  The stock just doesn’t normally move more than a few percent in a day.

Sands China (1928) and Galaxy Entertainment (0027) were both up 4.6%.  The Hang Seng, in contrast, was up 1.2% and its China Enterprises index was up 1.5%.

These are all unusual price movements, although 1128 jumps out as extraordinary, especially since all three stocks have been star performers in the Hong Kong market this year and are all trading at relatively high PE ratios.

What’s going on?  My guess is that information is leaking out that the Golden Week holiday has gone surprisingly well for the Macau casinos–and especially so for the American-run ones.

What am I doing as a result?  I’m hanging on to my entire 1128 position longer than I would otherwise.  In my analysis of the Wynn-related companies posted earlier this year, I had used a sum-of-the-parts method to look at WYNN.  I started with the idea that HK$15 (20x what I estimated 2010 eps would be) was a fair price for 1128.  Although I may not have written it, I’ve been thinking that HK$18 (same multiple, eps up 20%) is a reasonable first target for Wynn Macau for 2011.

Ordinarily, I’d be selling a portion of the 1128 I hold, maybe with a limit order of HK$16.50, hoping to buy it back later on at a lower price.  I think I’m going to wait and see, instead.

Addendum:  WYNN gained 8.5% in New York trading on Monday in a flat overall market.  If we figure that 1128 represents at current levels about 70% of the market value of WYNN, the move up in 1128 is the equivalent of a 6% rise in WYNN.  The “extra” 2.5% is the interesting part of the parent’s performance.

Leave a Reply