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Predictions a case of 'analyse this'

Despite some rallying, confidence is a luxury investors cannot afford in an environment of sharemarket volatility.

Despite some rallying, confidence is a luxury investors cannot afford in an environment of sharemarket volatility.

CONSIDER the symptoms: Sudden and irrational bouts of surging optimism and reckless spending suddenly displaced by an overwhelming sense of dread and recrimination, sparking an immediate austerity drive where everything is offloaded at fire sale prices.

Front up to a psychiatrist in this condition and you could find yourself heavily medicated and confined for a lengthy period.

But that's been the pattern across global markets throughout August as mass hysteria has sent emotions oscillating on almost a daily basis with dramatic reversals of fortune in either direction.

And we've still got more than a month before we hit October, that cursed time when things really tend to turn ugly.

On the local front, we've begun to experience a new phenomenon where individual companies have become subjected to wild swings with overly large rises or falls, sometimes against the run of trade. During the financial crisis three years ago, heavy selling was relatively uniform across the market, as global credit dried up. Individual sectors such as the banks came in for more of a pasting as did any company that had an overly large debt exposure.

In the past month, however, there have been two quite distinct forces at work. Citi analyst Nick Morton, who has constructed an "Earnings Surprise Model for Australia," notes that while global macro forces have created volatile trading conditions and dragged the broader indices lower, there has been a notable increase in stock-specific volatility, where individual companies have come under attack.

Prior to the reporting season, his model anticipated 90 companies delivering negative or very negative earnings surprises with just 30 anticipated unveiling either positive or very positive results. With just a few days to run, it would appear the model has largely been on the money.

In an effort to capitalise on the bipolar condition gripping investor psyche, it would appear funds managers many of whom are mandated to be fully invested have locked in a trading strategy based on the outlook statements for many of our top corporates.

They have been madly selling anything with a faint whiff of uncertainty about the future while simultaneously piling into those reporting even slightly better than expected results or those holding a glimmer of hope.

While an obvious strategy, the sheer volume of trades has begun to heavily skew price movements towards the extreme.

Among the headline acts of the past few days have been surfwear group Billabong International and media operation Seven West, both of which encountered enormous trading activity immediately after reporting their earnings. In the case of Billabong, the earnings weren't flash and were well shy of forecasts. But the company's reluctance to provide any guidance for the year ahead not entirely unreasonable given the outlook for the US, European and Japanese economies suddenly sent the analysts and traders into a panic.

Its stock plummeted a mind-boggling 26 per cent last Friday as the market took a dive, dropping 3 per cent with heavy losses across the board.

The Billabong rout continued Monday and Tuesday, extending losses to 36 per cent, even as the broader market recovered on Tuesday. Yesterday, though, the tables were reversed. The general market foundered but Billabong surged 10 per cent.

Seven West also bucked the trend yesterday. It genuinely surprised the market with a much stronger than expected earnings result, a 19.1 per cent improvement and well above consensus forecasts.

While you could argue Seven West should have better managed analyst expectations, there is no overlooking the stunning rise in its stock price yesterday.

Up more than 20 per cent at one stage, it finished the day 18.2 per cent higher. Among other media stocks, a handful also moved higher, although others did not. It is probably worth noting that Seven's bounce yesterday followed a near halving in its stock price in recent months, again highlighting the extreme volatility in the market right now.

That hair-trigger temperament is likely to continue for quite some time.

The latest survey of investor confidence by Global Proxy Solicitation and the Melbourne Institute recorded a huge drop between May and August. The latest survey, conducted in the first week of August when global markets began to wobble, shows a 14.6 per cent decline from May and a 20 per cent drop since August last year.

Melbourne Institute's Professor Guay Lim says the survey, which has been tracking shareholder confidence for two years and which has become a reliable leading indicator, indicates investors expect shares to remain weak for months ahead.

As the earnings deluge continued yesterday, it became clear that even half-decent results were not being rewarded by shareholders.

Qantas, for instance, almost doubled its earnings which were at the top end of guidance and above that generally expected by the analysts.

But its refusal to provide forecasts or an outlook caused its share price to slip into reverse.

One company, of course, that did manage to deliver a better than expected result after the market closed was BHP Billiton.

The consensus was for $US22.1 billion. Instead it delivered $US23.6, a respectable but not huge difference in percentage terms.

But it's still $US1.5 billion in real cash, the kind of headline number most chief executives can only ever dream.


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