Chewing The Fat About Cowboys & Indians

I have a few friends who work at senior positions at Bursa and Securities Commission, not trying to do name dropping, just the facts. We always end up up with heated debates on issues surrounding the markets. The latest was a friend's concerns over the cowboy-ness of our markets.

A cowboy market can be termed as a market that is full of syndicates and massive rampings and "lootings" by unscrupulous players. My friend was concerned about that and wanted to look for ways to rein them in with their own lassos. I basically told my friend that you need some "cowboy-ness" in every market. When I forced my friend to come out with cowboy names, names such as SAAG, Huaan, Mulpha, Mobif, Compugates... were mentioned. The theory goes that these counters would have less than 100,000 shares traded normally and can be considered to be dead ducks for most of the year. Suddenly out of the blue, these counters can register daily volumes in excess of 10 million a day! Surely they were rigged!!!

What are syndicates but the collusion among a few players. If the intention is to control the counter, ramp it up and dump, then its sinister and illegal, and should be prosecuted. When they do not really have control, i.e. a relatively large free float, like KNM, you cannot say these counters are controlled even though there may be syndicates behind these counters. Many syndicates do have the controlling shareholders behind them - if you think syndicates do not exist, please go fly a wau bulan.

I am not asking the Bursa or SC to ignore some of the more unscrupulous activity. I am basically voicing out that you need some element of cowboy-ness in every market. If the counter has sufficient liquidity and a good free float, and it appears to be high on volume list, its best to let things be. If the counter appears to be controlled - e.g. more than 50%-70% being tied up and the rampings seems rampant, then by all means query the company. The trouble is 99.9999% of all companies queried will answer that they are not aware of any news, developments or business activities that would have led to such irrational activity in their share's volume and price.

The SC and Bursa SHOULD look closely when certain groups of players buy and sell the same shares among themselves, and when that level is more than say 50% of total volume traded in a day. The SC and Bursa should have the ability to look at trades breakdowns to get at those information. But that alone is not a sufficient "bad factor".

Buying and selling can also be pure day trading, which cannot and should not be faulted. Heck, even EPF buys and sell the same shares in the same day.

The SC and Bursa are there to maintain some sort of integrity in the market and to make sure the public are not duped. It is better to have "share gains threshold" before launching a thorough investigation into the manipulation or syndicate activities. I would propose that:

a) put a company on your red alert list if a stock gains more than 50% in value over a 4 week period

b) an investigation should be launched if the said gains is also accompanied by: massive "private placements" activity; and/or certain individuals or groups recording same buys/sells activity that accounts for more than 50% of daily volume

Other than that, it is better to let cowboys be cowboys, you need that element to bring back the crowds. Its a necessary part of a healthy functioning market. Btw, I also told my friends that there are now way tooo... many lawyers working at Bursa and the SC, trying to monitor and run the local markets. Its not healthy, its too legalistic... and most importantly, most lacked market savvy-ness and an appreciation of market nuances, which are paramount in order to govern effectively and successfully. In the end, you will end up with just one of the two, effective but not successful, or successful but not effective.




p/s photos: Kanjiya Shihori

Short Selling In KLSE

Wise, Farsighted Or A Mistake

The government introduced several measures to enhance the local bourse including allowing large Malaysian companies with foreign operations and foreign owned companies with foreign assets of at least RM1 billion in market capitalisation to seek listing on Bursa Malaysia, enabling dual listings and reintroducing short selling. The government said the measures were aimed at bolstering the stock market to be a world class capital market. Other than that, to realign the regulatory framework, the securities and futures laws are to be reconsolidated into a single omnibus legislation.The consolidation of these two laws would enable the introduction of a single licensing framework for market participants.

Besides that, regulated short selling (RSS) and securities borrowing and lending (SBL) will be reintroduced, the government said. To attract global talent, the processing of visas and work permits for foreign individuals in all aspects of the financial services sector would be centralised at the respective regulators, namely, Bank Negara Malaysia and the Securities Commission.

RSS is a big decision and will be applauded and criticised by many. The naysayers will be highlighting that the market may not be deep enough. Participants may not be sophisticated enough. When authorities are claiming that GLCs are cheap, why would they go and derail that - as when shorting, most foreign institutions will be aiming for GLCs anyway. The timing is bad as we are trying to entice more buying not selling activity. Will result in more manipulation.

