Wednesday, March 07, 2007

NSE has jitters - and it is a good thing!

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!

12 comments:

MainaT said...

CT, I don't mind speculators as long as I am in the share already!
Agree on govt divesture, I'd for example prefer that govt sold more its shareholding in KCB than doing a share spilt. Supply and demand woul eventually drive down the price for "mwananchi"

Acolyte said...

Will you become my stockbroker? I need a wise hand in this business!

3N said...

Cold tusker, good analysis. The one thing that has to change is Broker service in Kenya; it is the most frustrating ordeal especially if you are abroad.
For investors the next few months are good since the market will cool off and share prices are falling.
In the mid to long-term Kenya will still have higher than average returns on equity investments.

coldtusker said...

MainaT: Speculation is a necessary component of the markets... it is a price-discovery mechanism... the problem lies when some investors swallow hook, line & sinker!

Aco: You can become a deadly enemy if I lost any of your chumz... Shouldn't you be writing Part 8 instead of trolling blogs???

I will trade you stock tips for an advance copy of "The Drama"... LOL...

3n - I agree since Kenya is growing faster than Western economies but buy selectively.

bankelele said...

I was compiling a to-to lit for regulators :

1. BOC – Carbacid merger decision
2. EA Cables / City Trust share trades
3. Family Finance capital raising
4. Complaints against other brokers (not Francis Thuo)
5. asset backed finance policy

Odegle said...

why is anyone shocked? what we are seeing today is what we predicted many times last year. again the success of ponzi schemes just illustrates what was right or wrng with the NSE last year. most pple we in it for the very short term. kengens IPO made pple believe that it always happens that way. of course much of what you say is also true.

Odegle said...

on another note people do you think we could give a little credence to the politicians allegations that money laundering is indeed happening in the NSE?

MainaT said...

Banks-Reporting requirements-i think their should be a set format for all financials e.g. 3 yrs and all listed cos should report within 3 months of their YE. Also, the issue of refunds. I think CDSC should have an online system allowing investors access to their portfolio-if not it then all the broker s should ahve the same.

Od-basic information will tell you that money laundering does happen at the NSE. Just to look at the requirements to open a CDS a/c and u have your answer.And you don't even need to open a bank a/c.

Msanii said...
This comment has been removed by the author.
Jakarumba said...

Odegle assuming I was involved in the Habib Bank raid in Msa (fortunately no one was murdered)and got a cut of the loot, say Kes. 5 million. I then make a deposit at in D & B's account in Stanbic, then simply place an order to purchase some stocks e.g Sameer at Kes. 15, that translates to about 330,000 shares. With such volumes someone maybe at stockskenya starts talking of a takeover, unknown to him/her its money laundering.

ke said...

CT;

This is what I've been saying over and over again, whenever you accuse me of being an "ivory tower"

Capitalism, at least in the long-term, does not occur in a vacuum. You need the rule of law and it needs to be implemented fairly and squarely.

This is why foreign investors are so afraid of putting their money in "Africa". They'll purchase the natural resources (oil, copper, etc) then, they'll get out.

coldtusker said...

Banks - CMA is doing a lousy job but there is no accountability for most government institutions.

Odegle - Prices were too high but who wanted to listen?
Ponzi schemes inherently fail but, again, who wants to listen?
Drug Money in the NSE? - Could be some but I think there are multiple factors & not solely the drug cash.

MainaT - Wishlist but at least 2 years away unless we get a progressive CEO/MD of the NSE, CDSC & CMA.

KE - I never contradicted your statement.