The President presented the 2009 budget to a joint sitting of the National Assembly on 3rd December. The benchmark oil price used was $45/barrel. The Federal government will spend N2.87 trillion from a projected revenue of N1.78 trillion. Consequently, the estimated deficit is N1.09 trillion.
The deficit could be financed via several means which include the devaluation of the Naira and internal and external borrowing. Since the announcement of the budget, the Naira has depreciated from N120 to $1 to N140 to $1 a decline of more than 16.5%. The market is therefore anticipating a devaluation of the Naira in 2009 hence the sudden increase in demand of dollars in the Foreign exchange market. The Central Bank has since jumped in to “defend” the Naira. How long this defense will last is anybody’s guess. However, it is safe to assume that unless oil prices rises above $65/barrel, the Naira will remain at N140 to 1$ or fall further.
The budget does not offer much hope for the capital market. The Federal government needs to borrow to fund its deficit. It is quite obvious that banks don’t have much to lend, since a large chunk of their loanable funds are trapped in the comatose Nigerian Stock Exchange (NSE). This further tightening up of liquidity means interest rates will not ease up anytime soon.
As the Naira depreciates, inflation is likely to go up further reducing purchasing power and Naira liquidity. This will lead to less cash being available to individual investors to speculate on the NSE.
The various State governments will soon present their 2009 budget. Just like the Federal government, most of the states will be running a huge deficit in 2009 which will largely be financed through borrowing. The outlook for 2009 can therefore only get worse.
My conclusion from the above is that 2009 will also not be all that rosy for the NSE. The 51% decline so far recorded in 2008 is not likely to be repeated in 2009. However, I don’t expect a more than modest gain. The Index will probably not recover to its early 2008 level until in 2010 or beyond.
The one thing that could change this rather gloomy outlook is a change in oil price. If the average oil price for the year ends up being above $65/barrel, then the capital market might benefit from spill over effect. We can only hope it does.
Tuesday, December 16, 2008
Thursday, December 11, 2008
A Year to Forget
On 6th November, the All Share Index (ASI) went up for the first time in 43 trading days. It was a welcome respite. The relief lasted only 8 trading days during which the ASI gained 12.6% and closed at 38,018 on 17th November. Since then it has been all downhill once again.
From 17th November to 11th December the Index lost a further 23%. The ASI closed at 29,262 on 11th December, a year low. The last time the Index was this low was in August 2006.
Based on the records for the Index from 1995 to 2008, this year is on track to close with the biggest decline for the Index. The worst so far was 1998 which recorded an 11.9% drop. The cumulative losses between 1997 and 1999, the 3 bear years was 27.5%. The year 2008 is set to eclipse this. 2008 is indeed a year to forget.
What we are witnessing is unprecedented. Our very own financial Tsunami, the like of which we have never seen. Oil price has collapsed, the Nigerian Stock Exchange ASI is down 49.5% year to date and our banks are suffocating under the weight of margin loans. Suddenly it is no longer so rosy for the banks with Zenith, Ecobank and Skye all reporting a poor quarter July to September 2008. I am sure others will follow in due course.
The best thing to do now for those already invested is to do nothing! It is too late to sell to cut losses assuming you can find a buyer. And with the meltdown not showing any sign of slowing down, averaging down is not ideal.
As 2008 draws to a close, i am looking forward to 2009 with the hope that it can’t get worse. Or can it?
From 17th November to 11th December the Index lost a further 23%. The ASI closed at 29,262 on 11th December, a year low. The last time the Index was this low was in August 2006.
Based on the records for the Index from 1995 to 2008, this year is on track to close with the biggest decline for the Index. The worst so far was 1998 which recorded an 11.9% drop. The cumulative losses between 1997 and 1999, the 3 bear years was 27.5%. The year 2008 is set to eclipse this. 2008 is indeed a year to forget.
What we are witnessing is unprecedented. Our very own financial Tsunami, the like of which we have never seen. Oil price has collapsed, the Nigerian Stock Exchange ASI is down 49.5% year to date and our banks are suffocating under the weight of margin loans. Suddenly it is no longer so rosy for the banks with Zenith, Ecobank and Skye all reporting a poor quarter July to September 2008. I am sure others will follow in due course.
The best thing to do now for those already invested is to do nothing! It is too late to sell to cut losses assuming you can find a buyer. And with the meltdown not showing any sign of slowing down, averaging down is not ideal.
As 2008 draws to a close, i am looking forward to 2009 with the hope that it can’t get worse. Or can it?
Sunday, November 23, 2008
Respite
The last two months were a nightmare for investors on the Nigerian Stock Exchange (NSE). The NSE All Share Index (ASI) went down for 42 consecutive trading days loosing 32.4% in the process. Value of transactions also plummeted and stocks became almost illiquid as there were no buyers in sight. On November 5th the ASI closed at 33,754 down 41.8% for the year and a new 52 week low.
It was therefore a huge relief when on 6th November the ASI went up by 0.35%. A small but giant leap! The collective sigh of relief by investors was almost audible in the papers the next day.
The uptrend lasted 8 days with the ASI gaining 12.6% closing at 38,018. Another downward trend started on 18th November with the ASI loosing 8.8% in 4 days. This was expected as the ASI this year tend to move up or down for a maximum of 8 trading days (except during the 1% downward rule).
Despite the current negative trend I believe most investors were very happy to have had 8 days of respite. The question now on everybody’s lips is will the previous low of 33,754 be breached? A breach will not bode well for the market in general. The next two to three trading days will provide an answer.
In the meantime, it is best to sit out this trend until it is clearer where we are heading. The only clear thing so far is that barring a miracle, the Index will close down for the year. That will be for the first time since 1999. Ouch…..
It was therefore a huge relief when on 6th November the ASI went up by 0.35%. A small but giant leap! The collective sigh of relief by investors was almost audible in the papers the next day.
The uptrend lasted 8 days with the ASI gaining 12.6% closing at 38,018. Another downward trend started on 18th November with the ASI loosing 8.8% in 4 days. This was expected as the ASI this year tend to move up or down for a maximum of 8 trading days (except during the 1% downward rule).
Despite the current negative trend I believe most investors were very happy to have had 8 days of respite. The question now on everybody’s lips is will the previous low of 33,754 be breached? A breach will not bode well for the market in general. The next two to three trading days will provide an answer.
In the meantime, it is best to sit out this trend until it is clearer where we are heading. The only clear thing so far is that barring a miracle, the Index will close down for the year. That will be for the first time since 1999. Ouch…..
Friday, October 31, 2008
Meltdown
October 2008 will go down as one of the worst months for the Nigerian Stock Exchange (NSE) All Share Index (ASI). The Index closed at 36,326 down 21.4% from its opening. This is the worst performance in any one month between 1995 and 2008. The Index has now lost 37.4% year to date and is down 45% from its peak in March 2008.
Value of transactions has all but collapsed. Only N39.7 billion was exchanged in October an average of less than N2 billion a day. This is the worst so far this year and a far cry from the N388 billion exchanged in February 2008. Another record set in October was that the Index went down throughout the month. There was no single positive day for the Index. It was so bad that on some days no stock gained. Another unwanted record!
The 1% cap on downward movement on prices was removed on 28th October which allowed October to set some of the above records. Despite the meltdown, the removal of the cap is a welcome development. We need the market to bottom out sooner rather than later. The 1% cap was merely postponing the inevitable.
By the end of the week most of the banking stocks were selling at more than 50% off their 52 week high. The ASI itself is back to the level last seen in January 2007. If care is not taken, all the gains of 2007 will be wiped out by the end of next week.
What we witnessed in October is probably a once in a generation event. The NSE has been wrecked by the financial tsunami tormenting the world financial markets. The collapse of markets all over the world in the last few months precipitated by the sub-prime mortgage crises in the United States has confirmed the impact of globalization and the interconnectedness of world economies.
Next week will be interesting. I shudder to think that another 25% decline is in the offing. The worse is surely over. Or is it not? Stay tuned.
Value of transactions has all but collapsed. Only N39.7 billion was exchanged in October an average of less than N2 billion a day. This is the worst so far this year and a far cry from the N388 billion exchanged in February 2008. Another record set in October was that the Index went down throughout the month. There was no single positive day for the Index. It was so bad that on some days no stock gained. Another unwanted record!
The 1% cap on downward movement on prices was removed on 28th October which allowed October to set some of the above records. Despite the meltdown, the removal of the cap is a welcome development. We need the market to bottom out sooner rather than later. The 1% cap was merely postponing the inevitable.
By the end of the week most of the banking stocks were selling at more than 50% off their 52 week high. The ASI itself is back to the level last seen in January 2007. If care is not taken, all the gains of 2007 will be wiped out by the end of next week.
What we witnessed in October is probably a once in a generation event. The NSE has been wrecked by the financial tsunami tormenting the world financial markets. The collapse of markets all over the world in the last few months precipitated by the sub-prime mortgage crises in the United States has confirmed the impact of globalization and the interconnectedness of world economies.
Next week will be interesting. I shudder to think that another 25% decline is in the offing. The worse is surely over. Or is it not? Stay tuned.
Tuesday, October 28, 2008
Back to Sanity
After two months of the bizarre ill advised 1% cap on downward price movement of stocks on the Nigerian Stock Exchange, the rule has been modified to its previous position. Effective 28th October stocks can move up or down by 5% which was the previous position before 27th August.
The Index promptly fell to 40,163 loosing 3.5% from its previous days close. That is all well and good. The sooner most stocks bottom out the better for everybody. The daily downward slide of the last 36 consecutive trading days has been very damaging to investors’ confidence. The continuous daily slide was largely due to the 1% cap. Now it is gone and hopefully the market will bottom out within the next 20 trading days at worst.
Another rule that seems to have been modified is the 100,000 units rule before an upward or downward movement in price. This has reportedly been modified to 50,000 units. Although this is yet to be confirmed, it will also be another positive development. Some “illiquid” stocks have been stagnant for a while due to this rule.
It will take some time before confidence will return and investors start pouring money into the market. However, the above measures will help boost confidence and hopefully we would see some upward movement in the Index before the year runs out.
In the meantime, my eyes are on the value of daily transactions which have been very low this month. Until this goes up significantly, there will be no meaningful recovery.
The Index promptly fell to 40,163 loosing 3.5% from its previous days close. That is all well and good. The sooner most stocks bottom out the better for everybody. The daily downward slide of the last 36 consecutive trading days has been very damaging to investors’ confidence. The continuous daily slide was largely due to the 1% cap. Now it is gone and hopefully the market will bottom out within the next 20 trading days at worst.
Another rule that seems to have been modified is the 100,000 units rule before an upward or downward movement in price. This has reportedly been modified to 50,000 units. Although this is yet to be confirmed, it will also be another positive development. Some “illiquid” stocks have been stagnant for a while due to this rule.
It will take some time before confidence will return and investors start pouring money into the market. However, the above measures will help boost confidence and hopefully we would see some upward movement in the Index before the year runs out.
In the meantime, my eyes are on the value of daily transactions which have been very low this month. Until this goes up significantly, there will be no meaningful recovery.
Saturday, October 25, 2008
Illiquid
Our stock market has become illiquid. There are no buyers. Value of transactions has dried up. The daily average Naira value of trades in October has been less than two billion Naira. The All Share Index has continued its downward slide unabated.
If anybody had told me six months ago that Access Bank will be selling at less than ten Naira I would not have believed it. Access closed at N9.88 on 24th October, a 20 month low. The 2009 forward PE ratio of Access is 6.1 while the 2009 forward dividend yield is 9.8%. It is not just Access, most of the quoted banks are selling at what appears to be a bargain. A few are still pricey (eg Union and Wema). The only rational explanation for this collapse is that the “Financial Tsunami” that has wrecked havoc in Europe and US is taking its toll on our banks.