I am very much for RSS. My reasons:

1) Better valuation - You cannot keep a market artificial. By having RSS, you have a market that rewards and punishes good fundamentals and bad valuation. Valuation will be clearer and more transparent.
2) More activity - Right now, you can only participate in the market provided you have ONE view, you must be bullish. In general, markets will only have two to three mini bullish phases a year. In total, you would be happy to get 3 months of bullish activity - you can kiss goodbye the other 9 months. Remisers and dealers would now be more open to having two views instead of just one.
3) Restrict over-manipulation - Syndicates will have to do more legwork when ramping stocks. Last couple of weeks could have been a great opportunity to short sell the poultry stocks, or even some questionable highly traded Mesdaq stocks.
4) Investors can hedge and have more strategies - Now even the individual investor can act like a hedge fund. Say, I like property stocks ahead of the 9MP, but think that the activity is overdone in poultry. Go long on one side and borrow to short the other. This gives more choices and strategies, and can reduce risk. Of course if you are an idiot and go the other way, you would double your losses - but there are more choices now... or is it more ways to hang yourself?! But if you are a poor investor, you will eventually lose all your money anyway with or without RSS - RSS will be good for the good investor.
5) Investors' intelligence - This will propel the public to learn more and study more about stocks in general. You have to form real opinions and not just rely on hearsay. As it is more exciting, investors will indulge more. Just as in horse racing, if you only have WIN bets, its dull. But if you have QUINELLAS (forecasting the first 2 horses) or TRIFECTAS (forecasting the first 3 horse in the same order), you get more activity. The cynics who say that RSS is just for institutions because the man on the street would not be savvy enough is wrong. Yes, they may have to learn, but they will. If we stop introducing new things to the market for fear of ignorance - then nothing new will be added, its a myopic view. Then, warrants or futures would never be introduced in the first place. We just have to make sure there is sufficient information out there - know what free float is, what open shorts' balance (open interest) is, know what is squeezing the shorts, understand that you need to incur interest and related cost to borrow stocks to short, know what breakeven is in a trade, etc...
6) GLCs - It will put the GLCs on the backfoot. As Khazanah is still in the initial stages of reviving the GLCs, having RSS will delay any plans Khazanah might have to sell down their stakes. Only until GLCs are performing well will Khazanah have the luxury option to sell down some stakes. Increasing the free float at a time when a company is still struggling is an invitation to shoot oneself in the foot. (As argued before in my previous blogs, I am a big believer in Khazanah selling down their stakes to improve liquidity).
7) Bad timing? - Well, there can never be an excellent time, can it? Just do it already. Just make sure the lending procedures and interest charges are competitive and attractive for both side. For stock owners, they could make some money by depositing shares to lend.
8) Hedge funds - If all parties work well, we could see more hedge funds being very active in the KLSE. In fact, this move will put a lot of pressure on the neighbouring bourses to do likewise.

For those who think that share prices should be encouraged to go up, not down - that is a naive and shallow opinion. Stocks do not just serve to make you money. You participate in the growth potential of each stock. Stock markets DO NOT OWE US A LIVING. When you get it wrong, you get it wrong. Already without RSS, investors still lose so much money, why not give this a chance. Prices go up and down, now at least you can profit when you bet it on the way down correctly.

Problems With Bursa Malaysia

The Bursa people did a press conference yesterday, trying to address the poor investor interest in Malaysian stocks. The following are factoids regarding Bursa's strategy, their understanding of the real problems, and whether their priorities have been misplaced.

1) Yusli, the CEO, said that the Bursa expects to maintain its 2006 financial results around the same level as last year. In 2005 the Bursa reported a credible net profit of RM81.3 million on revenues of RM257.6 million, and declared a hefty dividend.
My Take - That's what you get when you give your CEO and senior executives large chunks of shares/options in Bursa shares. It will make them think that financial results and cash back in "my pocket" are the most important things in running an exchange. (Please read my blog on Bursa and what's wrong with their corporate strategy) - its high time to refocus priorities on other more pressing issues, its not just a net profit thing for the Bursa. A lot of remisers, dealers and brokers who depend on the Bursa DO NOT have Bursa shares to help cushion the fall, like some.

