The Unbearable Unfairness Of Being A Broking Firm & Glove Counters Outlook

 

This bull run is more likely to be screwed up by the brokers themselves than genuine external economics.

The reason is simple: they have too much power in shifting the goalposts.

NO CONTRA ON GLOVE COUNTERS

The leaders (glove counters) started to weaken on Russian vaccine news last Thursday. However the glove counters plus small caps continued the weakness on Friday on news that ONE broker is going to institute NO CONTRA trades on glove counters on Monday. No contra means, you can't sell on first two days - you have to pick them up first. Conversely it means T+1, which is you pay on the day you buy, then you can sell on second day.

Bursa Malaysia said on its website that contra dealing is not a right of the client but rather a privilege accorded by the stockbroking company to its clients.

"This means that the stockbroking company is not obliged to allow contra dealing facilities for all its clients,” Bursa said.

I understand all that but to call it a privilege is a bit much. After all, when they solicit your business, the brokers won't tell you "hey, we can do T+1 or T+2 or T+0 (designated counters)". When a broker has the right to shift the goalposts, that is a huge "incentive" to front run (or in this case sell all your positions first) before announcing the rule change. Can we have a verification that that did not happen?

This has to do with the integrity and trustworthiness of the system and the brokers. Do not hide behind the rules that says you can. Brokers and regulators must do more than that to maintain trustworthiness and integrity, and not treat investors like trash.

The other probable reason is even worse, that the broker themselves do not have the balance sheet to fund the trades. OMG, that would be so bad. Not enough capital, don't play this game.

MARGIN LIMIT GIVEN ON CERTAIN COUNTERS

We have seen this a couple of times over the past few months. Mainly affected the glove related counters. Again all brokers are allowed to set the maximum upper price limits for all counters. Again they have the right to move the goalposts whenever they feel like it. Again, we do not know if the brokers and its employees and traders "traded ahead with that knowledge" at the expense of the rest of the market players.

What is galling is that the same brokers can reduce the limits, and yet the same house can issue a BUY research report on same stock/s for 80%-120% higher than the margin limit price???

I know one is risk management and the other is investment banking. But they are under one broker company. If the risk side says a stock margin limit is RM10.00, how are we to take the research report with a target fair price at RM22.00???!!!!

but wait ... THEY CAN ALSO RAISE BACK THE LIMITS ON AN AD HOC BASIS ... which they did within weeks.

Then some of them can also raise the upper limits of the same stocks within weeks. As you can see, the one making up the rules ad hoc basis stands to gain a lot - IF they inform certain parties in their own company (fund managers, top remisiers, top proprietary day traders, etc..). We don't know. Nobody seems to care. 

Basis Of Anger

a) when a broker says it is contra it only means T+2, it is not T+7 as before ... T+2 also you get scared??? I mean each client is given a buy limit BASED on shares/cash they have, and usually will not be more than 100% of that. So you already have coverage. Compared to the 90s, when the same broker offered T+7 on almost nothing.

b) when the broker who institute no contra on glove counters, did they do likewise on their proprietary day traders??? All PDTs are on T+1basis. Why not ask them to pick up first then sell as well to be fair.

GLOVE COUNTERS

I have to state that I do not have any glove counters now or even traded them for the last 2 weeks. If anything I can't pull myself to buy them at current prices but it seems everybody who was or is an analyst/economist/market commentator/business journalist .. would like to bash the rally.

Yes it makes little sense on fundamentals. When you start comparing them to overtaking Maybank, Public Bank etc... you know you are grasping at straws.

I would like to say that this entire bull run was started thanks to the MCO (and the likes) and the deluge of liquidity offered by various governments and central banks. Malaysia has been lucky to have at least the glove related sector generating real profits. They are easy targets to criticise when they rise and rise, and more people develop green eye envy as they did not get a slice of the action.

It is not their doing. The market has NO OTHER SECTOR with that kind of profits visibility. Naturally all spotlights are on them. 

Are all the articles nowadays being fair, they just bash and bash. You can raise some cautionary flags but look at the bigger picture. We so needed the current bull run, it more than saved the rest of the economy.

Some 300,000 new CDS accounts were opened over the past 3 months. This rally ensured the beneficiaries was broad based to all across the retail participants and not just the elites.

MY VIEW ON GLOVE COUNTERS

The current euphoria is nothing new. Not every glove sold gets used. No one knows what is the stock build up or backorder throughout the entire distribution channel. And it is normal when demand outstrip supply, people order more than what they need (hence ASP increase) to avoid the possibility of shortage later. So this buildup/backlog can reach a point where one day any slow down in demand or every players along the distrbution channel realised they got too much stocks and stop ordering, you'll suddenly see orders collapsing.