The main fear I have however, is that the short term profitability of some of the banks could be compromised due to their exposure to margin loans. If the stock market does not recover to its February level within the next six months, some banks will be forced to write off several billions of Naira.
In the light of the above, it would be prudent to discount the forecast profit of the banks in carrying out valuations. Using Access bank as an example and discounting their forecast earnings by 25%, the forward 2009 PE ratio becomes 7.8 and the dividend yield 7.9%. The result still shows that Access is currently selling at an attractive price.
For the long term investor (at least 3 years horizon) who is not exposed to Nigerian banks, and who has an appetite for risk, this is a good time to consider buying selectively. The key word is selective. Valuations should be done with discounted forecast earnings. For those of us who are already in, my advice is, stay put.
Other sectors worth watching are foods and beverages and healthcare. These two sectors are generally immune to a slowing economy as we must all eat and health is wealth. The healthcare sector is still pricey but could be attractive if its looses another 20%. Dangote Sugar in the Foods & Beverages sector is attractive and worthy of consideration.
Slowly, slowly the market is looking attractive, perhaps even presenting us with an opportunity of a life time. Do we have the confidence, courage (and dare I say – liquidity) to grab it? I hope so.
If anybody had told me six months ago that Access Bank will be selling at less than ten Naira I would not have believed it. Access closed at N9.88 on 24th October, a 20 month low. The 2009 forward PE ratio of Access is 6.1 while the 2009 forward dividend yield is 9.8%. It is not just Access, most of the quoted banks are selling at what appears to be a bargain. A few are still pricey (eg Union and Wema). The only rational explanation for this collapse is that the “Financial Tsunami” that has wrecked havoc in Europe and US is taking its toll on our banks.
The main fear I have however, is that the short term profitability of some of the banks could be compromised due to their exposure to margin loans. If the stock market does not recover to its February level within the next six months, some banks will be forced to write off several billions of Naira.
In the light of the above, it would be prudent to discount the forecast profit of the banks in carrying out valuations. Using Access bank as an example and discounting their forecast earnings by 25%, the forward 2009 PE ratio becomes 7.8 and the dividend yield 7.9%. The result still shows that Access is currently selling at an attractive price.
For the long term investor (at least 3 years horizon) who is not exposed to Nigerian banks, and who has an appetite for risk, this is a good time to consider buying selectively. The key word is selective. Valuations should be done with discounted forecast earnings. For those of us who are already in, my advice is, stay put.
Other sectors worth watching are foods and beverages and healthcare. These two sectors are generally immune to a slowing economy as we must all eat and health is wealth. The healthcare sector is still pricey but could be attractive if its looses another 20%. Dangote Sugar in the Foods & Beverages sector is attractive and worthy of consideration.
Slowly, slowly the market is looking attractive, perhaps even presenting us with an opportunity of a life time. Do we have the confidence, courage (and dare I say – liquidity) to grab it? I hope so.
Thursday, October 9, 2008
Financial Tsunami
A financial tsunami is currently sweeping the world, wrecking havoc and threatening to significantly damage entire economies. We are definitely in the middle of a major financial crisis the like of which the world has not seen in generations.
It all began in the US last year when home owners with sub-prime mortgages began defaulting on payments. This led to cash flow problems for a lot of banks which led them to squeeze credit. A large number of these banks had to take big losses which led to the melt down of their share prices and ultimate collapse of some Wall Street speculators. Major casualties include Bear Sterns, Lehman Brothers, AIG, Freddie Mac, Fannie Mae, Washington Mutual, IndyMac and the list goes on.
The greed of Wall Street and living beyond one’s means lifestyle of Americans has finally come home to roost sucking in the entire world. Due to globalization, what is essentially a crisis manufactured in the United States, has become a major world crisis. American banks have bundled up these toxic mortgages and sold them to banks in Europe & Asia. Sovereign funds not fully grasping the full magnitude of the crisis pumped in money into several American financial institutions in the last one year. They are now forced to write off these bailouts as several of these companies go bankrupt or are taken over for peanuts. Oil prices have gone south on fears of world recession threatening economies of major oil producers including Nigeria.
Our capital market in Nigeria has not been spared. The difference however is that our banks are not really distressed. The fall in share prices is more due to market liquidity drying up than because our banks are distressed. This is why the recent suggestion by Nigerian Stock Exchange (NSE) that banks should bail out the capital market is dangerous. How can NSE suggest our banks should risk depositors’ money by propping up share prices of quoted companies some of which are over valued anyway? No value will be added to the economy except to enrich a few people in the process. I hope the banks have more sense than to engage in such dangerous speculation.
The drying up of liquidity was probably caused by a combination of many factors including:
1) The exit of foreign portfolio managers from our market between February & June this year.
2) The apparent over valuation of the market which led to the exit of discerning local investors from the market.
3) The global financial crisis which has led to reduction in speculators both foreign and local.
4) The continued slide which continues to undermine confidence scaring away new money from the market in the process.
As we live through this historic crisis, I hope our banks and regulators will learn valuable lessons. Nigerian banks post consolidation are gradually embracing the culture of consumer loans. We see on a daily basis in our newspapers adverts by banks of all kinds of consumer loans. These banks need to ensure their risk management is robust enough to deal with the added new risk they are taking.
The crisis was mostly caused by Wall Street greed and American debt culture. Nigerians and Nigerian banks will do well not to be sucked into this dangerous debt culture whose ultimate outcome is the destruction of wealth and livelihoods.
It all began in the US last year when home owners with sub-prime mortgages began defaulting on payments. This led to cash flow problems for a lot of banks which led them to squeeze credit. A large number of these banks had to take big losses which led to the melt down of their share prices and ultimate collapse of some Wall Street speculators. Major casualties include Bear Sterns, Lehman Brothers, AIG, Freddie Mac, Fannie Mae, Washington Mutual, IndyMac and the list goes on.
The greed of Wall Street and living beyond one’s means lifestyle of Americans has finally come home to roost sucking in the entire world. Due to globalization, what is essentially a crisis manufactured in the United States, has become a major world crisis. American banks have bundled up these toxic mortgages and sold them to banks in Europe & Asia. Sovereign funds not fully grasping the full magnitude of the crisis pumped in money into several American financial institutions in the last one year. They are now forced to write off these bailouts as several of these companies go bankrupt or are taken over for peanuts. Oil prices have gone south on fears of world recession threatening economies of major oil producers including Nigeria.
Our capital market in Nigeria has not been spared. The difference however is that our banks are not really distressed. The fall in share prices is more due to market liquidity drying up than because our banks are distressed. This is why the recent suggestion by Nigerian Stock Exchange (NSE) that banks should bail out the capital market is dangerous. How can NSE suggest our banks should risk depositors’ money by propping up share prices of quoted companies some of which are over valued anyway? No value will be added to the economy except to enrich a few people in the process. I hope the banks have more sense than to engage in such dangerous speculation.
The drying up of liquidity was probably caused by a combination of many factors including:
1) The exit of foreign portfolio managers from our market between February & June this year.
2) The apparent over valuation of the market which led to the exit of discerning local investors from the market.
3) The global financial crisis which has led to reduction in speculators both foreign and local.
4) The continued slide which continues to undermine confidence scaring away new money from the market in the process.
As we live through this historic crisis, I hope our banks and regulators will learn valuable lessons. Nigerian banks post consolidation are gradually embracing the culture of consumer loans. We see on a daily basis in our newspapers adverts by banks of all kinds of consumer loans. These banks need to ensure their risk management is robust enough to deal with the added new risk they are taking.
The crisis was mostly caused by Wall Street greed and American debt culture. Nigerians and Nigerian banks will do well not to be sucked into this dangerous debt culture whose ultimate outcome is the destruction of wealth and livelihoods.
Sunday, October 5, 2008
September
September was a tough month for investors in Nigerian quoted equities. The NSE All Share Index declined for 17 straight days loosing 6.1% in the process and down 20.3% for the year. Value of transactions during the month was a meagre N134 billion, the lowest for the year. Most stocks were on offer throughout the month with no buyers in sight.
The current situation should not come as a surprise given the trend in the last 6 months. The 1% limit placed on downward movement in stock prices has not stopped the decline. What it has succeeded in doing is driving away speculators from the market. Without speculators, liquidity has all but disappeared. In addition, the continued daily slide has continued to weigh on investors mind further draining away their fragile confidence in the market.
The Central Bank of Nigeria announced further measures in September to improve liquidity. These included the reduction in Cash Reserve Requirement and liquidity ratio for banks. So far the new measures have not affected the market positively.
What next? Can it get worse? The reality is that we are in uncharted territory. World markets have been in a state of turmoil throughout the year with almost all markets in negative territory for the year. The good news however, is that Nigerian banks have not been involved in the reckless financial engineering that has threatened the very survival of some US banks.
My advice is to stay out of the market if your horizon is less than 2 years. For those with a long term view, now is the time to consider value investing. There are definitely bargains to be had.
October promises to be interesting. Will the year low achieved on August 26th be breached? We will know in the next two weeks. Stay tuned.
The current situation should not come as a surprise given the trend in the last 6 months. The 1% limit placed on downward movement in stock prices has not stopped the decline. What it has succeeded in doing is driving away speculators from the market. Without speculators, liquidity has all but disappeared. In addition, the continued daily slide has continued to weigh on investors mind further draining away their fragile confidence in the market.
The Central Bank of Nigeria announced further measures in September to improve liquidity. These included the reduction in Cash Reserve Requirement and liquidity ratio for banks. So far the new measures have not affected the market positively.
What next? Can it get worse? The reality is that we are in uncharted territory. World markets have been in a state of turmoil throughout the year with almost all markets in negative territory for the year. The good news however, is that Nigerian banks have not been involved in the reckless financial engineering that has threatened the very survival of some US banks.
My advice is to stay out of the market if your horizon is less than 2 years. For those with a long term view, now is the time to consider value investing. There are definitely bargains to be had.
October promises to be interesting. Will the year low achieved on August 26th be breached? We will know in the next two weeks. Stay tuned.
Thursday, September 11, 2008
Come into my Trading Room - A Review
The book “Come into my trading room” by Alexander Elder is an excellent guide to trading for both the novice and experienced trader. The book is written in clear and accessible language that keeps the reader engaged throughout.
The book is divided into 3 parts. Part 1 is the introduction and sets the stage for concepts covered in the rest of the book. A clear distinction is made between an Investor, Trader and a Gambler. Investing requires a great deal of patience and is long term. Traders make money by betting on short term price swings. There is only one rational reason to trade – to make money. However, some amateur traders get carried away by excitement and forget this fundamental objective.
Part 2 discusses the 3 M’s of successful trading: mind, method and money.
Mind – Trading Psychology
According to Elder, to be a successful trader requires discipline. This is true for most professions but especially true for the markets because there are no external controls. There is no boss to force discipline. You have to do it yourself. Good record keeping and sound training are a must.
Method – Market Analysis
This section concentrates on how to analyze markets using technical analysis. The author recommends using no more than 5 indicators. The key is to select a few core tools that suits one’s style of analysis and trading. Technical indicators can be divided into 3 groups: Trend following, oscillators and miscellaneous. It is important to combine trend following indicators which identify trends with oscillators which identify reversals.
Money – Risk Management
Money management has 2 important goals: survival and prosperity. Accumulate equity by cutting losses short and maximizing gains. A strategy is to determine maximum permissible loss for each trade and maximum loss per month. Elder recommends a maximum of 2% loss per trade and a maximum of 6% loss per month.