2) Yusli also trumpeted that local and foreign funds could return to Malaysian stocks, and to do that, one of the first thing will be showcasing 30 companies in a big joint conference hosted by the Bursa, CIMB and UBS on March 22 to 24. Yusli added that there will be GLCs and plantation firms. "We have some really good companies and we want to tell as many investors as possible".
My Take - Most institutional investors KNOW THE 30 companies a lot better than the CFOs/CEOs doing the presentation already!!! Not investing in Malaysian companies is not due to a lack of awareness or lack of intimate knowledge of the companies per se, good investors also know why they should not be investing after doing their own research. It is so naive to think that a few conferences like these will perk up buyers - my, I didn't know how good these companies were, I should buy now.... really Yusli...

3) Yusli did mention that after speaking to big foreign investors, they did mention that the Bursa needs to have more big, quality and liquid stocks.
My Take - Okay man, here are some real issues. BIG - how to be big, well similar GLC could merge; good GLCs and other listed firms with proper expertise could venture overseas to by up regional stakes (Malaysian market is too small to grow into anything decent if a company stays local).
QUALITY - That is being addressed by Khazanah on its GLCs, have to wait and see if the strategy pans out. As for other listed non-GLCs, quality is there but there is a big complacency around many of those companies. Many are happy to be Jaguh Kampung (backyard champs) and stay that way, they are happy making their RM30 -100 million. Companies to emulate: Tanjong, YTL Power, IJM, IOI Corp, etc...
As for LIQUIDITY, this is one thing the Bursa can do more effectively. Khazanah can take the lead, too many companies are holding about 45%-55% of their shares. There is no need to do that. Believe in sharing growth values. Have the confidence to operate with just 34% stake or thereabouts. More transparency, accountability will put more pressure on strategic decisions and management decisions, but that's the way forward. Studies in the past have shown that companies who have placed out shares from a high majority stake to just a controlling stake, actually saw their share price rise, and activity level also rose despite the greater free float. Greater free float means more big institutions can then consider buying them as there will be sufficient liquidity to move in and out. Khazanah should really take the lead, reduce stakes and place them out.

Part of the reason for the under-performance by Malaysian stocks last year was the tight control on the ringgit. Many funds were in agreement to load up on ringgit based assets last year in anticipation of a stronger ringgit or revaluation. That did not occur, and wasted a lot of investors' time. Malaysia is such a small market, you don't want to get disappointed by a small market. Its like a guy, if he got rejected by a supermodel, that's kinda ok, but to be rejected by a 4' 11" pork chop, that's another thing. Stop making the ringgit artificially weak, the authorities are only helping to make the plantation companies look better than what they really are.

Sometimes we are just like a piece of pork chop, in Cantonese, a very average looking girl. The corporate results are not outstanding, liquidity is a problem, not enough big companies. Companies that do well are actually helped by the ringgit, what if the ringgit is allowed to appreciate from here. Other bourses offer more upside. Malaysian stock prices while not expensive is not cheap either. Liquidity in the system is decent but countered by firming interest rates. Property prices have been stagnant.

Sometimes no one will want to date your daughter, and you will feel sad about it. Every dog has its day, nobody stays down forever. The KPIs to be announced by the GLCs should be looked at closely. Not so much what they reveal, but how and what Khazanah will be doing with performers and non-performers - that will be the crucial thing. Of the GLCs such as plantations, banks, conglomerates, utilities and services - the one sector that is "easier to navigate" and control is utilities - I suspect real improvements and changes will be more evident in utilities - hence TM and Tenaga should see more upside activity, if there happens to be any.

