The Wonders of Asian Small Caps

Yesterday we saw the launch of 2 IPOs which generated significant attention.

Glencore is justifiably interesting as it marks the culmination of a transformation from a an outfit with a somewhat 'questionable' reputation run by Marc Rich to one of the worlds more active commodity traders. This has happened as commodities have become of increasing importance to the world. After a short period (in historical terms) when hard physical assets were derided as being old fashioned (atlas no long contained maps of resources held but of satellite coverage and broadband connections). Today, the importance of oil, iron ore, coal and the like has never been greater. Portfolio investors have created a new asset class, commodity traders are the new financial whiz kids and wars are being fought over access. The ascendency of Glencore has been timed meticulously.

Ironically, the stock fighting for equal billing upon its IPO is Linked In, a company that belongs to the family of companies that resulted in commodities being ignored as of little importance in the 90's. I dont profess to understanding 'LinkedIn'. I am a member, have a few hundred connections, but dont really know how to use it properly, how to trust it and, most importantly, how the company is going to make any money out of me. However, this probably summarises my doubts about Social Media in general. The reality is that the company has first mover advantage to the stock market and the people responsible for buying and selling the stock, are probably more familiar with it than they are with Glencore.

However, whilst these two important IPOs have met with considerable attention, the quality of journalism (and I include sell-side stock analysts here)  has, not untypically, been fairly poor and demonstrated a lack of understanding of the stock markets and how they work. I may have an answer.

Before anyone is allowed to be published, have them take a test with the following question:

Explain the stock price performance between December 2010 and May 2011 in a HK listed stock called Pacific Plywood (0767:HK). This is a stock I owned in the early 90's as a punt. It has really never been about plywood, but more about it being a shell that could be used for something exciting. I sold out years ago, but always have kept an eye on it for fun. At the end of December it was trading around HK$0.05. Then in January, something started happening. In March it had reached HK$4.53. During this period, the stock was suspended for short period, announcements of a rights issue were made, but in the end, nothing particularly exciting happened. Today, the stock is trading at HK$0.096. Not a bad trading range for a few months.

I wont, at least in this post, answer my own  question about what has happened here other than to point out that these moves still happen in Asia (and may well do so elsewhere). Is it market manipulation, is it insider trading, is it fraud........it isn't for me to say, but in my opinion, understanding such moves is an important dynamic in understanding the behaviour of markets. Pacific Plywood may be a world of difference from LinkedIn or Glencore, but today's financial commentators would do well to understand how and why such moves happen before they start writing about the reasons for an IPO's pricing and its first day performance.