The importance of establishing exit points was also emphasized. It is critical to decide exit points before entering a trade. Entries are easy while exits are difficult and separate winners from losers.
Part 3 provides examples of recent trades executed by the author. The author emphasized the importance of keeping goods records of all trades. This helps the learning process and assists in making one a better trader.
In all, “Come into my trading room” is an excellent book and I recommend it to anyone seeking financial freedom through trading.
The book is divided into 3 parts. Part 1 is the introduction and sets the stage for concepts covered in the rest of the book. A clear distinction is made between an Investor, Trader and a Gambler. Investing requires a great deal of patience and is long term. Traders make money by betting on short term price swings. There is only one rational reason to trade – to make money. However, some amateur traders get carried away by excitement and forget this fundamental objective.
Part 2 discusses the 3 M’s of successful trading: mind, method and money.
Mind – Trading Psychology
According to Elder, to be a successful trader requires discipline. This is true for most professions but especially true for the markets because there are no external controls. There is no boss to force discipline. You have to do it yourself. Good record keeping and sound training are a must.
Method – Market Analysis
This section concentrates on how to analyze markets using technical analysis. The author recommends using no more than 5 indicators. The key is to select a few core tools that suits one’s style of analysis and trading. Technical indicators can be divided into 3 groups: Trend following, oscillators and miscellaneous. It is important to combine trend following indicators which identify trends with oscillators which identify reversals.
Money – Risk Management
Money management has 2 important goals: survival and prosperity. Accumulate equity by cutting losses short and maximizing gains. A strategy is to determine maximum permissible loss for each trade and maximum loss per month. Elder recommends a maximum of 2% loss per trade and a maximum of 6% loss per month.
The importance of establishing exit points was also emphasized. It is critical to decide exit points before entering a trade. Entries are easy while exits are difficult and separate winners from losers.
Part 3 provides examples of recent trades executed by the author. The author emphasized the importance of keeping goods records of all trades. This helps the learning process and assists in making one a better trader.
In all, “Come into my trading room” is an excellent book and I recommend it to anyone seeking financial freedom through trading.
Sunday, August 31, 2008
Intervention
For the second time this year, the authorities saw it fit to intervene in the capital market. The market was in a free fall as the All Share Index (ASI) was down 35% from its peak and down 25.5% for the year as at 26th August. The measures taken were effective 27th August.
One positive measure was the reduction in transaction fees. This is a welcome development as the fees charged are rather too high compared to other exchanges. One very negative measure which had an immediate impact was the capping of downward movement of price of all stocks to a maximum of 1% daily. Upward movement was retained at 5% daily. A similar measure was enforced in early June when prices were not allowed to fall for 1 week. No date has been announced for the removal of the 1% cap.
This one way cap is disturbing as it amounts to manipulation. Any capping should be the same both ways. The last time a cap was applied and then removed, the ASI went on a free fall loosing 28% resulting in this new cap. So when will this temporary fix end?
Since the cap, the ASI has gained 10.6% in just three days. Most stocks have suddenly become scarce. Just a day earlier there were no takers but now everybody wants to get in on the action.
I see this capping as an opportunity to exit some weak stocks as prices move up to break even territory. Some stocks showed serious weakness during the bear run and one would be better off selling them.
On the other hand, this is not the time to buy assuming one can even get anything to buy. The constant changing of the rules of the game erodes confidence and discourages long term investing. The authorities have shown they have no appetite for a declining market. Who knows whether they might decide in the future to peg upward movement during a bull run?
My approach is simple. Sell off weak stocks and buy nothing until sanity returns.
One positive measure was the reduction in transaction fees. This is a welcome development as the fees charged are rather too high compared to other exchanges. One very negative measure which had an immediate impact was the capping of downward movement of price of all stocks to a maximum of 1% daily. Upward movement was retained at 5% daily. A similar measure was enforced in early June when prices were not allowed to fall for 1 week. No date has been announced for the removal of the 1% cap.
This one way cap is disturbing as it amounts to manipulation. Any capping should be the same both ways. The last time a cap was applied and then removed, the ASI went on a free fall loosing 28% resulting in this new cap. So when will this temporary fix end?
Since the cap, the ASI has gained 10.6% in just three days. Most stocks have suddenly become scarce. Just a day earlier there were no takers but now everybody wants to get in on the action.
I see this capping as an opportunity to exit some weak stocks as prices move up to break even territory. Some stocks showed serious weakness during the bear run and one would be better off selling them.
On the other hand, this is not the time to buy assuming one can even get anything to buy. The constant changing of the rules of the game erodes confidence and discourages long term investing. The authorities have shown they have no appetite for a declining market. Who knows whether they might decide in the future to peg upward movement during a bull run?
My approach is simple. Sell off weak stocks and buy nothing until sanity returns.
Tuesday, August 26, 2008
Never Argue with Market Trend
Although I am not a practitioner of Technical analysis, I was very concerned when on 8th August the NSE All Share Index (ASI) dropped to below 50,000 for the first time in over a year. Since then the Index has been in a free fall loosing 18% in August. Out of 18 trading days in August, we have had only one positive day and that was a meager 0.16% rise. August has also produced the longest loosing streak for the year (11 consecutive loosing days and counting). It has been a very testing month with value of transactions also drying up to less than 40% of what was recorded in February.
When we welcomed August, I was not very optimistic going by past trends. From August to mid September is usually the time of the year when the Index and Value/Volume of transactions slow down and/or falter. However, I have never witnessed such level of decline. And that is including the bear years of 1997-1999. Looking at the data from 1995 to date, we have never had such level of decline in one single month. The worst so far was July 1999 when the ASI lost 17%. Unless something positive happens in the next 3 trading days, August is on track to be the worst month in 13 years.
So what can one do? All the books I have read so far have advised staying out of a bear market. In their opinion when panic sets in investors throw out all rational thinking and dump stocks at ridiculous prices. They advice staying out until a new positive trend develops: higher highs and higher lows. This advice has been vindicated in the last four months. If one had stayed out of the market from April when the negative trend became obvious one would have been in good shape. In fact the opportunity to get out was available in June. Alas some of us refused to take the advice of experienced experts. We stayed in. Rationalizing that GTB at N22 was cheap etc. Two months down the line GTB fell to below N20.
Never argue with the market, the experts say and they are right. When the trend is downward, stay out (unless you are an astute short seller). When the trend is upward get in. Cut losses short and let winners run. It is that simple. Alas only a few practice it with discipline. I hope when the next bear calls we would have the discipline to follow the wisdom of experienced traders.
When we welcomed August, I was not very optimistic going by past trends. From August to mid September is usually the time of the year when the Index and Value/Volume of transactions slow down and/or falter. However, I have never witnessed such level of decline. And that is including the bear years of 1997-1999. Looking at the data from 1995 to date, we have never had such level of decline in one single month. The worst so far was July 1999 when the ASI lost 17%. Unless something positive happens in the next 3 trading days, August is on track to be the worst month in 13 years.
So what can one do? All the books I have read so far have advised staying out of a bear market. In their opinion when panic sets in investors throw out all rational thinking and dump stocks at ridiculous prices. They advice staying out until a new positive trend develops: higher highs and higher lows. This advice has been vindicated in the last four months. If one had stayed out of the market from April when the negative trend became obvious one would have been in good shape. In fact the opportunity to get out was available in June. Alas some of us refused to take the advice of experienced experts. We stayed in. Rationalizing that GTB at N22 was cheap etc. Two months down the line GTB fell to below N20.
Never argue with the market, the experts say and they are right. When the trend is downward, stay out (unless you are an astute short seller). When the trend is upward get in. Cut losses short and let winners run. It is that simple. Alas only a few practice it with discipline. I hope when the next bear calls we would have the discipline to follow the wisdom of experienced traders.
Tuesday, August 5, 2008
Liquidity
The Nigerian financial system has been suffering a liquidity squeeze for some months. The stock market has felt the full force of the squeeze as Naira value of trading has been on the decline since early March. The All Share Index (ASI) has also lost 22% since its all time high achieved on 5th March this year.
One common explanation offered for the decline in liquidity is the proposed common year end for all banks. This is as a result of desperation of some banks to attract deposits to boost their balance sheets. Previously some of the banks have used inter bank borrowings to boost their balance sheets at year end. However, these funds will no longer be available if the common year end is implemented.
The Central Bank of Nigeria (CBN) concerned with the outrageous deposit rates some banks have been offering out of desperation to attract deposits decided on July 23rd to postpone the policy implementation to December 2009 instead of December 2008. The postponement only lasted 13 days as the CBN announced on August 5th that the policy has been completely cancelled. Banks can now do as they wish.
Will the policy reversal improve the liquidity situation? Yes it will. But in my view not to the level that will push the Index back to record territory.
Liquidity will take some time to improve significantly. This is because another major cause of the liquidity squeeze will take time to disappear. This is the effect of the capital raising of banks and other companies on the liquidity of individuals and institutional investors. More than N1.5 trillion was raised through IPO’s and PO’s in the last two years. This is a significant amount representing more than 14% of the current market capitalization. To put it in context Guaranty Trust Bank had N365 billion deposit liabilities as at 29th February 2008. So taking out N1.5 billion (this does not include funds raised through private placements) from the banking deposit system is bound to create a strain on the system.
Therefore unless something happens to accelerate the replenishment of funds in the pockets of Nigerians and Institutional investors, the liquidity squeeze will continue for another couple of months. Perhaps even till the implementation of the 2009 budget.
The banks off course can help accelerate the replenishment by offering cheap credits to consumers using the capital they have raised. This might take some time as some of the banks have expensive deposit liabilities raised during the “desperation” period.
My outlook for August and September remain the same. I don’t expect any significant upward movement in the ASI.
As is the usual trend, October might offer some respite buoyed by the policy reversal, gradual improvement of liquidity and year end positioning.
I hope so.
One common explanation offered for the decline in liquidity is the proposed common year end for all banks. This is as a result of desperation of some banks to attract deposits to boost their balance sheets. Previously some of the banks have used inter bank borrowings to boost their balance sheets at year end. However, these funds will no longer be available if the common year end is implemented.
The Central Bank of Nigeria (CBN) concerned with the outrageous deposit rates some banks have been offering out of desperation to attract deposits decided on July 23rd to postpone the policy implementation to December 2009 instead of December 2008. The postponement only lasted 13 days as the CBN announced on August 5th that the policy has been completely cancelled. Banks can now do as they wish.
Will the policy reversal improve the liquidity situation? Yes it will. But in my view not to the level that will push the Index back to record territory.
Liquidity will take some time to improve significantly. This is because another major cause of the liquidity squeeze will take time to disappear. This is the effect of the capital raising of banks and other companies on the liquidity of individuals and institutional investors. More than N1.5 trillion was raised through IPO’s and PO’s in the last two years. This is a significant amount representing more than 14% of the current market capitalization. To put it in context Guaranty Trust Bank had N365 billion deposit liabilities as at 29th February 2008. So taking out N1.5 billion (this does not include funds raised through private placements) from the banking deposit system is bound to create a strain on the system.
Therefore unless something happens to accelerate the replenishment of funds in the pockets of Nigerians and Institutional investors, the liquidity squeeze will continue for another couple of months. Perhaps even till the implementation of the 2009 budget.
The banks off course can help accelerate the replenishment by offering cheap credits to consumers using the capital they have raised. This might take some time as some of the banks have expensive deposit liabilities raised during the “desperation” period.
My outlook for August and September remain the same. I don’t expect any significant upward movement in the ASI.
