Prudential-Bache errs in matter of conversion

PUBLISHED : Thursday, 01 October, 1998, 12:00am
UPDATED : Thursday, 01 October, 1998, 12:00am

One wonders sometimes whether the job title 'analyst' is given such esteem by the investing public that almost anything presented in a printed investment report is treated as having validity.

One wonders because sometimes these reports can draw a thunderous argument out of the thinnest vapour and yet convey the impression that it is all well thought out.

A good example is Prudential-Bache Securities' most recent issue of its Asia Weekly which, under the heading 'Hong Kong forex reserves drop may hit confidence', argues that Hong Kong's foreign reserves of US$87.6 billion at the end of August could drop to US$20 billion by the end of 1999.

The first gem in the argument is the assertion that US$30 billion of the decline will come from a surge in the Government's fiscal deficit. This figure of US$30 billion, however, is about 50 per cent more than the Government's entire expenditures last year, leave alone any possible deficit.

A deficit of HK$30 billion is arguable but someone obviously forgot to press the divide key on his calculator and enter the value 7.75 when converting this to US dollars.

Well done, fellows. What's a slight error here and there when you have a case to make? One shouldn't let the facts get in the way of a good story, you know.

But better yet is the assertion that 'our rough estimate puts government spending on equities after August 28 at US$3-5 billion although there are no published figures'.

It's a rough one all right. It's attributed to 'various sources', but you look through the report in vain for anything more than one statement - 'The most obvious indicator is the gap between the September and October futures index, which continues to be as great as 300 basis points.' It staggers the imagination that anyone can possibly think of this as constituting firm evidence of sizeable government intervention.

Yes, it is true that the settlement price of the first month Hang Seng Index contract on the futures exchange has recently shown an unusual premium over the second month contract. The chart below shows this on a weekly average with single-day anomalies eliminated.

But the first explanation that comes to mind is that most speculators on the futures expect the effects of the intervention in August to dissipate soon and bring the Hang Seng Index tumbling down again in October. So far, they have been confounded. They must have been reading Pru-Bache investment reports.

This example's wondrous achievement of logic is cemented with the conclusion 'Whether the intervention can sustain the index is a big question, but one thing is clear: this will speed up the depletion of Hong Kong's foreign reserves, which in turn will hasten the demise of the linked exchange rate.' There you go. It's all been decided.

Never mind that the Government has denied intervening in the equity market since August 28, that it risks being made to look foolish if it intervenes so soon again and that stockbrokers scouring their screens have come up with no sign of intervention.

Pru-Bache has spoken.