Monday, October 28, 2019

Thoughts #18: Money Flees When You Need It

The recent collapse of Thomas Cook brought about an old revelation: money flees when you most need it and vice versa ie money attracts money until extraordinary investing returns are longer possible. On the former, Thomas Cook's share price below shows the story well.



Thomas Cook, the 178 year old company was not in any kind of trouble until late last year. Its share price was healthy and it even added airline capacity to capture strong demand during last year's summer. As usual, it was the bond markets that first saw the warning signs. Thomas Cook bonds started showing signs of distress when its prices traded down significantly in Oct 2018. Once the rumour came out that the firm might be in trouble, everyone withdrew support...

“There’s been a continuous knock-on effect,” said Richard Clarke, an analyst at Bernstein. “Their suppliers get wary, hotels ask them for more money up front, consumers become less willing to book with them . . . I’m sure that’s why we’ve seen continuous increases in the size of their rescue package.”

The excerpt from FT above captures it all. The financial industry works as such. Not only do suppliers and banks withdraw support when needed, short sellers short the stock, bond traders either sell the bonds or buy insurance against their bonds, further pushing up the price to insure and reinforce the notion the company could be in trouble.

Olam Lives!

It was the same story for Noble. When there's news of trouble, everything just go downhill, fast. The story for Olam panned out quite differently though as it got help from first Temasek and then Mitsubishi Group, two powerhouses that changed its destiny. When there's enough money, it attracts more. Today, Olam trades at a healthy SGD 6bn market cap.

The lesson learnt (or to relearn) here: leverage is a double edge sword. Be doubly careful of companies with too much debt, payables, hidden liabilities. When money smells trouble, it flees. A vicious cycle forms, bringing down businesses quickly. When things go too well, money attracts money, the big gets bigger and the strong gets stronger.

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