As is the usual trend, October might offer some respite buoyed by the policy reversal, gradual improvement of liquidity and year end positioning.
I hope so.
Sunday, August 3, 2008
July
I welcomed July with a lot of optimism. Unfortunately, July turned out to be the second worst month of the year as the NSE All Share Index lost 5.1%.
There were a lot of corporate announcements as expected. However, they failed to lift or excite the market as value of transactions at N191 billion was the lowest for the year. In fact some stocks lost ground despite announcing positive results and dividends. E.g. Access Bank which started the month at N17.64 closed at N15.98 ex div.
Traditionally, the values of transactions in August and September have been low. However, the Index has shown no consistent pattern. In 2007, the Index went down in August compared to July but it went up in 2006 and 2005.
In my view, the 5.1% loss we experienced in July might not be repeated in August. However, I don’t expect a gain of more than 5% as well. In fact 5% or more will be a major surprise. This is because the only major announcement expected is from Zenith, otherwise it will be mostly quite. Furthermore, the liquidity squeeze might still continue despite the postponement of the common year end to December 2009. Unless liquidity suddenly improves I don’t expect any major rally.
In August as has been in the last 2 months, my strategy is that of wait and see. Purchases could however be made if the opportunity presents itself e.g. GTB at N23 and FBN at N27 (post bonus and ex div).
I hope we get some respite in August despite my lack of optimism.
There were a lot of corporate announcements as expected. However, they failed to lift or excite the market as value of transactions at N191 billion was the lowest for the year. In fact some stocks lost ground despite announcing positive results and dividends. E.g. Access Bank which started the month at N17.64 closed at N15.98 ex div.
Traditionally, the values of transactions in August and September have been low. However, the Index has shown no consistent pattern. In 2007, the Index went down in August compared to July but it went up in 2006 and 2005.
In my view, the 5.1% loss we experienced in July might not be repeated in August. However, I don’t expect a gain of more than 5% as well. In fact 5% or more will be a major surprise. This is because the only major announcement expected is from Zenith, otherwise it will be mostly quite. Furthermore, the liquidity squeeze might still continue despite the postponement of the common year end to December 2009. Unless liquidity suddenly improves I don’t expect any major rally.
In August as has been in the last 2 months, my strategy is that of wait and see. Purchases could however be made if the opportunity presents itself e.g. GTB at N23 and FBN at N27 (post bonus and ex div).
I hope we get some respite in August despite my lack of optimism.
Sunday, July 20, 2008
Gems
The recent market turmoil has forced me to spend more time reading and reflecting on my investing philosophy. I have re-read a few of my old books and some new ones. I have found some very useful ideas in these books and I decided to reproduce the most thought provoking and most relevant to our current situation here.
These 15 Gems are from: One up on Wall Street – Peter Lynch; Survive and profit in ferocious markets – John Rothchild; Stock market wizards – Jack Schwager; Trading for a living – Alex Elder; and How to make money in stocks- William O’Neil. My comments are in italics.
1. Force yourself to buy on extreme weakness and sell on extreme strength. Although a fairly straight forward advice it is very difficult to implement as I recently found out. Buying on extreme weakness requires a lot of guts and self belief. My target entry price on Dangote Sugar has recently been met but I have been agonizing whether to buy. I finally decided to buy half of my initial plan on Monday. I will complete the trade depending on the direction of the marker in the next few days.
2. Market declines are great opportunities to buy stocks in companies you like. Supports the first gem. With this in mind it becomes a bit easier to implement the first advice.
3. Be patient. When the fundamentals say a stock is under priced but the market does not respond, stick with it. The market will respond.
4. Buying a company with mediocre prospects just because it is cheap is a losing technique.
5. Ignore the short term. True but easier said than done.
6. Think trades through. Including profit/loss exit points before you commit. It is essential to have an investment plan. Performance can then be compared to the plan and necessary decisions can be taken from a sound basis.
7. When you invest, ask yourself what is the worst that can happen. Consider the risks before the rewards.
8. Bear markets can last for 6 months or in rare cases 2 years. Don’t let them diminish your long term resolve. I hope the current bear run doesn’t go beyond 6 months. If it does, my resolve will be severely tested.
9. Bear markets are more compressed in time, more sharp in movement and more dramatic.
10. To come out ahead you don’t have to be right all the time or even majority of the time.
11. Cut your losses short. 10 and 11 work together. You can’t expect to be ahead if you don’t cut your losses short.
12. When it comes to mutual funds, select a good one and stick with it for 10 or more years. Automatically reinvest the dividends. True especially in our market that has been positive for 9 years running.
13. Concentration is critical to superior performance. The greater the number of stocks you hold, the more market like your performance becomes.
14. Hold no more than 10 stocks because your top ten ideas will always perform better than your top 100. Another difficult to follow advice in our market especially with regard to banking stocks. I need to prune down my holdings in banks but which do I keep?
15. Never make a bet you can’t afford to loose. True. You will sleep much easier if you apply this.
These 15 Gems are from: One up on Wall Street – Peter Lynch; Survive and profit in ferocious markets – John Rothchild; Stock market wizards – Jack Schwager; Trading for a living – Alex Elder; and How to make money in stocks- William O’Neil. My comments are in italics.
1. Force yourself to buy on extreme weakness and sell on extreme strength. Although a fairly straight forward advice it is very difficult to implement as I recently found out. Buying on extreme weakness requires a lot of guts and self belief. My target entry price on Dangote Sugar has recently been met but I have been agonizing whether to buy. I finally decided to buy half of my initial plan on Monday. I will complete the trade depending on the direction of the marker in the next few days.
2. Market declines are great opportunities to buy stocks in companies you like. Supports the first gem. With this in mind it becomes a bit easier to implement the first advice.
3. Be patient. When the fundamentals say a stock is under priced but the market does not respond, stick with it. The market will respond.
4. Buying a company with mediocre prospects just because it is cheap is a losing technique.
5. Ignore the short term. True but easier said than done.
6. Think trades through. Including profit/loss exit points before you commit. It is essential to have an investment plan. Performance can then be compared to the plan and necessary decisions can be taken from a sound basis.
7. When you invest, ask yourself what is the worst that can happen. Consider the risks before the rewards.
8. Bear markets can last for 6 months or in rare cases 2 years. Don’t let them diminish your long term resolve. I hope the current bear run doesn’t go beyond 6 months. If it does, my resolve will be severely tested.
9. Bear markets are more compressed in time, more sharp in movement and more dramatic.
10. To come out ahead you don’t have to be right all the time or even majority of the time.
11. Cut your losses short. 10 and 11 work together. You can’t expect to be ahead if you don’t cut your losses short.
12. When it comes to mutual funds, select a good one and stick with it for 10 or more years. Automatically reinvest the dividends. True especially in our market that has been positive for 9 years running.
13. Concentration is critical to superior performance. The greater the number of stocks you hold, the more market like your performance becomes.
14. Hold no more than 10 stocks because your top ten ideas will always perform better than your top 100. Another difficult to follow advice in our market especially with regard to banking stocks. I need to prune down my holdings in banks but which do I keep?
15. Never make a bet you can’t afford to loose. True. You will sleep much easier if you apply this.
Sunday, July 13, 2008
Are we Immune?
Capital Markets the world over have been in a state of turmoil and uncertainty for most of 2008. Most markets are in the red zone for the year including our own NSE. US markets entered official bear territory last week as major indexes closed 20% off the record high.
The NSE All Share Index is 17.6% down from the record high achieved on 5th March 2008. While we don’t have an official definition of a bear market, the mood among regulators and investors is that we are in a bear market.
From the comments of regulators of the NSE and investors, it appears most are perplexed as to why we should be on this bear run. That in my view is to ignore the strong positive run we have had in the last 9 years and the state of the world economy and financial markets.
Since last year when the credit crises surfaced in the US and Europe, the financial industry has not been the same. Record write offs by financial giants Citigroup, Merrill Lynch, UBS etc have followed. The crisis has slowed world economic growth and has pushed the US economy and other European economics onto the brink of recession. High oil and commodities prices have acerbated the situation.
Commentators the world over are predicting gloom. One that caught my eye was a comment by Peter Kenny, “the bottom line is that we are in the middle of a financial tsunami. This is a storm the likes of which this country (US) hasn’t seen”. With Fannie Mae and Freddie Mac (backbones of US mortgage market) facing a meltdown of their share price in the last few days, let’s hope Kenny is wrong. History has shown us that when all are predicting doom and gloom, chances are that recovery is just around the corner.
So what about us in Nigeria, are we immune to the turmoil? In my view we are not and our regulators should start acting that way. The high oil price has helped Nigeria more than hurt but even our manufacturers are groaning under the weight of high diesel price. More importantly, it appears liquidity in the capital market has gradually declined. Although we are told foreign portfolio money only accounts for 12% of the market, I am betting it can only get lower. Foreign money managers have bargains in their backyards and therefore have no incentive to come to Nigeria shopping. Add that to the fact that our own market is also on a bear run and therefore not as attractive as it once was. The liquidity has to come from within.
Regulators of our market need to acknowledge we are not immune to the state of global economic health. We investors need to also acknowledge that and stop worrying. After all our banks are in the best state of their lives unlike those in the US and Europe.
This bear run will surely come to an end like all things in life. Considering all the gloom around us, it might be sooner than we think.
Exchange.........YTD July 10th %
NSE.............(5.5)
Cairo...........(5.3)
JSE.............(6.6)
S & P 500.......(15.2)
DJIA..............(16)
FTSE.100........(16.5)
CAC.40..........(24.8)
BSE 30.(India)..(31.1)
Source: FSDH weekly report
The NSE All Share Index is 17.6% down from the record high achieved on 5th March 2008. While we don’t have an official definition of a bear market, the mood among regulators and investors is that we are in a bear market.
From the comments of regulators of the NSE and investors, it appears most are perplexed as to why we should be on this bear run. That in my view is to ignore the strong positive run we have had in the last 9 years and the state of the world economy and financial markets.
Since last year when the credit crises surfaced in the US and Europe, the financial industry has not been the same. Record write offs by financial giants Citigroup, Merrill Lynch, UBS etc have followed. The crisis has slowed world economic growth and has pushed the US economy and other European economics onto the brink of recession. High oil and commodities prices have acerbated the situation.
Commentators the world over are predicting gloom. One that caught my eye was a comment by Peter Kenny, “the bottom line is that we are in the middle of a financial tsunami. This is a storm the likes of which this country (US) hasn’t seen”. With Fannie Mae and Freddie Mac (backbones of US mortgage market) facing a meltdown of their share price in the last few days, let’s hope Kenny is wrong. History has shown us that when all are predicting doom and gloom, chances are that recovery is just around the corner.
So what about us in Nigeria, are we immune to the turmoil? In my view we are not and our regulators should start acting that way. The high oil price has helped Nigeria more than hurt but even our manufacturers are groaning under the weight of high diesel price. More importantly, it appears liquidity in the capital market has gradually declined. Although we are told foreign portfolio money only accounts for 12% of the market, I am betting it can only get lower. Foreign money managers have bargains in their backyards and therefore have no incentive to come to Nigeria shopping. Add that to the fact that our own market is also on a bear run and therefore not as attractive as it once was. The liquidity has to come from within.
Regulators of our market need to acknowledge we are not immune to the state of global economic health. We investors need to also acknowledge that and stop worrying. After all our banks are in the best state of their lives unlike those in the US and Europe.
This bear run will surely come to an end like all things in life. Considering all the gloom around us, it might be sooner than we think.
