They say... it never rains but pours...
So what happened?
- thuo & crooks were suspended thus freezing over KShs 100mn of investors' funds. Other investors at other broker firms bailed out of fear of a contagion of collapsing brokers. The CMA does not produce a (public) report that helps us sort the wheat from the chaff.
- Prices rose too high, too soon. The expectations for splits & bonuses led to price increases that were unjustified. Profits not splits/bonuses should drive share prices.
- Banks have pulled back on loans for stocks. Decreased liquidity means fewer trades & a drop in prices.
- Valuation mismatch. Valuations were out of whack & they are pulling back. Most shares remain too expensive.
- Economy growth was 6% (2006) from 5.3% (2005) which is not a spectacular rate of growth. Furthermore, a growth rate of 6% is nothing to be proud of for our small economy! We need rates of 10% annually over 25 years to see a real difference!
As a comparison, India's was 8% while China's was 9%.
- Brokers cut back on credit to customers i.e. no cash = no play. This has led to reduced trades. Some brokers forced the sale of shares to cover customers' debit balances thus increasing supply of shares with a consequent reduction in prices.
All in all... this was GOOD for the market... Why?
- CMA & NSE will be (hpefully) forced to police the brokers. It is time for either new blood or mergers among the brokers. There should be a minimum capital requirement for brokers.
- Pullback of credit is good but it needs to be reintroduced in limited doses with a high margin requirement. Many speculators will be shut out but they are needed to provide liquidity!
- The govt can stop crowing about the stockmarket's gains & start providing real impetus to the economy by supporting infrastructure development which will boost the economy & stockmarket.
I expect further price drops for many shares but that will allow for investors to buy in at better prices. I hope the govt continues with the divestiture since this allows businesses to tighten their belts & act in the best interests of the shareholders NOT the cronies!
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