Change Agent

Restoring Confidence to the Banking System

2009-08-16T04:04:00.000-07:00

A few months ago, i wrote an article pleading with the then Governor of the Central Bank of Nigeria (CBN) to allay our fears about the state of our banks. Alas Professor Soludo did not do much to calm my nerves. Since my plea, a new Governor, Sanusi Lamido has taken over the leadership of the CBN from Soludo whose term expired in May.

On 14th August, less than 3 months after taking over, Sanusi Lamido acted decisively to deal with the uncertainty hanging over the banks by sacking the Managing Directors of Afribank, Finbank, Intercontinental, Oceanic and Union Bank. In his view these 5 banks pose a serious threat to the financial system and the management of the banks have acted in a manner detrimental to the interest of their depositors and creditors. The CBN was forced to act to save depositors and restore confidence to the banking system.

In my view, this is a welcome development. In a time of crisis, there is often a need to show leadership and act decisively. For almost a year, the 5 banks have been suffering from illiquidity, surviving on the Expanded Discount Window and interbank borrowings. As the Governor said, three of the banks were very important to the banking system and something needed to be done before they lead to a collapse of the financial system.

The Governor’s actions required courage. For there are vested interests that would have done everything possible to stop this decisive action. However, the actions of the CBN are in order and are in the interest of depositors and long suffering investors. Some of the actions of the banks were shocking. Take Intercontinental bank for example. The bank loaned out more than thirty four billion Naira to three companies they themselves called “fringe” players in the downstream sector of Oil and Gas. It is shocking that such huge sums will be loaned out to three companies that have no significant record of success to speak of. Where was the risk management?

Then there are the billions loaned out to speculators on the Nigerian Stock Exchange (NSE) in the form of margin loans. The value of the securities have since collapsed by more than 70% in some cases. In the process trillions of Naira vanished.

The management of these banks have shown themselves not capable of managing the growth experienced by the banks. Within three years the five banks have frittered away more than three hundred billion Naira in fresh capital. The CBN did the right thing by sacking the managers. Something needed to be done to save what is left of the banks.

Depositors should remain calm. The CBN has injected over 400 billion Naira to save these banks in an unprecedented move backing its words that no bank will be allowed to fail.

It is my hope that these actions by the CBN will restore confidence to the system, reduce the cost of funds and lead to recovery of the economy in general.

Redemption

2009-08-03T17:28:00.000-07:00

We are in the summer and it is meant to be quite but the NSE has been simmering in the last couple of trading days. The NSE All share Index has gone up for 8 straight days and is on the brink of a possible gain on day 9.

In the last 18 months i have come to realise that a lot of things are very possible on the NSE. The expectation is that with the common year end, the last qtr will be tight. But then the CBN cut the Monetary Policy Rate. Oil price has stabilized above $55 for some time reducing the federal deficit. In the last 1 week the Naira has fallen in the official market to N150.25 to the $ further reducing the deficit. So despite the collapse of power and security concerns, the economy is looking like it may finally get some life. Furthermore world markets are looking up with the Dow crossing 9,000.

Looking at the NSE Index it has now gone up for 8 trading days. It faltered on 30th July but did not go down and then it went up on 3rd August when it looked like it might be on its way down. The last time this sort of resistance happened was between 16th April and 24th. It had earlier happened between 1st to 7th April. It was thus in April that the Index resisted a fall and then burst up in May. It then went on that remarkable run that saw it come within whiskers of the year opening value.

However, a not very common occurrence is that the value of transactions went up gradually for 6 trading days starting on 24th July and reaching a climax on 31st July. Value fell today. Is that the sign of a reversal? Or are we about to see another remarkable run? Possibly. Will i be happy if the Index continues to go up carrying us towards another remarkable gain? Yes off course! It will offer me another opportunity to quietly take some gains. I have already realigned my portfolio to my satisfaction but i have learnt it pays to graciously accept unreasonable gains.

For those considering buying into the market, i will say exercise due care and do not get caught out in what might be a suckers rally. Ensure you have tight stops for any speculative buy.

Perhaps this is the chance for some smart banks to quietly and slowly get rid of the toxic assets in their books and in the process get much needed liquidity boost and offer beleaguered shareholders some redemption.

Beyond the Write Offs

2009-08-01T15:53:00.000-07:00

It is no longer news that our banks will need to make provisions against losses from margin and downstream oil sector loans. ETI set the ball rolling by releasing a very disappointing full year result. This was followed by FBN writing off N26 billion to everyone’s surprise. However, not many were surprised when Oceanic bank set a record by writing off N42 billion in one swoop.