Exchange.........YTD July 10th %
NSE.............(5.5)
Cairo...........(5.3)
JSE.............(6.6)
S & P 500.......(15.2)
DJIA..............(16)
FTSE.100........(16.5)
CAC.40..........(24.8)
BSE 30.(India)..(31.1)
Source: FSDH weekly report
Friday, July 11, 2008
Cutting Losses Short
In the last four months the patience of investors on the NSE has been severely tested and it is getting to a breaking point. The All Share Index dropped to a year low 53,366 on 25thJune. There was a brief rally for a week but most of the gains have since been lost. Mercifully, the low of 25th June has not been breached.
Right now the market has been so volatile that the safest thing to do by non professional traders is to sit on the side lines. At least that is what I have been doing in the last two weeks. Another thing I have been doing lately is reading and I have read a few gems.
One common theme that keeps recurring in all the books is the need to cut losses and move on. According to the authors hanging onto a loosing position is a refusal to admit a mistake was made in buying the stock. Investors will save themselves from financial ruin by cutting losses short. The common recommendation is to exit a position once 8-10% is lost.
I have a limit of 15% although I could exit earlier if it is obvious the stock is heading for a major fall. My rationale is that I usually have about 12 stocks in my portfolio and a 15% loss represents an average 1.25% loss in capital. That is tolerable.
Earlier in the year I exited Standard Trust Insurance before it became a loosing stock. I sold Japaul in March and cut my losses. If I had delayed the decision, I would have been looking at more than 40% loss. Cutting my losses short is a key risk management strategy I have adopted. Fortunately, in spite of the bear run, none of the stocks currently in my portfolio are in a loosing position.
My advice is to always have an exit strategy either up or down at the time of entry. It is a well tested successful risk management strategy. Without it financial ruin could be around the corner especially in a long drawn out bear market.
Right now the market has been so volatile that the safest thing to do by non professional traders is to sit on the side lines. At least that is what I have been doing in the last two weeks. Another thing I have been doing lately is reading and I have read a few gems.
One common theme that keeps recurring in all the books is the need to cut losses and move on. According to the authors hanging onto a loosing position is a refusal to admit a mistake was made in buying the stock. Investors will save themselves from financial ruin by cutting losses short. The common recommendation is to exit a position once 8-10% is lost.
I have a limit of 15% although I could exit earlier if it is obvious the stock is heading for a major fall. My rationale is that I usually have about 12 stocks in my portfolio and a 15% loss represents an average 1.25% loss in capital. That is tolerable.
Earlier in the year I exited Standard Trust Insurance before it became a loosing stock. I sold Japaul in March and cut my losses. If I had delayed the decision, I would have been looking at more than 40% loss. Cutting my losses short is a key risk management strategy I have adopted. Fortunately, in spite of the bear run, none of the stocks currently in my portfolio are in a loosing position.
My advice is to always have an exit strategy either up or down at the time of entry. It is a well tested successful risk management strategy. Without it financial ruin could be around the corner especially in a long drawn out bear market.
Tuesday, July 1, 2008
As We Welcome Back the Bulls
The last few months have been very emotionally challenging to the average investor on the Nigerian Stock Exchange (NSE). As at 25th June the All Share Index has lost 19.6% from its all time high of 66,371 achieved on March 5th. The Index closed 53,366 on June 25th the lowest point since 16th November 2007 and down 8% for the year.
Fortunately for most of us, the worst seems to be over as the index went up for the first time in nine days on June 26th. Since then the index has appreciated 7% although it is still 1.6% down for the year. So what have we learnt from all this?
Keep an eye on market valuation
The Index closed at an all time high on 5th March at 66,371. The average market PE was 35.9 while the average dividend yield was 1.6%. If we compare this to the market PE and dividend yield on the last trading day of the last 3 years, we would definitely conclude that the PE was high and the yield low. These two indicators are used in other markets to access the valuation of the market. Our experience in the last four months indicates that these indicators can be used to good effect in valuing the NSE.
Year.....................PE......Yield %
5th..March 2008....35.9---1.6
31st.Dec 2007......30.0---2.1
29th.Dec 2006......23.4---3.88
30th.Dec 2005......16.3---4.75
25th.June 2008.....27.0---2.1
It is therefore very important to keep an eye on the market PE and dividend yield. A large diversion from historical trends calls for caution. While these two might not be enough to be sure of an over extended market, they can be used in addition to other factors such as excessive bullish outlook by analyst and the media, excessive speculation on penny stocks and stocks no longer responding to strong earnings announcements. All these were present in our market in the last few months. Therefore, in retrospect some correction was due. When such factors are observed, it is time to be cautious and consider taking money out of the market.
Stick to fundamentally sound stocks
This is an advice for all seasons but becomes even more important during a bear run. It is emotionally easier to stick with sound companies when the going gets tough. Weak companies tend to fall more in a bear market and recover less quickly when the bull run starts.
Most of the banks listed on the NSE are very sound companies. Although they took a beating during the bear run, they also led the recovery. In addition, at the bottom most of the banks were selling at very attractive valuations and provided a great opportunity for entry and subsequent gains.
Get rid of overvalued stocks
Once it becomes clear that a bear run is on the cards, it is advisable to get rid of over valued stocks. These will typically be stocks will high PE’s and low dividend yields relative to their sector and market. Intercontinental Bank and IBTC were two stocks that were selling at a premium compared to other banks. They suffered like most of the banks and they have been sluggish in the current recovery.
Cash
Always have some cash to take advantage of some great opportunities that will appear at near bottom. There were great opportunities from June 19th to 25th. Only those with cash were able to take advantage. Several stocks such as GTB, Costain and Dangote Sugar have already returned more than 20% from their lows attained in the last two weeks.
Cash can be kept in money market investments that could be easily liquidated to take advantage of bargains.
Finally
Whatever you do, once a bear run starts do not panic. Everything has an end. The long Bull Run ended on 5th March and so did the Bear Run after almost 4 months.
The market looks to be favorable in July although expect the current run to slow down in the next two to three days. Positive earnings announcements will ensure July provides investors with needed respite.
Fortunately for most of us, the worst seems to be over as the index went up for the first time in nine days on June 26th. Since then the index has appreciated 7% although it is still 1.6% down for the year. So what have we learnt from all this?
Keep an eye on market valuation
The Index closed at an all time high on 5th March at 66,371. The average market PE was 35.9 while the average dividend yield was 1.6%. If we compare this to the market PE and dividend yield on the last trading day of the last 3 years, we would definitely conclude that the PE was high and the yield low. These two indicators are used in other markets to access the valuation of the market. Our experience in the last four months indicates that these indicators can be used to good effect in valuing the NSE.
Year.....................PE......Yield %
5th..March 2008....35.9---1.6
31st.Dec 2007......30.0---2.1
29th.Dec 2006......23.4---3.88
30th.Dec 2005......16.3---4.75
25th.June 2008.....27.0---2.1
It is therefore very important to keep an eye on the market PE and dividend yield. A large diversion from historical trends calls for caution. While these two might not be enough to be sure of an over extended market, they can be used in addition to other factors such as excessive bullish outlook by analyst and the media, excessive speculation on penny stocks and stocks no longer responding to strong earnings announcements. All these were present in our market in the last few months. Therefore, in retrospect some correction was due. When such factors are observed, it is time to be cautious and consider taking money out of the market.
Stick to fundamentally sound stocks
This is an advice for all seasons but becomes even more important during a bear run. It is emotionally easier to stick with sound companies when the going gets tough. Weak companies tend to fall more in a bear market and recover less quickly when the bull run starts.
Most of the banks listed on the NSE are very sound companies. Although they took a beating during the bear run, they also led the recovery. In addition, at the bottom most of the banks were selling at very attractive valuations and provided a great opportunity for entry and subsequent gains.
Get rid of overvalued stocks
Once it becomes clear that a bear run is on the cards, it is advisable to get rid of over valued stocks. These will typically be stocks will high PE’s and low dividend yields relative to their sector and market. Intercontinental Bank and IBTC were two stocks that were selling at a premium compared to other banks. They suffered like most of the banks and they have been sluggish in the current recovery.
Cash
Always have some cash to take advantage of some great opportunities that will appear at near bottom. There were great opportunities from June 19th to 25th. Only those with cash were able to take advantage. Several stocks such as GTB, Costain and Dangote Sugar have already returned more than 20% from their lows attained in the last two weeks.
Cash can be kept in money market investments that could be easily liquidated to take advantage of bargains.
Finally
Whatever you do, once a bear run starts do not panic. Everything has an end. The long Bull Run ended on 5th March and so did the Bear Run after almost 4 months.
The market looks to be favorable in July although expect the current run to slow down in the next two to three days. Positive earnings announcements will ensure July provides investors with needed respite.
Thursday, June 19, 2008
Another Bloody Day
It was another bloody day on the Nigerian Stock Exchange (NSE). Red was splashed all over the place as 66 stocks took a plunge. Only 17 managed to close higher.
After the bloodbath of Monday and Tuesday, Wednesday offered some respite with 1.6% decline. Alas, it was short lived. Volume dipped more than 60% on Thursday and the All Share Index lost 2.3% to close at 54,908, the lowest point for the year. So far the index has lost 5.3% for the year. The loss for the week stands at a cumulative 9.1% perhaps the biggest lost in any four days for a decade. So where do we go from here?
The last year to resemble a bear was 2005 when the All Share Index only managed 1% gain for the year. Most of the destruction was done between February and early April. The All Share Index dropped to its lowest point for the year 20,661 on April 6th. By then the market was down by 13.4%.
The reversal started in late April but by the end of May, the momentum was lost. A full recovery began in July. The Index rose to 21,911 by the end of July closing with a cumulative year loss of 8.1%. The worst was over. From then onwards it was a steady climb until 4th November when an all time high 26,137 was achieved with the market returning 9.6% for the year. It was a remarkable turnaround given the bloodbath in the first quarter. However, this gain was not carried till year end as Mid November to December recorded declines to close the year almost flat with a 1% gain. So what can we learn from all this?
The worst will probably be over in the next two weeks as we approach July. We expect a lot of quarterly announcements to lift the market. Most of the panic selling would also have subsided and cooler heads will begin to take control.
For the strong, there are some good opportunities in the market at the moment. For the cautious I will advice a wait and see attitude for at least one more week.
I am looking forward to July. It can't come sooner.
After the bloodbath of Monday and Tuesday, Wednesday offered some respite with 1.6% decline. Alas, it was short lived. Volume dipped more than 60% on Thursday and the All Share Index lost 2.3% to close at 54,908, the lowest point for the year. So far the index has lost 5.3% for the year. The loss for the week stands at a cumulative 9.1% perhaps the biggest lost in any four days for a decade. So where do we go from here?
The last year to resemble a bear was 2005 when the All Share Index only managed 1% gain for the year. Most of the destruction was done between February and early April. The All Share Index dropped to its lowest point for the year 20,661 on April 6th. By then the market was down by 13.4%.
The reversal started in late April but by the end of May, the momentum was lost. A full recovery began in July. The Index rose to 21,911 by the end of July closing with a cumulative year loss of 8.1%. The worst was over. From then onwards it was a steady climb until 4th November when an all time high 26,137 was achieved with the market returning 9.6% for the year. It was a remarkable turnaround given the bloodbath in the first quarter. However, this gain was not carried till year end as Mid November to December recorded declines to close the year almost flat with a 1% gain. So what can we learn from all this?
The worst will probably be over in the next two weeks as we approach July. We expect a lot of quarterly announcements to lift the market. Most of the panic selling would also have subsided and cooler heads will begin to take control.
For the strong, there are some good opportunities in the market at the moment. For the cautious I will advice a wait and see attitude for at least one more week.