But the top 5 fellas already have orders secured as far out as 2 years. That means no matter how you DO NOT LIKE GLOVE, these top 5 fellas will be reporting exceptional profits for at least the next 4 quarters. It is not going to a straight line rally but these bouts of correction are needed and healthy for the run. Let them run, and they will correct every now and then, BUT DON'T LET THE CORRECTION BE MAN-MADE (like the two rules cited above).

Can Top Glove reach RM50... maybe. I am looking at a fertile ground for at least another 12 months. Just citing Top Glove, I think it can be around RM25-28 before going ex for bonus. the next 9-12 months will see it trying to gain back to RM20 on an ex basis (or RM40 on a pre basis).

How it will all end. Everybody is ramping up capacity. There are new entrants who will come in within 2-3 years. Once the top 5 start to drop ASP, you can see a huge collapse. 12-16 months out when the order pile up starts shrinking and ASPs starts to drop, even Top Glove can go back to RM5-8 ex basis or (RM10-16 pre basis). That is still much higher than where it was 6 months ago.

The top few can survive and in a fight they can drop prices to even a slight loss to kill off all the small players, and they will do it that way. Only by killing and absorbing them can you "maintain" future prices. Hence all small players will get trampled two years out.

Gloves is like a commodity, there can only be a few players, full stop.

The Bursa Bull Market - Prognosis & Ramifications

PROGNOSIS

When Covid19 started baring its fangs, many countries imposed MCO, and the general belief was that EVERYTHING should be down and out. Many certainly believed that equity markets were a sure write off for the rest of the year. 

Not only Covid19, we also had the unnecessary plunge in oil prices to boot.

What happened was confounding. Not only did equity not tank and die, but they also staged a remarkable turnaround, unleashing a liquidity surge like a dam being cracked open. Who saw that coming?

Governments and central banks opened their wallets. While a substantial portion of the real economy is still in tatters, the stock market went off on its own tangent. I did turn bullish too a couple of months back, and as in any proper bull markets, there will be excesses.

THE NEW PLAYERS

But no one really predicted the deluge of interest locally. Initially we were launched into orbit via the glove makers. Given that that is almost the one sole sector showing signs of real profits. It started off innocently enough. Soon, new retail players started to join in. Was it because of boredom owing to the MCO? We will never really know but apparently from March till now, some 300,000 new CDS accounts were opened!!! 

Bursa and Sc were worried over the last 10 years over the declining number of retail participants. The average age of private investors were rising from 35 to 45 and if nothing new happened, soon the average age of retail investors will be 50. It appears that the generation reaching 20-30 from 2005-2019 had absolutely no interest in stock markets.

Bursa did plenty of roadshows, seminars, engaging speakers, even going to university ... but to little effect. What happened in one fell swoop, the younger generation all surged into the markets.

Hence the quality and roadmap of this bull run has taken a different trajectory from other bull runs of the past 20 years. We now have a more than substantive group with almost zero experience with limit ups, daily market corrections of more than 100, 200 points, limited appreciation of the role of syndicates and day traders.

In many ways, this bull run is not like any other bull run before on KLSE. We thought the markets can never return to the vibrancy mode of the 90s. Well, its stronger than the 90s in many ways. The volatility is there but nowhere as bad on the downside than during the roaring 90s. One explanation was that in the 90s, probably 50-60% of the trades were on margin WITH ZERO COLLATERAL. Hence any quivering will see dramatic sell downs.

These days, sell downs still happen but they were brief and easily supported. Hence in this sense the quality and sustainability of the retail funds this round is more solid. Nobody is buying with zero collateral.

How different are the new accounts?

- Internet media / guru led: Instead of using phones to disseminate information and tip back in the 90s, the trend is a lot quicker now, chat groups, telegrams .. tips can easily go viral.

- Substantive numbers have zero knowledge of past corrections. Little knowledge of how syndicates and PDTs operate - in some cases, that is a good thing.

- Less reliance on remisier: They used to be gatekeepers. During heady days, you can't even get through to your remisier ( and they have 3 phone lines mind you). Now internet trading makes it swifter, and you don't have to go through your dealers' "eyes roll" with your choices.

During the highs of the 90s we can boast of 2-4 counters limiting up a day. My gawd, we had 11 counters limit up yesterday!!!

NOTE TO FINANCE MINISTRY

While it is speculative at the moment, the powers to be SHOULD NOT stamp out the current market momentum. For one, the last 3 months have more than INJECTED SUFFICIENT STIMULUS, MONEY VELOCITY into the economy to more than cover the contractions owing to the prolonged ill effects of Covid19/MCO.

