You are right... :)

It is of utmost importance for those who play the stock market to treat everything (eg. differing views)
in an impersonal manner. Because if one does, it as good as a guarantee to lose.

If one is easily agitated, it clearly shows one's approach in the stock market is wrong.
One must be absolutely objective and not get upset or angered by anything which do
not conform to our own prejudices...  

THE Australian arm of a US broking house has been circulating a note that clearly indicates that local stock Babcock & Brown was financially vulnerable, at a time when investors appear to have been short selling Babcock shares.

Contrary to suggestions overseas hedge funds have been ganging up to short sell stocks they had analysed closely, the desk note from Lehman Brothers Australia executive Paul Davenport noted the company's stock code, apparently as a guide for investors overseas who were not familiar with the company.

Regulator ASIC has been aiming to reassure a nervous share market by cracking down on any rumour-mongering that could be used to depress companies' share prices -- a problem that has stuck a number of corporates in recent weeks, particularly Babcock, Allco and ABC Learning.

The Lehman Brothers Australia desk note dated March 5 had the problem that by the time it went out, B&B chief executive Phil Green had already moved to change his company's financial stucture to repair the chinks in its financial armour, although it was only announced afterwards. The note and an accompanying spreadsheet were titled "margin debt scenario", which focused on Babcock & Brown's alleged vulnerability to margin loans.

On March 7, Mr Green tried to reassure the market that the group was "comfortable" with its positions relating to the funds and had no need to sell its stakes in them and no intention of doing so.

As the stock kept falling, Mr Green tried something else: on March 10 he revealed that it had been systematically reducing its margin loan from $631 million since December 31, and to date had retired more than $250 million of short-term loans on its listed vehicles.

There is little doubt that the Lehman note added to fears in the market that Babcock stock was facing margin calls, particularly given that the March 3 spreadsheet, which is understood to have been accurate given the information that was then publicly available, showed that the loan to valuation ratio for the collateral on Babcock's margin loans had blown out from 57 per cent to 74 per cent since December 31.

The norm for margin loans is LVR of 70 per cent, the note said.

"If the value of the listed associates keep dropping, the LVR might continue to go up and when it is above 70 per cent, there will be increasing likelihood of a margin call."

The attached Excel spreadsheet listed 15 Babcock-related entities, including Babcock & Brown Power, Babcock & Brown Infrastructure, Jackgreen and Sydney Gas. It said: "Attached is an Excel file that highlights the calculations -- it is fluid, it will update from Bloomberg."

It concluded: "The bulls will argue Babcock doesn't have a problem. The bears will say if it was 57 per cent in December and 74 per cent now, then this is a worrying trend!"

The note and the Excel spreadsheet bases those LVR estimates on statements in B&B's latest financial accounts, which show the value of the listed associates at December 31, 2007, at $1.1 billion, and the margin loan at $631 million.

But as the market learned on March 10, B&B had been reducing its margin loan and so the $631 million figure was incorrect.

If the spreadsheet had included that information, the LVR would have been 45 per cent instead of the 74 per cent recorded on the excel spreadsheet. This 30 per cent differential kept the stocks well away from margin calls.

Responding to questions from The Australian last night, Mr Davenport said that among his hedge fund and fund manager clients,"everyone has been interested in the margin loan situation with various companies".

He said the note was "a way of clarifying the exact margin situation with this company".

Mr Davenport said he believed the problem for B&B was a "potential, not an imminent" risk because the company had "unrestricted cash and undrawn capacity that could be used to pay off the margin loan, which is what happened".

"Obviously this cash can be counted against any loan and I was aware this cash existed.

"Subsequently Babcock decided to use the cash plus get a new loan from Deutsche to pay off the margin loan.

"That is why I used Dec 31 and published accounts. It is the right thing to do when making such calculations."

He said that he had not seen any short selling in Babcock recently because "there has been no borrow available for over a month".

There are various ways to short sell stock but the most common one is to borrow shares from share custodians holding them on behalf of institutional investors.