Bursa - Look Deeper To See The Warts

As reported in The Star Biz today (16/2/06): Bursa Malaysia Bhd reported a net profit of RM81.3mil for the year ended Dec 31, 2005, surpassing the RM60.3mil it forecast at the time of its initial public offering (IPO) in February last year. The company announced a final gross dividend of 10 sen a share following an interim gross dividend of 10 sen that was paid earlier. These are apart from the capital distribution of 83 sen a share in December. Yusli Mohamed Yusoff Chief executive officer Yusli Mohamed Yusoff pointed out that Bursa produced a total shareholder return of 88% for investors who successfully subscribed to the shares at RM3 each last year. This outstanding total shareholder return is based on the dividends paid and payable for its 2005 financial year, cash distribution and appreciation in its share price that closed at RM4.68 yesterday. Yusli said improvements in the financial results were achieved in spite of the “challenging market conditions” last year. One aspect of these conditions was a significant withdrawal of retail investors from trading or investing in stocks. Yusli said retail participation in the market formed only 29% of trading value – an eight-year low – compared with 71% by institutional investors last year. As a group, individuals accounted for only a third of total turnover versus about 50% in previous years. “We would like to draw retail investors back into the market,” he added. In doing so, Bursa will work closely with the brokerages. The research sponsored by Bursa for small listed companies, for instance, was working well. Chief operating officer Omar Merican said more products would be introduced for retail investors who formed a growth sector of customers. The country has a young population and each year, there are half a million new investors. “They should shift their savings into good investments,” he said. Yusli observed that as investors' sentiment improved, market velocity improved from 25% last year to 30% up to Feb 10. “We hope the current volume of trading can be sustained,” he said.

The financial results were good. However, an exchange's priority is more than just EPS or total return on assets. The board and management have to put into place startegies, product development, improve market monitoring & surveilence, championing the integrity of the markets and protecting minority interests. So, a proper report card will look at many facets of operations, and more so, the management's awareness of growth factors needed to elevate the Bursa to the next level. Here are some of the other important factors that should be addressed by the Bursa and how well they have been faring:

a) Number of IPOs - While that is a function of the underlying economy, it is nonetheless the role of Bursa to facilitate a steady stream of good IPOs to excite investors. It is a quandry, the Bursa should have a good pipeline of listings and at the same time do more have more checks and QCs to maintain the integrity of the exchange in terms of companies allowed to be listed (2005: C)

b) Funds Raised - One of the main functions of an exchange is to facilitate companies to raise funds. It could be in the form of an IPO, or promotion of new instruments such as REITs. Bursa should also have closer dialogue and working relationship to speed up approvals/rejections on applications for issuance of new shares/rights or other forms of fund raising. A speedy turnaround allows for a more effective exchange (2005: B)

c) Companies Regulation & Governance - An exchange in concert with the Securities Commission should be keeping regulatory standards of Malaysia on par with market's best practices. So far so good, albeit a tad excessive. Quarterly reporting already places too swift a turnaround doing just numbers collating with little value add. Over-regulation imposes a higher running cost for certain departments, and at the same time over-burdens the board and management with mundane issues when they could be focusing on more important ones. Ask any board and management if they think the current system should be lightened - probably 99% would want things to be lighter by 20%-30% (2005: B)

d) New Instruments - An exchange should not just introduce new instruments every so often unless it is thought to provide the market with more breadth, and the market participants have the ability to trade the instruments as informed investors. The introduction of REITs is a welcomed move as it will allow for investors to park their funds at annuity-like assets, a good alternative to fixed deposits, and at the same time allow property owners to cash out a portion of their holdings to be parlayed into other projects (thus boosting the underlying economy). However, the exchange have been slow to introduce structured warrants or covered warrants, and the brokers have been very slow in moving to promote these instruments. Covered warrants have been a big hit in HK and Singapore, no reason why it would not be successful in Malaysia - needs more promotion and leadership from the Bursa. Another product that suffered a similar fate is equity linked (EL) instruments, which is a lot better than straight out short selling as EL instruments allows for yields to be captured with an equity linked bet, which could be a put or a call or both. Again, leadership is lacking from the Bursa. Of course, not all products is right for the Malaysian market, e.g. I personally do not think the market has the depth for stock specific put and call options (2005: C)

e) e-Integration - Assimilation into the new world of internet. Neither here nor there, it looks as if the Bursa will see how the internet impacts on them rather than see how they can leverage on the advantages of the internet to better position the exchange. Internet based brokers are left to live and die on their own, again, a more deliberate form of leadership is needed in this area. Is internet broking the future for broking or isn't? Then, play the cards accordingly, Bursa (2005: D)