This will not only save the government coffers billions of ringgit in unnecessary stimulus packages but will help "redivert government funds" to other affected sectors not benefitting from the market boom.

Let's just see how much "money" has or can flow to the economy. Let's just look at the glove related sector. Let's just assume 20% of shares were traded by retail and gains were pocketed. 

CAREPLUS   540m shares  20% x 5.10 = RM550m

HLT   525m   20% x 2.30 = RM241.5m

SUPERMAX    1.3bn   20% x 21.00 = RM5.46bn

TOP GLOVE   2.7bn  20% x 22.00 = RM11.88bn

HARTA    3.4bn   20% x 13.00 = RM8.84bn

That's just a few, and that's like more than RM28bn ... imagine a stimulus program announced to inject RM28bn. Coupled with the run on small caps, we are looking at an approximate figure of RM35bn thus far. It doesn't stretch the government's coffers of debt burden.

That conservative RM35bn has a velocity of money factor into the real economy. Depending on which economist you ask, its 5x-8x value to the real economy. Simply said, the monies will be primarily used in the economy and spending flows, it trickles down the line.

Hence it is totally silly to even think of imposing a windfall tax on glove makers. How much can the government get? Assume they make RM3bn this year, taxing 10% is only RM300m ... but you will impact gravely on the market run. Collectively they have already "injected" RM28bn into the real economy, and even more in coming months ... do you really want to derail all that for RM300m. What can you do with RM300m a year? They are doing R28bn stimulus thus far. So think properly.

The worst thing to do is to save up the gains or used to pay down debt to the banks as banks are still very wary and hence the flow of funds stops at the banks currently.

300,000 new CDS accounts, what you are having is a broad based rally benefitting an awful lot of people. It is not an elite club. It goes a long way to energising the real economy.

WHAT ABOUT THE BUST

When it happens, it happens, just don't prick it with man-made methods. Presently only things such as reduction of margin will shock the market lower. Brokers have already rules to protect themselves, no need to kill the goose laying golden eggs. It is not like the 90s, all brokers have adequate protection on their remixers, dealers and margin lines as they are.

There are a lot of positives on the current market. The only bad mouthers are those who do not have a position and is willing a correction. Of course the exuberance caused many silly counters to sillier prices. Let it be, its part of a bull market. There will be excesses. All our accounts have margin limits. No one will die this round unless you borrow from Ah Long.

Circuit Breakers

Well, it did catch almost everyone by surprise. The announcement by Bursa to have a ceiling price for a few counters. It is a long-standing rule, it wasn't invented on an ad hoc basis. First of all, I don't think any of the normal "metrics" were broken: e.g. lots of trades being rolled over; suspicious trades to move prices higher, etc... One can see that the buying was genuine and the retail army was very formidable.

According to Bursa rulings, when a stock or warrant hits a limit up or limit down for two consecutive trading days, "as the case may be on the next market day, the exchange may maintain the trading price at the last done price of the previous market day for such period as specified by the exchange"

"MAY" is the key word. Kudos to Bursa for doing so.

Even after a few bouts of "proper correction" in the gloves sector, the band marches on. Some of that retail liquidity moved into small caps and soon a bull market reminiscent of the 90s was born. Apparently, some 3m new CDS accounts were opened over the last few months. Something unthinkable has happened. When Covid19 started baring its fangs, many countries imposed MCO, and the general belief was that EVERYTHING should be down and out. Many certainly believed that equity markets were a sure write off for the rest of the year.

What happened was confounding. Not only did equity not tank and die, but they also staged a remarkable turnaround, unleashing a liquidity surge like a dam being cracked open. Who saw that coming?

Governments and central banks opened their wallets. While a substantial portion of the real economy is still in tatters, the stock market went off on its own tangent. I did turn bullish too a couple of months back, and as in any proper bull markets, there will be excesses.

The Bursa rule, to me, is right and proper. Daily volumes were hitting record levels and being broken again and again. A genuine exchange may just be a conduit to transact trades. If trades were genuine, no one should stop them. Alas, we are in an imperfect world, where herd mentality and over-exuberance can cause untold ramifications if not held in check.

That is why most markets have circuit breakers, to prevent a stampede. To provide a cooling-off period when things get silly. Greed and crowd mania can be very bad things when they get out of hand. 

I am not saying markets need correction but let's all take a breath, step back, and reassess. Circuit breakers are there to SAVE OURSELVES from ourselves.