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.
Thursday, October 9, 2008
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.
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