Since then Zenith, Oceanic and UBA have released their quarterly results and all 3 have written off billions. I expect all the other banks to follow suit with write offs in their quarterly announcements. I am glad the banks have decided to come clean after being helped along by the new CBN governor. As an insider the Governor was very aware of the extent of the problem at least in FBN.

While i welcome the write offs so that we can move forward, i believe the management of the banks need to show some accountability. It is not just enough to write off billions and pretend all is well. We as shareholders need to know what management has put in place to avoid a future recurrence of almost complete breakdown in risk management. We need to know whether the key parties in the debacle have been sanctioned appropriately. As a minimum no one should get a performance bonus after such disastrous results. For many years bank executives have been handsomely compensated on the back of good results. Now that the tide has changed we expect to see some restraint on executive compensation.

I therefore call on all shareholders to attend the Annual General Meeting and voice their concerns. We need to see some remorse from management for such wealth destruction. We also need to hear what they are doing to avoid recurrence. Hopefully the end of the era of praise singing at AGM’s is in sight.

Round 2

2009-07-18T14:52:00.000-07:00

Someone once said “the ability to anticipate the market instead of reacting to it is the most important attribute that separates the consummate investor from the rest of the investing crowd”. Can we anticipate the market? Perhaps. Attempting to predict the direction of the market is usually a fools errand, but there is no harm in trying.

There is no doubt we are in bear territory. The NSE All Share Index has lost 23.5% since it peaked for the year at 30,925 on 2nd June. On June 2nd , the market had by then been on a spectacular run and was up a stunning 56% since its low of 19,804 established on 26th March. It was an incredible reward for those who went in during the dismal first quarter. Therefore the current bear run is not shocking when considered alongside the remarkable gains.

So how can we recognise the signs of a recovery from the current bear run? Can we anticipate the next bull and jump in at close to the bottom? Back in late January when i decided to jump back in big time it was because i felt stocks were cheap using various valuation methods. Using Price to Earnings (PE), Price to Book and Dividend Yield, stocks were selling at 4 year lows. The average Yield at the end of January was 6% while the PE was 14.3. That compared favourably with the average of 16.3 and Yield of 4.75% on 30th December 2005. The market did not bottom out until March after a suckers rally in February. At the bottom of the market on 26th March 2009 the yield was 6% and PE 12.5%. However, all the stocks i bought in late January and early February did not breach their lows in the March sell off. What i did not anticipate then was that i will be rewarded so quickly.

I used mainly two criteria to decide what to buy: the dividend yield and the PE. I placed more emphasis on the dividend yield. Deciding that at worst i will get a dividend. Most of the banks stood out. I selected those i was familiar with and those that have taken the worst beating. A number of non bank stocks also stood out. I bought those with the largest yields and a reasonable dividend paying record. I avoided Insurance companies. Having just taken a course on Risk management, the faith of Insurance companies in the UK during the stock market collapse in the early 2000’s kept ringing in my ears. Despite their “attractive” valuations i stayed away.

Within two weeks of my entry the February suckers rally was in full swing. I sold a few to reduce my losses from the previous year but mercifully held on most until May/June. I guessed correctly that the stocks had more to run and that they were still fundamentally attractive. Anticipating a selloff in the 3rd quarter i decided to bank some of my gains, I took out all the cash i put in during the first quarter plus more in May and June. I rebalanced my portfolio keeping a few banks and buying more non banks that i hope will act as stabilizers. I kept a nice amount of cash to take advantage of any opportunities that might arise. So far so good.

July has so far been testing. The Index has gained only 3 times in 13 trading days shedding 11.9% in the process. The average PE as at July 17th was 13 and the Yield 5%. The PE is now more attractive than in January but the Yield has dropped probably reflecting some of the poor dividends announced by some Insurance companies. A few stocks are definitely becoming more attractive. My eyes are firmly on non banks stocks for now. The banks need to fall further to compensate for the more uncertainty hanging over them. Insurance stocks are still a no go.

Another positive development that might affect the faith of the market is the reduction in Monetary Policy Rate by the Central Bank. Lower interest rates are generally good for the economy and the market.

I still believe the last half of the year will be tough due to the common year end for banks and the painful write downs some banks need to make. However, if one has a thick skin and some cash to last a long bear run, it will also present an opportunity.

The strategy is to try hard not to exhaust cash before the bear is finally slaughtered. Buy in bits and avoid needless risk like buying IAA or Transcorp for instance. And above all be patient and prepared for a long, bumpy and exhausting ride.