I am looking forward to July. It can't come sooner.
Wednesday, June 18, 2008
Bears on the Prowl - Again
After last week’s freeze on downward movement of share prices on the NSE, the bears returned in full force on 16th June. The NSE All Share Index lost 2.6% on Monday 16th June. Another 2.6% was lost on Tuesday and by Wednesday all the gains of the previous week were eroded as the Index closed 56,205, down 3.08% for the year. A year low.
Obviously the ill advised freeze of last week did not restore investor confidence. I hope the NSE DG has learnt something and will leave nature to take its course in the market.
The decline on Wednesday was a mere 1.57% which was lower than the previous two days of the week. Volume was also higher compared to the previous two days. So perhaps the worst has passed. However, Thursday is traditionally a low volume day. Consequently, we might not see any recovery until Friday.
For the long term investor, this temporary decline should not be a source of sleepless nights. We have had 8 consecutive bull years. So a bear is due. In 2005, the market returned a mere 1%. There were very good buy opportunities. GTB was one of them selling at lower than the 2004 Public Offer price. I bought it and rode it to 300% gain in less than 2 years. GTB is again selling at less than the GDR price of last year. I smell an opportunity for the long term investor.
My plan for the year was a modest 25% gain for my portfolio. However, this appears to be too aggressive considering market performance so far. I have therefore revised my goal down to 15%. Lets hope this can be achieved.
Meanwhile I await trading result of 19th June. It promises to be an interesting day.
Obviously the ill advised freeze of last week did not restore investor confidence. I hope the NSE DG has learnt something and will leave nature to take its course in the market.
The decline on Wednesday was a mere 1.57% which was lower than the previous two days of the week. Volume was also higher compared to the previous two days. So perhaps the worst has passed. However, Thursday is traditionally a low volume day. Consequently, we might not see any recovery until Friday.
For the long term investor, this temporary decline should not be a source of sleepless nights. We have had 8 consecutive bull years. So a bear is due. In 2005, the market returned a mere 1%. There were very good buy opportunities. GTB was one of them selling at lower than the 2004 Public Offer price. I bought it and rode it to 300% gain in less than 2 years. GTB is again selling at less than the GDR price of last year. I smell an opportunity for the long term investor.
My plan for the year was a modest 25% gain for my portfolio. However, this appears to be too aggressive considering market performance so far. I have therefore revised my goal down to 15%. Lets hope this can be achieved.
Meanwhile I await trading result of 19th June. It promises to be an interesting day.
Saturday, June 14, 2008
Technical Analysis
I have a confession to make, I don’t know much about Technical Analysis. Recently I decided to remedy this and bought a highly recommended book. The book is Technical Analysis: The complete resource for financial market technicians by C.D. Kirkpatrick and J.R. Dahlquist. I have just completed a first reading of the book. It is quite interesting although a bit dense at times. However, it is still easy enough for the beginner.
According to the authors Technical Analysis is the study of past market data, mainly price and volume data. This information is then used to make investing or trading decisions. It is based on one major principle: trend. The basic assumptions are:
• Stock prices are determined by the interaction of demand and supply
• Stock prices tend to move in trends
• Shift in demand and supply cause reversals in trends
• These reversals can be detected in charts
• Emotions and investor behavior influence security prices. The two main emotions are fear and greed
The technicians mantra is the trend is your friend. The strategy is to buy a security at the beginning of an uptrend at a low price, ride the trend and sell when the trend ends at a high price. However, implementing this strategy is quite difficult according to the authors.
The chapter on sentiment is quite interesting. Market sentiment refers to the emotions of market participants. For example in a typical bull market, at the peak of the optimism, most investors have put all their available money in the market. Therefore there is no new money available to drive the market higher. The market has therefore peaked and the only way is down. At the height of the emotion, prices deviate substantially from fundamental values, a correction is due.
I think this happened recently in the Nigeria stock exchange (NSE). The NSE All Share Index began to decline (loosing 3% for the year) and the management acted in a bizarre fashion to stop the decline on 9th June. They achieved this by freezing fall in prices for a week. This was a panic reaction and although I gained from it, I sincerely hope NSE management will not do this in the future. This amounts to price fixing and does not bode well for the long term health of the market.
The book is quite a useful addition to Technical Analysis literature. I will recommend it to anyone who is interested in Technical Analysis. I have picked up a few things I will try out but my conclusion is that I simply do not have the time to fully exploit technical analysis. I still have my day job to worry about.
According to the authors Technical Analysis is the study of past market data, mainly price and volume data. This information is then used to make investing or trading decisions. It is based on one major principle: trend. The basic assumptions are:
• Stock prices are determined by the interaction of demand and supply
• Stock prices tend to move in trends
• Shift in demand and supply cause reversals in trends
• These reversals can be detected in charts
• Emotions and investor behavior influence security prices. The two main emotions are fear and greed
The technicians mantra is the trend is your friend. The strategy is to buy a security at the beginning of an uptrend at a low price, ride the trend and sell when the trend ends at a high price. However, implementing this strategy is quite difficult according to the authors.
The chapter on sentiment is quite interesting. Market sentiment refers to the emotions of market participants. For example in a typical bull market, at the peak of the optimism, most investors have put all their available money in the market. Therefore there is no new money available to drive the market higher. The market has therefore peaked and the only way is down. At the height of the emotion, prices deviate substantially from fundamental values, a correction is due.
I think this happened recently in the Nigeria stock exchange (NSE). The NSE All Share Index began to decline (loosing 3% for the year) and the management acted in a bizarre fashion to stop the decline on 9th June. They achieved this by freezing fall in prices for a week. This was a panic reaction and although I gained from it, I sincerely hope NSE management will not do this in the future. This amounts to price fixing and does not bode well for the long term health of the market.
The book is quite a useful addition to Technical Analysis literature. I will recommend it to anyone who is interested in Technical Analysis. I have picked up a few things I will try out but my conclusion is that I simply do not have the time to fully exploit technical analysis. I still have my day job to worry about.
Saturday, May 24, 2008
IPO's and PO's: To Buy or not to Buy?
Lately I have been thinking whether it is really worth it investing in Initial Public Offers (IPO’s) and Public Offers (PO’s). The main reasons for my second thoughts are:
1) Partial allotment. Most recent IPO’s and PO’s have been hugely over subscribed leading to partial allotment. The first shocker was the PO of First Bank. As it was the first PO to return huge sums of money in recent times, most of us were caught napping. I only got about 23% of what I applied for. In hindsight I should never have bothered buying.
2) Delay in receiving shares allotted. The second reason is the delay in receiving certificates or receiving credit in CSCS account. I participated in the Access Bank Public Offer in August last year. Nine months after I am still waiting for my certificate to be verified. Consequently, I don’t still have access to my money.
3) Delay in receiving return money. The third reason is the delay in receiving return money in respect of shares not allotted. To date I have not received my return money for PHB, AIICO and Costain. These offers closed in December last year.
While it is difficult to know before hand whether it is worth it to invest in these offers, the following could aid the decision making.
• Amount on offer. How much is the company trying to raise? In my view if the amount is less than twenty billion Naira, I will stay clear of the offer. Recent examples include Dangote Flour, NAHCO, AIICO and Costain. All were for under Naira twenty billion and all were hugely over subscribed. In hindsight, one would have been better off buying in the secondary market all except Dangote Flour (not available at it was an IPO). Although this criteria does not completely eliminate the risk, it reduces it. E.g. Bank PHB.
• The discount. This is only relevant to public offers. If there is a significant discount to the secondary market price (30% or more), I will consider investing. Otherwise I will pass. A recent example is Bank PHB. The discount on offer was 33% and there was a potential gain of 50% to be had. Bank PHB has proved to be a good gamble. However, buying Skye Bank offer was not such a good idea. The discount on offer was only 17%. However, you can now buy Skye bank at Naira 16 compared to the offer price of Naira 14. This means one would have been better off not buying the public offer as the certificate and possible return money are not available three months after the offer closed.
• IPO decision spreadsheet. I found this tool http://nivestors.com/yahoo_site_admin/assets/docs/IPO_Decision_Table.59121612.xls
courtesy of www.nivestors.com. It was brought to my attention in the investors forum of stockmarketnigeria.com. It helps in simplifying and quantifying the decision.
In the future I will definitely use the above criteria in deciding whether I should invest in an IPO or PO.
1) Partial allotment. Most recent IPO’s and PO’s have been hugely over subscribed leading to partial allotment. The first shocker was the PO of First Bank. As it was the first PO to return huge sums of money in recent times, most of us were caught napping. I only got about 23% of what I applied for. In hindsight I should never have bothered buying.
2) Delay in receiving shares allotted. The second reason is the delay in receiving certificates or receiving credit in CSCS account. I participated in the Access Bank Public Offer in August last year. Nine months after I am still waiting for my certificate to be verified. Consequently, I don’t still have access to my money.
3) Delay in receiving return money. The third reason is the delay in receiving return money in respect of shares not allotted. To date I have not received my return money for PHB, AIICO and Costain. These offers closed in December last year.
While it is difficult to know before hand whether it is worth it to invest in these offers, the following could aid the decision making.
• Amount on offer. How much is the company trying to raise? In my view if the amount is less than twenty billion Naira, I will stay clear of the offer. Recent examples include Dangote Flour, NAHCO, AIICO and Costain. All were for under Naira twenty billion and all were hugely over subscribed. In hindsight, one would have been better off buying in the secondary market all except Dangote Flour (not available at it was an IPO). Although this criteria does not completely eliminate the risk, it reduces it. E.g. Bank PHB.
• The discount. This is only relevant to public offers. If there is a significant discount to the secondary market price (30% or more), I will consider investing. Otherwise I will pass. A recent example is Bank PHB. The discount on offer was 33% and there was a potential gain of 50% to be had. Bank PHB has proved to be a good gamble. However, buying Skye Bank offer was not such a good idea. The discount on offer was only 17%. However, you can now buy Skye bank at Naira 16 compared to the offer price of Naira 14. This means one would have been better off not buying the public offer as the certificate and possible return money are not available three months after the offer closed.
• IPO decision spreadsheet. I found this tool http://nivestors.com/yahoo_site_admin/assets/docs/IPO_Decision_Table.59121612.xls
courtesy of www.nivestors.com. It was brought to my attention in the investors forum of stockmarketnigeria.com. It helps in simplifying and quantifying the decision.
In the future I will definitely use the above criteria in deciding whether I should invest in an IPO or PO.
Sunday, May 18, 2008
The Craze for Private Placements
A phenomenon is sweeping across the investment landscape in Nigeria. This phenomenon has been gathering storm in the last 2 years. This powerful wave is the Private Placement (PP) phenomenon.
PP’s have been with us for many years but were made more popular by the capital raising of banks in 2004 and 2005. My first investment in a PP was in 2004 when I bought the IBTC placement at N3.9 a share. I sold my holdings in late 2007 at N18+. Not bad but not spectacular compared to recent gains made by some investors in PPs.
It is the lure of these extraordinary gains that is attracting investors and promoters to PPs. Suddenly every company is doing a PP and investors are jumping to invest in any PP in sight.
The strong bull run of 2007 has encouraged many companies to issue PPs. This is because when the investing sentiment is bullish, investors are more willing to take on more risk at high prices. Private companies have latched onto this opportunity to sell a piece of their company at valuations that cannot be justified. The main desire of the promoters is to reward themselves by taking advantage of the general lack of sophistication of majority of investors in Nigeria.