f) Market Regulation - This is regulation with respect to intervention by the Bursa on market based activity. Whatever the Bursa did or didn't do, they will be cursed. When they don't intervene, they are accussed of allowing excessive speculation and ordinary investors to be scalped. When they do intervene, they are accussed of interfering with free market foces, buyers beware adage is often quoted to support this backlash against the Bursa. My opinion is that, rules and parameters must be made clear on the outset - we already have limit ups and limit downs per session - these are in place to cool sentiment one way or another. If a stock goes limit up for two or three sessions over a two or three day period, the Bursa will usually step in by demanding that buyers pay with cash for the stock - this is a good and effective enforcement and regulation tool, and the Bursa should be more aggressive with this on stocks that have been overly exuberent (not backed by fundamentals). The recent warning given by the Bursa on TH Hin on its overactive behaviour should be a percursor to implementing the ruling on cash buying only. Things like Fountain View can be very difficult to stop, like who is to say Farm's Best is not another Fountain View?? But we have not seen any additional market warnings on stocks such as Farm's Best, Nasioncom or Iris, just check out their gains for the past 1 month!!! The Bursa needs to be more consistent - an internal rule or guideline must exist, such as if any stock is up by more than 70%-100% over a one month period (of which all the mentioned stocks would come under that qualification) would have a public warning to investors (like the one issued on TH Hin). Continuance upward movement after the warning would be followed by the cash buying only ruling (if the stock is being bought by genuine buyers on fundamentals, then paying cash should not be a problem, plus it will eliminate all those who buy on gearing so that they will not be caught badly in any correction) (2005: C)

g) The 3 Boards & Relevance - The existence of rules pertaining to the attractiveness of the Main Board, Second Board and Mesdaq must be reviewed annually. Are the paid up rules too low for Main and Second Board? Are Mesdaq listings too easy? The Second Board in particular are in dire straits and nothing much has been done to it. The market activity in Second Board stocks for the past 2 years have been pathetic, many companies which should have been delisted are still hanging around in Second Board. The rate of delisting must be speeded up to clean up the respective boards. I am not too worried about Mesdaq rules being too easy, yes, companies will fail, and fail at quite a high rate in Mesdaq, but that's the beauty and purpose of Mesdaq, these are growth potentials. We will see more companies failing in Mesdaq over the next 2 years but the Bursa should be firm to maintain the essence and integrity of having Mesdaq, to tweak the rules to a more difficult level would erode a lot of the important characteristics of a growth companies' board. As for the paid up of Second Board (RM40 million), that should stay, no point lifting it as most of the problems Second Board companies faced stem from "self-speculation & indulgence" during the heady days of 1995-1996, and has very little to do with the RM40 million paid up thing. Main Board's minimum paid up should be increased to RM100 million or RM150 million to distance itself from the other two boards (2005: C-)

h) Working With Intermediaries - Bursa should do a lot more in working with intermediaries as they would be able to add a lot of value and speed up the supply-chain to benefit the Bursa and investors. Working closer with MDC, venture capital firms, merchant bankers, trustee & custodian companies, private bankers, MITI, brokers, minority interest groups, accounting bodies, internet financial portals, other exchanges in the region and globally, research/institute of higher learning, etc... will ensure more effective turnaround of ideas and implementation of value-added practices into the market place (2005: C)

i) The Singapore Equation - ask any broker in town, who among them wants to do inter-broke business (trades passed from overseas brokers to local brokers) as the margins are almost non-existent. I believe both exchanges have been talking but let's get a move on it as it has been dragging on for way too long. Allow brokers for both countries to buy and sell shares on each other's exchanges. Immediately, you will find both broking firms on both sides getting a lot more business, doubling the number of companies one can buy/sell/market. Both exchanges will get enormous gains from the additional fees from additional trades. It will add so much more depth and market participants. The Singapore brokers would gain more than the Malaysian brokers as more Singaporeans would want to buy Malaysian stocks than vice-versa, but that is a narrow minded view to take. The benefits has multiplier effects for everyone involved. Let's integrate the trading systems of both countries already! (2005:C-)

Conclusion - So, we need to have the Bursa to look at other areas as cited above as it is not sufficient to report good financial results when the overall market is lacklustre - that only means that the Bursa got good profit margins on overcharging on various fees, but the market participants are not reporting similar good financials, why? The Bursa should plough back a certain portion of fees charged to improve the state of the markets (as cited above) that it manages. You gotta take care of the angsa that gives you the telurs, don't just gloat about how nice the telurs "you made".