Ray of Hope

2009-07-12T06:34:00.000-07:00

May provided further respite and ray of hope to beleaguered investors on NSE. The Index gained a stunning 38% , surely a record gain in any one month. It was a month in which investors who took the risk in the first quarter were rewarded beyond their imagination. Value of transaction at just over N56 billion was the highest for the year which is consistent with a rising market which generates more interest.

June on the other hand was a reality check. Value of transactions at over N94 billion was the highest in 9 months. The Index reached a year high on June 2nd at 30,925 and came within whiskers of the year opening. However, by the end of the month the Index had dropped to 26,862 a 9.6% decline from May closing. This was certainly not a surprise after the record setting gains in May.

As we enter the summer the dullest time of the year, it is likely that the index will drop further from its June closing before the summer is out. Already the first few days in July indicate a declining interest in the market. Value of transactions are declining daily albeit slowly. But the signs of a bear market are there: lower lows and lower highs combined with shrinking volume.

With the new Central Bank Governor talking tough and uncertainty still hanging over the faith of some banks this is the time for caution. A time to perhaps sit still. Except for some investors still holding on to dead wood. This might be another opportunity to exit with modest losses before another round of meltdown.

April

2009-04-30T18:37:00.000-07:00

April brought welcome relief after the destruction in March when the All Share Index lost 15.1% closing at 19.852. This was the first time it closed for the month below 20,000 since November 2003.

Mercifully April was much better, in fact better than February as the Index gained 8.7% closing at 21,491. The full year result for GTB contributed to the positive performance of the Index. The Index gained 8.3% in 7 days following the release of the result. Without the positive impact of GTB, the month would have closed almost flat.

The full year result of GTB restored some confidence to the beleaguered market. The level of disclosure was impressive and the performance above expectations in the light of the gloom. The result lifted some of the clouds hovering over the banks.

The value of transactions in April was also encouraging. Although just under N43 billion was exchanged a far cry from the N250 billion that was exchanged in April last year, it was the highest for the year. Indicating investors are becoming more interested in the market.

May will be pivotal. Will the gains made in April be reversed just as we saw in March? Or would the flurry of full year results (Oceanic, Ecobank, Dangote Sugar etc) and quarterly results (Zenith, UBA, Skye etc) lift the market?

That said, the feeling is that the worst is over. The Index might commence mild fluctuations till the last quarter of the year. In general the faith of the market, just like its capitalization rests on the performance of the banks. As the banks perform so will the Index. Let’s hope the result released by GTB is an indication of positive news to come.

Capping of Interest Rates

2009-03-26T06:26:00.001-07:00

The Central Bank of Nigeria (CBN) issued a circular on 23rd March 2009 on bank interest rates. The CBN was concerned that interest rates have gone out of hand and something needs to be done. To address this, the Bankers Committee met on 21st March (a Saturday) to discuss. The circular was to communicate the decisions taken. The key ones were:

1) Henceforth, banks will not seek deposit at rates exceeding 15%
2) The lending rate of banks will not exceed 22% plus a maximum of 2% in fees
3) The CBN will lend to banks at a rate that is not higher than 5% above the Monetary Policy Rate (MPR).

The question is why are interest rates high in both the retail and interbank markets? Probably because there is a liquidity crisis and the banks don’t trust each other. Hence require higher rates to compensate them for the risk they are taking by lending to each other. The next question then is how will fixing rates solve the liquidity crisis?

In my view, fixing the rates will not solve the underlying crisis, which is lack of cash by banks. We have seen the effect of trying to force the market with the 1% downward rule of Nigeria Stock Exchange (NSE) and the recent closure of the Interbank Foreign Exchange market. Both measures ended up eroding confidence and had the reverse effect.

I would have thought the first thing CBN will do is to reduce the MPR. With the MPR at 9.75% the CBN is in an enviable position as it can cut rates. Some central banks have lost this option long ago. Why not drop the rate to say 7.75% and the maximum spread for lending to banks to be 3% above MPR? This should help reduce cost of funds as some banks will decide it makes financial sense to access the expanded discount window rather than access the interbank market.

Perhaps another thing that can be done is to inject more money into the economy. An idea is for the Federal Government, States and Local Governments share some more from the excess crude account. The money was saved for the rainy day. Now is the time to use it. The Federal Government can use its share to pay off the billions owed to contractors. They can also use the money for needed capital projects such as completing fast some of the Power Plants already in progress. With this more cash will flow into the banks and reduce the liquidity crisis.