In addition, an ugly trend that has reared its head is staff of issuing houses and placement agents requesting for a premium on the issue price. This is for a PP that has not even close. So they get to make money for nothing! This is fraudulent to say the least and I encourage readers to report such to management of the issuing house or placement agent. These guys need to be taught a lesson.
While investing in PPs could be very profitable, investors should be very careful in which PP they invest in. This is even more relevant with the recent habit of return money on PPs. There are several things an investor can do to safeguard his funds from investing in a very risky PP. These include:
1) Invest only in a reputable company with known products. Eg PP of BGL, Reltel etc. A PP issued by any of the above is surely genuine.
2) Look out for PP packaged by a reputable issuing house such as IBTC, FBN Capital, Afribank Capital and the like. These issuing houses will not get themselves involved in a fishy PP.
3) Do not invest in over priced PPs. To make a reasonable profit, the entry price must be reasonable. The valuations of some recent PPs have been unrealistic. It simply does not make sense to invest in a very risky PP that is over priced.
4) Diligently examine the audited accounts and the forecast. Make sure the fundamentals of the company are sound.
5) Invest only in PPs promoted by reputable business people who know the business.
By concentrating on only PPs that meet the above criteria, investors will be able to separate the wheat from the chaff. In doing so, an investor might discover a gem of a PP, a winner and will stay clear of very risky PP’s that could end up as losers.
PP’s have been with us for many years but were made more popular by the capital raising of banks in 2004 and 2005. My first investment in a PP was in 2004 when I bought the IBTC placement at N3.9 a share. I sold my holdings in late 2007 at N18+. Not bad but not spectacular compared to recent gains made by some investors in PPs.
It is the lure of these extraordinary gains that is attracting investors and promoters to PPs. Suddenly every company is doing a PP and investors are jumping to invest in any PP in sight.
The strong bull run of 2007 has encouraged many companies to issue PPs. This is because when the investing sentiment is bullish, investors are more willing to take on more risk at high prices. Private companies have latched onto this opportunity to sell a piece of their company at valuations that cannot be justified. The main desire of the promoters is to reward themselves by taking advantage of the general lack of sophistication of majority of investors in Nigeria.
In addition, an ugly trend that has reared its head is staff of issuing houses and placement agents requesting for a premium on the issue price. This is for a PP that has not even close. So they get to make money for nothing! This is fraudulent to say the least and I encourage readers to report such to management of the issuing house or placement agent. These guys need to be taught a lesson.
While investing in PPs could be very profitable, investors should be very careful in which PP they invest in. This is even more relevant with the recent habit of return money on PPs. There are several things an investor can do to safeguard his funds from investing in a very risky PP. These include:
1) Invest only in a reputable company with known products. Eg PP of BGL, Reltel etc. A PP issued by any of the above is surely genuine.
2) Look out for PP packaged by a reputable issuing house such as IBTC, FBN Capital, Afribank Capital and the like. These issuing houses will not get themselves involved in a fishy PP.
3) Do not invest in over priced PPs. To make a reasonable profit, the entry price must be reasonable. The valuations of some recent PPs have been unrealistic. It simply does not make sense to invest in a very risky PP that is over priced.
4) Diligently examine the audited accounts and the forecast. Make sure the fundamentals of the company are sound.
5) Invest only in PPs promoted by reputable business people who know the business.
By concentrating on only PPs that meet the above criteria, investors will be able to separate the wheat from the chaff. In doing so, an investor might discover a gem of a PP, a winner and will stay clear of very risky PP’s that could end up as losers.
Sunday, May 4, 2008
What to do in a Bear Market
After the amazing 75% increase in 2007 a lot of us have forgotten or don’t even know what is a bear market. The last one we experienced was in 1999 when the All Share Index fell by 7.2%. We had 3 consecutive bear years between 1997 and 1999 before the market recovered in 2000.
So what should we do now, in what looks like a bear year? Technically we are not in bear territory since the Index is up 2% for the year. However, the market has been sliding down since mid February with no end in sight. At this rate we will be in negative territory by the end of week of May 9th.
Don’t Panic
Whatever you do don’t panic. If you are in it for the long term, short term trends should not panic you. Now is a good time to do spring cleaning. Stick with only sound companies. See the next point.
Sell Early
While you should not panic and sell everything in sight, you should sell your losers early. Don’t sit around and watch some of your stocks loose 20% or more. Once in a while we all buy losers. These are typically stocks with weak fundamentals, stocks we should never have bought but we did anyway. Now is the time to get rid of them.
Selling early has saved me in the current negative run. I bought Japaul at N13.7 and Standard Trust Insurance at N5 purely on speculation. I sold Japaul at N12 and STI at N5.2 when I noticed we were in what looks like a bear run. The current price of Japaul is N9.4 (down by 31%) and STI N4.23 (down by 15%).
Historically, companies with weak fundamentals do worse in a bear run. So get rid of them now.
In addition, sell those stocks you feel are over valued relative to their peers if you need the cash. I needed cash and I felt GT Bank with a PE of 29+ was selling at a premium compared to UBA. So I sold some of my GT Bank at N37.5. Today GT Bank has dropped to N33 while UBA has moved from N49 to N55.
Shop for Bargains
Shop for bargains using the proceeds of sales of losers or extra new cash. Check out those quality stocks now and buy them at reasonable prices. If you are afraid the market might still be going down, use dollar cost averaging to reduce total cost. That is invest the same amount in the same stocks biweekly or monthly. If the market continues to drop you would buy more shares with the same amount in later months.
It is difficult to time the market. No one knows the bottom has been reached until after the fact. Averaging ensures you are in the game without attempting to time the market. However, don’t use this method to average down the cost of losers. This will be like throwing good money after bad money. Use this method to only buy solid companies.
Invest in Mutual Funds
Most mutual funds in Nigeria tend to reflect the performance of the market. Invest in a mutual fund now and you are almost certain of a good return when the market recovers. Most funds are selling at lower prices compared to two months ago, now is a good time to go in.
Reduce Debts
Consider using your spare cash to reduce debts. In the short term it is better to reduce a 14% debt than to invest in a falling market.
Invest in Money Market Instruments
Put some of your cash in short term money market instruments. While the return is usually between 8%-10%, it surely isn’t bad compared to negative returns in stocks.
Finally
Remember, historically, bear runs have been followed by a bull run whose magnitude and length have been greater. The numbers below tells the story.
Whatever you do, don’t panic!
1997... (7.9%)
1998... (11.9%)
1999... (7.2%)
2000... 54%
2001... 35.2%
2002... 10.7%
2003... 65.8%
2004... 18.5%
2005... 1%
2006... 37.8%
2007... 74.7%
So what should we do now, in what looks like a bear year? Technically we are not in bear territory since the Index is up 2% for the year. However, the market has been sliding down since mid February with no end in sight. At this rate we will be in negative territory by the end of week of May 9th.
Don’t Panic
Whatever you do don’t panic. If you are in it for the long term, short term trends should not panic you. Now is a good time to do spring cleaning. Stick with only sound companies. See the next point.
Sell Early
While you should not panic and sell everything in sight, you should sell your losers early. Don’t sit around and watch some of your stocks loose 20% or more. Once in a while we all buy losers. These are typically stocks with weak fundamentals, stocks we should never have bought but we did anyway. Now is the time to get rid of them.
Selling early has saved me in the current negative run. I bought Japaul at N13.7 and Standard Trust Insurance at N5 purely on speculation. I sold Japaul at N12 and STI at N5.2 when I noticed we were in what looks like a bear run. The current price of Japaul is N9.4 (down by 31%) and STI N4.23 (down by 15%).
Historically, companies with weak fundamentals do worse in a bear run. So get rid of them now.
In addition, sell those stocks you feel are over valued relative to their peers if you need the cash. I needed cash and I felt GT Bank with a PE of 29+ was selling at a premium compared to UBA. So I sold some of my GT Bank at N37.5. Today GT Bank has dropped to N33 while UBA has moved from N49 to N55.
Shop for Bargains
Shop for bargains using the proceeds of sales of losers or extra new cash. Check out those quality stocks now and buy them at reasonable prices. If you are afraid the market might still be going down, use dollar cost averaging to reduce total cost. That is invest the same amount in the same stocks biweekly or monthly. If the market continues to drop you would buy more shares with the same amount in later months.
It is difficult to time the market. No one knows the bottom has been reached until after the fact. Averaging ensures you are in the game without attempting to time the market. However, don’t use this method to average down the cost of losers. This will be like throwing good money after bad money. Use this method to only buy solid companies.
Invest in Mutual Funds
Most mutual funds in Nigeria tend to reflect the performance of the market. Invest in a mutual fund now and you are almost certain of a good return when the market recovers. Most funds are selling at lower prices compared to two months ago, now is a good time to go in.
Reduce Debts
Consider using your spare cash to reduce debts. In the short term it is better to reduce a 14% debt than to invest in a falling market.
Invest in Money Market Instruments
Put some of your cash in short term money market instruments. While the return is usually between 8%-10%, it surely isn’t bad compared to negative returns in stocks.
Finally
Remember, historically, bear runs have been followed by a bull run whose magnitude and length have been greater. The numbers below tells the story.
Whatever you do, don’t panic!
1997... (7.9%)
1998... (11.9%)
1999... (7.2%)
2000... 54%
2001... 35.2%
2002... 10.7%
2003... 65.8%
2004... 18.5%
2005... 1%
2006... 37.8%
2007... 74.7%
Saturday, April 19, 2008
My Top Ten Investment Books
Here are my top ten investment books in no particular order although I will start with my favourite.
1. Contrarian Investing: Anthony Gallea & William Patalon. My favourite investment book. Well written and full of excellent advice. Follow the advice in this book and your portfolio will be the better for it.
2. The Intelligent Investor: Banjamin Graham. Written by the acknowledged master of value investing. A classic on value investing. A must have for every investor.
3. The New Money Masters: John Train. A guide to the strategies of Soros, Lynch, Rogers, Neff etc. An excellent treatise on great investors.
4. A Random Walk Down Wall Street: Burton Malkeil. The bestselling book on investing by a Princeton University professor of economics. The book challenged Wall Street and conventional wisdom.
5. One Up on Wall Street: Peter Lynch. From one of the acknowledged masters on Wall Street. Lynch shows us how to beat the pros.
6. Nice Girls Don’t Get Rich: Lois Frankel, PhD. Financial advice for women. Very useful for women of all ages. I enjoyed this quote: “ From birth to 18, a girl needs good parents. From 18 to 35 she needs good looks. From 35 to 55 she needs a good personality. From 55 onwards she needs cash.” Sophie Tucker
7. Why Smart People Make Big Money Mistakes: Gary Belsky & Thomas Gilovich. This book introduced me to behavioral economics. A fascinating book on how we spend, invest, save, borrow and waste money. A must read if you want to understand the psychological causes of irrational behaviour towards money.
8. Common Stock & Uncommon Profits: Philip Fisher. Full of great investment wisdom. Even Warren Buffet recommends it.
9. Contrarian Investment Strategies: David Dreman. Another excellent book on contrarian investing.
10. Lifetime Guide to Money: Wall Street Journal. An invaluable guide to managing your finances.
1. Contrarian Investing: Anthony Gallea & William Patalon. My favourite investment book. Well written and full of excellent advice. Follow the advice in this book and your portfolio will be the better for it.
2. The Intelligent Investor: Banjamin Graham. Written by the acknowledged master of value investing. A classic on value investing. A must have for every investor.
3. The New Money Masters: John Train. A guide to the strategies of Soros, Lynch, Rogers, Neff etc. An excellent treatise on great investors.
4. A Random Walk Down Wall Street: Burton Malkeil. The bestselling book on investing by a Princeton University professor of economics. The book challenged Wall Street and conventional wisdom.
