Thursday, 1 March 2012
Feb 06, 2012
The free fall of the Dhaka Stock Market for a while now has inflicted such exorbitant losses on ordinary investors that some investors have even paid the ultimate price (taking their own lives). Clearly the human sufferings are heart wrenching. But the world of money and finance is not driven by compassion and fellow feeling, instead the driving principle is ruthless passion for financial riches. As such, beneath the ashes of the burnt down market lies the glitter of future gold rush.
Of course no one has the crystal ball to predict the future course with certainty. In my humble opinion though, the Dhaka Stock Market is possibly in the process of bottoming out soon. At times such as this, disciplined investors usually invest some of their investable money in stocks with solid fundamentals even in the midst of a general economic downturn, dwindling foreign exchange reserves, rising inflation, mounting government debt, escalating political instability and deteriorating law and order circumstances. One such stock may be Grameen Phone (GP).
Disclaimer: I am not liable for any loss that may incur following an investment strategy in light of my commentary.
Dhaka Stock Exchange
February 08, 2012
I am not sure why one would think that the current level of share valuation (DSE General around 4,000) is not a fair valuation by international and worldwide historical standards. Here is a very simple way to think about it. Suppose the total 2011 earnings index of DSE companies is 400. Then a valuation of 4,000 means that each unit of latest earnings is valued at 10. Worldwide average for such a multiple is perhaps around 10-15. The valuation multiple increases with better earnings growth prospect, lower cost of funding, lower inflation, less uncertainty (economic, political, geo-political..), et cetera. Do we have reason to believe that any of these factors are currently favorable for the DSE listed companies as an aggregate?
Beyond the fundamentals, of course, are the psychological factors, foremost of which is confidence that leads to greater risk taking. Do we have reason to believe that the financial statements of the listed companies are quite genuine, the electronic trading system is not manipulated or otherwise compromised, black money that was allowed to be invested with immunity is not being whitened and taken out (note that if I made 100 million in black money, I don't care if I get back even 60 or 50 with immunity, after all it is not truly my fairly earned money, these things happen frequently in casinos around the world including whitening of illegal tenders), corporate insiders are not colluding to crush the price down to buy them back at dirt low prices and then later return to start a manipulated secondary offering at a higher price, et cetera.
One of the critical factors that have exacerbated the bursting of the bubble was also a key factor creating the bubble at the first place. This is namely the enormous amount of margin buying (that is buying a BDT 1,000 stock with only say BDT 400 of your own money) that was permitted for a long time and too high a proportion of bank assets that could be held in stocks. When a bubble gets busted (it sure does, sooner or later), the process of de-leveraging then creates a vicious downward spiral. Banks are of course highly levered to start with (funded by mostly deposits, with perhaps 10%-20% shareholder equity). Already fully invested, investors (ordinary and institutional) would have no other choice than to keep liquidating. Very ruthless, but if you used 70% borrowed money, it only takes a 30% reduction in price for you to get wiped off. In
Dhaka, the prices of course have dropped by more than 50% by now from their highs.
Fixes for the
Dhaka Stock Market
February 09, 2012
One of the things that this time policymakers need to pay a lot more attention to and then remain vigilant is:
"PREVENTION IS BETTER THAN CURE"
In other words, to avoid repeat of the "free fall", the best cure is to avoid the repeat of "free rise" at the first place.
By the way, some of us have argued long in a similar vein to arrest population growth for a tiny country such as ours. Like the stock market, if we keep expecting the best (market always going up, new and old investors will keep pouring money, population analogy: our economic growth, domestic food production, physical infrastructures, FX reserve, .. , will keep rising fast enough to feed and improving the living standards of an ever growing population) and not prepare for the worst by vigorously and proactively arresting the problem right now, we might be heading for a disaster that will be much more pervasive and beyond any rescue. I can see similar complacency in other critical areas such as power supply, transportation infrastructure, environment,..
Coming back to the stock market, trying band aid solutions in a capricious manner have not achieved any result, and is unlikely to produce any result. It is impractical and is also not conducive in the long term to artificially/synthetically induce a rally. In fact, these band-aid like fixes have contributed to further wealth appropriation of ordinary investors. Personally, I know some relatives who were advised by the brokers to average their cost down by investing more money when DSE was still around 5,200, and then they were discouraged to sell when it temporarily rose to above 6,000. Meantime they have borrowed more money against their home and are now facing grave financial circumstances.
A fundamental change in our mindset is needed to start the process of rationality and rejuvenation in the market. This is, namely, the job of the Government and its regulatory agencies is not to aid reversal of market direction (rise or fall). The job is fundamentally to create an economic and investment environment and a banking and trading infrastructure that facilitates (not directs) orderly incorporation of business profitability information into share prices and minimizes the risk of legal or illegal market manipulations. It is somewhat confusing, but true, that some forms of market manipulations are perfectly legal, albeit immoral. Legal: If you are a large investor, you can place large buy orders at increasingly higher prices to create a sharp rise, and thereby enticing many noise/momentum traders (people that do not undertake any fundamental investment analysis) to chase this artificially manufactured trend usually with maximum borrowing. The strategic large trader then sits back as money keeps pouring. Once it has reached a much higher feat, strategic trader starts selling in a gradual fashion. The stock price goes back to the level where it was to start with, meantime the noise/momentum traders have lost most of their money as their average buying price is much higher.
TUEsday, April 10 2012
Dhaka Stock Market is Asking for Trouble Yet Again
April 10, 2012
On February 6, 2012, I noted that the Dhaka Stock Market was nearing its bottom. Around that time the DSE General Index hit a low around 3,500. After about two months and a few days, the DSE General Index now stands at around 5,200, that is, about 50% higher than its recent low of around 3,500.
The end of ceaseless bleeding in February and the rise since then has provided much needed relief to investors who survived the brutal downturn. However, in my humble opinion, the pace of the Dhaka Stock Market rise is once again reaching unsustainable level and could usher in another ruthless round of volatility and possibly another sustained down phase. It is difficult to imagine what new and significantly positive economic fundamentals would rationalize such a fast pace of recovery in the market. In the absence of tangible and significantly positive economic drivers in the days ahead, the ordinary investors once again risk losing whatever remains of their sharply drawn down equity.
Interestingly, while the authorities were frantically (and erratically in my view) instituting all kinds of measures to arrest the down turn by way of creating artificially inflated demand for stocks, the same very expansionary measures may turn out to be the principal cause of creating a bubble yet again only to be busted down the road. While re-emergence of confidence in risk taking is healthy, excessive or irrational risk-taking is not and in fact is the certain road to disaster. As I mentioned on February 8 and 9 posts, the preceding bubble was in significant part created by excessive margins and consequent leverage. In the midst of trying to stop the free fall, the authorities have in fact manufactured an even more explosive leverage situation now than before. As always, prevention is better than cure. In other words, the best remedy for avoidance of market crash is to prevent a meteoric rise in security prices that is not rooted in broader economic fundamentals and profitability of the business sector.