The CBN has been very market oriented in the last few years. However, it has shown in the last 6 months that it is running out of ideas. Perhaps the CBN needs to work with the executive and legislature to find a way out the of the liquidity crisis that has been lingering on for over 9 months. The capping of rates can be interpreted as a cry for help. The Executive and Legislature should step up and offer help before it is too late.

NSE and Alleged Price Manipulation

2009-03-25T09:41:00.000-07:00

I read with interest an advert placed by African Petroleum (AP) on the alleged price manipulation of their stock. The advert was disturbing and has the capacity to further undermine the already fragile public confidence in the market.

There were several things that were quite disturbing about the advert. How did AP get hold of the Central Securities and Clearing System (CSCS) transactions of Dangote or is this information available in the public domain? Why is AP now crying that their price has fallen down to earth? Why did they not complain when the price went up to ridiculous levels before the public offer? Did it not go up due to the same loop hole that is now being exploited?

It is obvious especially in hindsight that prices were manipulated up during the public offer mania. We are all living through the consequences. I sincerely hope the Securities and Exchange Commission (SEC) and the Nigeria Stock Exchange (NSE) will be alive to their various responsibilities.

A situation whereby price manipulation whether up or down go unchecked by the authorities is not healthy for our market. Investors should also be reminded that it is not only when prices are going down that they should ask questions. When prices go up to levels that are obviously irrational, investors should also seek logical explanation otherwise they should stay out of the market and resist the temptation offered by a quick gain.

I also use this opportunity to call on the NSE and SEC to sanction companies that have refused to provide their quarterly earnings as required. Such sanctions should not just be a slap on the wrist but should be sanctions that are appropriate. We need better disclosure to calm investors’ nerves. Now is certainly not the time to continue to turn a blind eye on such obvious non compliance.

February

2009-03-16T06:28:00.000-07:00

In line with tradition, February 2009 was a much better month than January. The volume and value of transactions was higher. A total of N37 billion was exchanged compared to N29.8 billion in January. However, the amount was a far cry from the N375 billion that was exchanged in February 2008 (an all time record). The NSE All Share Index closed at 23,377 up 7.2%. This is the first time since February 2008 that the Index has closed higher the following month.

Unfortunately, the gains made in February have since been eroded in March. As at 13th March, the Index has dropped to 21,003 a new 52 week low and a decline of 10.2% compared to February.

In my view the outlook for the capital market does not look very good for the rest of the year. I base my opinion on the following:

- Very tight liquidity which has resulted in high deposit and lending rates. This liquidity will not ease up quickly especially with the adoption of December uniform year end at the end of this year.

- A depreciating Naira as a result of policy inconsistency from the Central Bank. This means more Naira is required to fund imports further worsening liquidity.

- High inflation which is usually not good for companies and individuals since it discourages long term investments.

- Gloomy economic outlook: Low oil price, reduced production due to OPEC quota and high government deficit. Due to the deficit the government will need to borrow locally to fund the shortfall. This will further reduce the funds available to the private sector and continue to impact negatively on cost of funds.

I therefore advice a long term view for any investment on the NSE. I expect the All Share Index to close down this year. The Index needs to go up at least 50% to close even for the year. I believe that is a tall order given the points outlined above.

For the long term patient investor, now is the time to look for quality stocks at reasonable valuations. For the trader, trade with caution.

Crash

2009-02-01T11:27:00.000-08:00

January 2009 will go down as the worst month in the history of the Nigerian Stock Exchange. The All share Index lost 30.6% to close at 21,814. The last time the Index was below 22,000 was in 2003. The drop of 30.6% was incredible given that the cumulative losses suffered in the entire forgettable 2008 was 46%.

The value of transactions exchanged did not fare any better. Only N29.8 billion was exchanged an average of about N1.4 billion daily. This compares miserably to the N286 billion exchanged in 2008 an average of N13 billion daily. It is safe to say that what we witnessed in the last 7 months is a crash.

For the value investor times could not be more exiting. The market PE is currently about 14.3 while the dividend yield is 6%. The market has not been this attractive for quite a while. In my view the market is currently oversold and there are opportunities in most sectors. Definitely, this is not the time for the trader as there has been little volatility to trade. However, for long term investors, this is the time to seriously consider buying quality dividend paying stocks at prices last seen 5 years ago.

Year............PE.....Yield %
30th Jan 2009...14.3... 6
31st Dec 2008...16.7... 4
25th Jun 2008...27.0... 2.1
5th Mar 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

Whether investors will have the courage and liquidity to go on a buying spree is yet to be seen. One of the things I learnt during this long bear market is that fear is indeed more powerful than greed.