5. One Up on Wall Street: Peter Lynch. From one of the acknowledged masters on Wall Street. Lynch shows us how to beat the pros.
6. Nice Girls Don’t Get Rich: Lois Frankel, PhD. Financial advice for women. Very useful for women of all ages. I enjoyed this quote: “ From birth to 18, a girl needs good parents. From 18 to 35 she needs good looks. From 35 to 55 she needs a good personality. From 55 onwards she needs cash.” Sophie Tucker
7. Why Smart People Make Big Money Mistakes: Gary Belsky & Thomas Gilovich. This book introduced me to behavioral economics. A fascinating book on how we spend, invest, save, borrow and waste money. A must read if you want to understand the psychological causes of irrational behaviour towards money.
8. Common Stock & Uncommon Profits: Philip Fisher. Full of great investment wisdom. Even Warren Buffet recommends it.
9. Contrarian Investment Strategies: David Dreman. Another excellent book on contrarian investing.
10. Lifetime Guide to Money: Wall Street Journal. An invaluable guide to managing your finances.
Tuesday, April 15, 2008
Lack of Funding as an Obstacle to Solving the Power Crises
As I am writing this I am hot, frustrated and angry. I am using a rechargeable lamp (recharged using my generating set) because I have not had power from PHCN for the past 24 hours. Nothing new.
I am frustrated because although the problems of electric power generation in Nigeria are complex, they can be solved. I am angry because the present government is spending too much time on the past rather than concentrating on doing something now to address the problem. What the government needs to do is to tackle the generation, transmission and distribution problem in a methodical fashion.
Take as an example the issue of inadequate generation. Recently we were told that PHCN is currently generating less than 2,000 MW. Quite pathetic one might add. What if I tell you we can double this in the next 3 years by spending between $3 and $4 billion dollars? Believe me it is possible. This is how.
The previous Obasanjo administration mandated Oil Majors who are currently in Joint Venture (JV) partnerships with NNPC to build Independent Power Plants (IPP). The projects will include High Voltage transmission lines, gas i nfrastructure and the gas where required. The Oil Majors will contribute between 40-45% of the cost of the project (this is based on their equity in the JV) while NNPC will contribute between 55% and 60%. There are several benefits of this arrangement:
1. The government will only contribute 55% - 60% cash during the construction of the project (typically 3- 4 years) instead of 100%. Therefore the impact on the cashflow of government is minimized. The JV partners will recover their contribution over a couple of years after the project has become operational.
2. PHCN benefits from the project management experience of the Oil Majors. The IPP’s will surely be delivered by the Oil Majors as they have their reputations to protect. The current scandals surrounding the NIPP projects will certainly not be experienced in the IPP projects. For example Agip have since delivered their IPP project. Without the Agip IPP our current crises could have been even worse.
3. The Oil Majors will ensure gas supply to the IIP since they are directly involved in gas production.
Unfortunately for Nigerians only Agip has been able to deliver on the IPP due to lack of funding from NNPC. While the Oil Majors are willing and able to fund their share of the project, NNPC has failed in the last two years to provide funding for the projects. For one reason or the other, Shell, C hevron, Elf and ExxonMobil have not received the funds from NNPC needed to deliver the p rojects. Shell has made significant progress without f unds from NNPC. However, for how long do we expect Shell to carry our burden? NNPC is not really to blame as the government refused to appropriate NNPC the funds it needs.
The real question t hen is how much money is required to deliver the projects? Between Shell, Elf, Chevron and ExxonMobil the amount that is required from the government is between $3.5 to $4 billion dollars. Let me put this amount in context. The $4 billion is about 37 days of oil production if we assume oil price of $90 and 2.2 million barrels a day production and government take of 55% of the production. Please note that this is a very conservative estimate. Can you imagine! All we need to fund the four IPP’s is to commit 37 days production spread over 3 years (approximately 2 weeks production per year!).
Although what I have proposed is rather simplistic, it is equally not that complex. Unfortunately for Nigerians the government of Yar’Adua and NNPC just don’t get it. The whole country cant move forward because of the power situation. Meanwhile oil price is at record highs and NNPC is starved of funds to execute national priority projects.
For the past few months NNPC has been discussing with Oil Majors on how to fund its projects (including IPP’s). With oil price above $100 this is totally unnecessary. This is the time to use the oil money to invest in infrastructure and the oil industry itself. This is not the time to engage in long discussions with Oil Majors on funding. Unfortunately some advisors have convinced the current president that this is the way to go.
Yar’Adua told us during his campaign that power is a priority. However, his actions contradict this. The 2008 budget did not provide the required amount to execute the IPP projects or any major power project. When something is a priority the logical thing to do is to allocate funds to it.
So we continue to live in darkness. Until such a time when someone does the simple calculation and realizes that all we need is 37 days of production to add 2,000 MW to the national grid. While 2,000 MW might look small,it will be a huge leap as it will double our current generation. And perhaps our nights will be brighter and cooler.
I am frustrated because although the problems of electric power generation in Nigeria are complex, they can be solved. I am angry because the present government is spending too much time on the past rather than concentrating on doing something now to address the problem. What the government needs to do is to tackle the generation, transmission and distribution problem in a methodical fashion.
Take as an example the issue of inadequate generation. Recently we were told that PHCN is currently generating less than 2,000 MW. Quite pathetic one might add. What if I tell you we can double this in the next 3 years by spending between $3 and $4 billion dollars? Believe me it is possible. This is how.
The previous Obasanjo administration mandated Oil Majors who are currently in Joint Venture (JV) partnerships with NNPC to build Independent Power Plants (IPP). The projects will include High Voltage transmission lines, gas i nfrastructure and the gas where required. The Oil Majors will contribute between 40-45% of the cost of the project (this is based on their equity in the JV) while NNPC will contribute between 55% and 60%. There are several benefits of this arrangement:
1. The government will only contribute 55% - 60% cash during the construction of the project (typically 3- 4 years) instead of 100%. Therefore the impact on the cashflow of government is minimized. The JV partners will recover their contribution over a couple of years after the project has become operational.
2. PHCN benefits from the project management experience of the Oil Majors. The IPP’s will surely be delivered by the Oil Majors as they have their reputations to protect. The current scandals surrounding the NIPP projects will certainly not be experienced in the IPP projects. For example Agip have since delivered their IPP project. Without the Agip IPP our current crises could have been even worse.
3. The Oil Majors will ensure gas supply to the IIP since they are directly involved in gas production.
Unfortunately for Nigerians only Agip has been able to deliver on the IPP due to lack of funding from NNPC. While the Oil Majors are willing and able to fund their share of the project, NNPC has failed in the last two years to provide funding for the projects. For one reason or the other, Shell, C hevron, Elf and ExxonMobil have not received the funds from NNPC needed to deliver the p rojects. Shell has made significant progress without f unds from NNPC. However, for how long do we expect Shell to carry our burden? NNPC is not really to blame as the government refused to appropriate NNPC the funds it needs.
The real question t hen is how much money is required to deliver the projects? Between Shell, Elf, Chevron and ExxonMobil the amount that is required from the government is between $3.5 to $4 billion dollars. Let me put this amount in context. The $4 billion is about 37 days of oil production if we assume oil price of $90 and 2.2 million barrels a day production and government take of 55% of the production. Please note that this is a very conservative estimate. Can you imagine! All we need to fund the four IPP’s is to commit 37 days production spread over 3 years (approximately 2 weeks production per year!).
Although what I have proposed is rather simplistic, it is equally not that complex. Unfortunately for Nigerians the government of Yar’Adua and NNPC just don’t get it. The whole country cant move forward because of the power situation. Meanwhile oil price is at record highs and NNPC is starved of funds to execute national priority projects.
For the past few months NNPC has been discussing with Oil Majors on how to fund its projects (including IPP’s). With oil price above $100 this is totally unnecessary. This is the time to use the oil money to invest in infrastructure and the oil industry itself. This is not the time to engage in long discussions with Oil Majors on funding. Unfortunately some advisors have convinced the current president that this is the way to go.
Yar’Adua told us during his campaign that power is a priority. However, his actions contradict this. The 2008 budget did not provide the required amount to execute the IPP projects or any major power project. When something is a priority the logical thing to do is to allocate funds to it.
So we continue to live in darkness. Until such a time when someone does the simple calculation and realizes that all we need is 37 days of production to add 2,000 MW to the national grid. While 2,000 MW might look small,it will be a huge leap as it will double our current generation. And perhaps our nights will be brighter and cooler.
Sunday, April 6, 2008
High Expectations Among Investing Public
In the last two years the Nigerian stock exchange has attracted unprecedented interest. This was largely as a result of the banking industry capital raising exercise that saw several banks approach the market for fresh funds. The banks spent millions in advertisement which led to increased awareness among the public of the benefits of investing in the market.
The market posted a gain of 74.7% in 2007. However, it appears such a gain will not be repeated in 2008. At the end of the first quarter of 2007, the NSE All Share Index gained 31% compared to 8.7% at the end of the first quarter of 2008.
Already there is a talk of a crash. Whether there will be a crash or not is difficult to call as this depends on so many factors. Although a correction, not a crash is a possibility as most stocks are currently overvalued.
On the other hand, we might see a modest gain during the year of between 15-20%. Unfortunately, a 20% growth might not satisfy most investors as they have been spoilt by the spectacular growth in 2007. These investors have ignored the performance of the market in the last couple of years in managing their expectations.
2004 – 18.5%
2005 – 1%
2006 – 37.8%
2007 – 74.7%
The growth in 2007 is clearly an exception and cannot be repeated year in year out. Investors will do themselves a favour by lowering their expectations to a more modest 20% annual gain. Anything extra should be seen as a bonus.
The market posted a gain of 74.7% in 2007. However, it appears such a gain will not be repeated in 2008. At the end of the first quarter of 2007, the NSE All Share Index gained 31% compared to 8.7% at the end of the first quarter of 2008.
Already there is a talk of a crash. Whether there will be a crash or not is difficult to call as this depends on so many factors. Although a correction, not a crash is a possibility as most stocks are currently overvalued.
On the other hand, we might see a modest gain during the year of between 15-20%. Unfortunately, a 20% growth might not satisfy most investors as they have been spoilt by the spectacular growth in 2007. These investors have ignored the performance of the market in the last couple of years in managing their expectations.
2004 – 18.5%
2005 – 1%
2006 – 37.8%
2007 – 74.7%
The growth in 2007 is clearly an exception and cannot be repeated year in year out. Investors will do themselves a favour by lowering their expectations to a more modest 20% annual gain. Anything extra should be seen as a bonus.
Thursday, January 24, 2008
On Blogging
I have always wanted to write. I joined a writers club in my home town at 15 but had to drop out after joining a university in another city. Since then, I have written a few pieces but without a medium for publishing, the motivation to write often was none existent. Along came blogging.
I discovered blogging in 2006 but it was only in 2007 that I created a blog for myself. A blog provides the medium to express oneself. Hopefully some readers will find the blog worth visiting.
A writer can only grow and improve by writing. A blog provides a great medium for the would be freelance writer to test the market.
My resolution in 2008 is to post at least one piece on my blog every month. I am sure the adventure will be worth while.
I discovered blogging in 2006 but it was only in 2007 that I created a blog for myself. A blog provides the medium to express oneself. Hopefully some readers will find the blog worth visiting.
A writer can only grow and improve by writing. A blog provides a great medium for the would be freelance writer to test the market.
My resolution in 2008 is to post at least one piece on my blog every month. I am sure the adventure will be worth while.
Subscribe to:
Posts (Atom)