Time to Act

2009-01-21T09:17:00.000-08:00

In the last few days, the share price of most banks quoted on the Nigerian Stock Exchange (NSE) has taken a beating. The share price of some of the banks has shed more than 40% this year alone. While I do not subscribe to the idea of a bail out of the NSE, I believe the Central Bank of Nigeria (CBN) needs to calm the nerves of investors and depositors. The CBN needs to come clean about the health of the banks.

What the market is telling us is that the earnings declared by some of the banks is probably not a true reflection of their financial condition. Otherwise why on earth will the shares of a perfectly healthy bank in a growing emerging economy be selling at a Price to Earnings ratio of less than 5 and a dividend yield of more than 10%?

I am calling on the CBN Governor to come clean about the health of our banks and the level of their exposure to the Nigerian Stock Exchange. We need him to exercise leadership and take responsibility. The CBN relaxed in September 2008 the Cash Reserve Requirement and Liquidity Ratio for commercial banks and also allowed banks to access the Discount Window by pledging Commercial Papers. This action suggests that there was at that time a serious liquidity crisis which called for the CBN to act so aggressively to improve liquidity. Despite such actions, interest rates have not eased.

Nigeria is at a cross road. The financial crisis in the West has led to the collapse of Oil price our main source of foreign exchange. The Naira has declined more than 25% against the dollar in the last 2 months. The economy and the Stock market are facing big tests. We need the CBN Governor to step up and allay our fears and restore some confidence.

2008 In Review

2009-01-04T12:21:00.000-08:00

The year 2008 is a year to forget for most investors on the Nigerian Stock Exchange (NSE). The All Share Index closed the year at 31,451 down 45.8% from its opening position for the year. Based on available data, this is the worst year for the Index between 1995 and 2008. Infact the loss suffered in 2008 is worse than the cumulative loss of 27% suffered between 1997 and 1999.

The All share Index went down for 10 consecutive months, also a record. The FSDH Banking Index was down 57%, the Insurance Index 54% and Manufacturing Index 43%. Only the Petroleum Marketing Index closed up 19%. Value of transactions also collapsed from an average daily figure of N18.5 billion in February to a paltry average of N2.2 billion in December. The most devastating loss was suffered in October as the Index lost 21% the worst decline in 13 years. It was not pretty all round.

The ASI reflected global trends. Most markets were down in 2008. The NSE was especially hard hit by regulatory incompetence and earlier excesses that led to serious over valuation of a large number of stocks.

One of the few positives one can take away from 2008 is the lessons learnt from the long drawn out bear market. The 12 lessons articulated by Brent Arends are worth heeding. They can be found at www.marketwatch.com/news. Here are some of the lessons I have learnt:

1) Cut your losses short. See my earlier post on this topic.
2) Liquidity is key. All bull markets are rooted in easy money. Once that disappears, chances are the market will commence a downward trend.
3) Be properly diversified across sectors. A portfolio composed of Banks and Insurance companies fared far worse than the ASI.
4) Be flexible in your analysis.
5) If you are a trader and the market shows a downward trend, stay out unless you can short.
6) You can underpay for a bad company and still never recover.
7) Avoid being trapped in bear psychology. Between 1995 and 2008, only four years ended down.
8) There is no such thing as a permanent hold decision. Sell when the fundamentals begin to deteriorate.

I look forward to 2009 with the hope that the worst is truly behind us. I cannot really imagine another year of 40%+ decline.

2009 Budget

2008-12-16T07:16:00.000-08:00

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.

A Year to Forget

2008-12-11T13:29:00.000-08:00

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?

Respite

2008-11-23T17:26:00.000-08:00

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…..

Meltdown

2008-10-31T16:56:00.000-07:00

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.

Back to Sanity

2008-10-28T06:41:00.001-07:00

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.

Illiquid

2008-10-25T16:38:00.000-07:00

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.

Financial Tsunami

2008-10-09T01:10:00.000-07:00

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.

September

2008-10-05T16:18:00.000-07:00

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.

Come into my Trading Room - A Review

2008-09-11T07:36:00.000-07:00

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.

Intervention

2008-08-31T15:14:00.000-07:00

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.

Never Argue with Market Trend

2008-08-26T13:24:00.000-07:00

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.

Liquidity

2008-08-05T14:07:00.000-07:00

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.

July

2008-08-03T10:31:00.000-07:00

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.