Friday, August 25, 2006

NSE Bull Run: Kenya's deja vu?

At the begining of 2003 after the Narc team took over power several economic indicators showed a positive outlook with the most visible being the bull run at the NSE. several reasons could be advanced for the bull run chief among them being that the govt reduced the cash ratio for the banks and financial institutions from 8 to 6 % thereby releasing billions into the market.

The banks did not know immediately what to do with the money in a country where inovation is a foreign word. since banks were used to conservative ways of making money namely loaning the government, the excess liquidity ended up in the nse. This led to the unprecdented bull run. with people investing without looking at the fundamentals at all. even companies which had not paid any dividend for years saw their prices appreciate. industry observers and analysts were left baffled.

We thought the bul run would ease off due to market correction but again something else came up. The 'perculiar' nature of kenyans. Kenyans always go with the crowd. they will always go where other kenyans are without asking why.

We saw when the hype started that NSE was the place to make quick bucks, people rushed there. it reminded me of the old days when people were buying plots and puting up houses without regard to whether or not there were any returns. when the plot run subsided, there came the rush for 'exhibition halls' people paid upwards of 1 million shilings as 'good will' for a 6 by 6 room and as much as 30,000 rent for the same. whether or not they made money is debatable. then came the matatu craze and many others

Right now the issue is that there is money in the NSE and everybody is angling for a share. people even pulled out of the time tested SACCOs to invest in mutual funds. some took loans to service the share purchases etc. however the ones who have been laughing all the way are the brokers who gain either way.

to understand therefore whether or not this bull run will continue, all you have to do is study all these trends. the prices will keep on their eratic movements as long as kenyans look for quick gains in the stock exchange.

Tuesday, August 15, 2006

East African Cables – a case of whitewashed graves

East African Cables – a case of whitewashed graves

By the close of business Friday, investors and speculators were going gaga about some hitherto nondescript cable manufacturer called East African Cables.

The issue was that a firm that was priced at 27 shillings only in 2004 was trading at 535 and priding itself as the most highly traded share in the NSE. What was interesting was that since an investment club called Tran century that is closed linked to the first family and their friends, took over the firm from Nashud Meralli, the share price has rallied high beating all odds to lead at the NSE. (Merali is himself a very shrewd business man and deal hunter and when he dumps a share you better do!)

What beats one is that nothing has changed fundamentally since the acquisition. However the new owners toast a new MD as the source of all their success. They also say that the construction boom has contributed to their positive outlook. The truth however is that their main customer is the perennial poor performer KPLC. Since there have not been any major new KPLC lines or connections, this argument is difficult to place. Also competition from cheap imports should have put paid their profit prospects.

Again when one looks at the PE ratio for the firm, it is a staggering 50 % + this coupled with the fact that most firms in the NSE in the same category are not rallying this much leaves a bitter taste in the mouth.

Another factor that is worrying is the fact that in a week the stock almost doubled its value from 330 to 576. On one particular trading day, rumour has it that the trade was book trade and not actual. Meaning that one particular stock broker brought the order to the floor, bid the price then re-purchased it. This is a case of price fixing. Cases of price fixing are normally dealt with by putting a ceiling on the percentage appreciation that a particular stock can gain. However the crooks found a way of getting away with it by announcing a share split.

That brings us to another bone of contention! Share splits are not only done to make share ‘affordable’ it is also done to increase share base. That is if the firm is doing well enough the warrant such a move and indeed if there is clear room for expansion.
Again at 330 per share, I am not convinced that the share was too expensive to warrant a split. We should have started discussing splits when the share hit 574. Did some one know it would reach 574 and start plotting for a split or was someone ‘pushing’ it to 574 to justify a split? Of course artificial shortage has been created by the principal shareholders who will benefit greatly in the case of split. They have simply held onto their stocks while creating all the hype and rumour that is currently causing us sleepless nights trying to get onto the EAC register.

In view of the foregoing it would be safe to conclude that there is massive insider trading and price fixing. This is pure fraud. But the question is who is this who can do this and still get away with it without getting the CMA on their backs?

My speculation is that those close to the power of the day have probably found a way of making money ahead of the general elections through otherwise ‘legitimate’ means. That’s stealing from Kenyans without actually being seen as a thief. Instead of the traditional KANU way of getting money from state corporations, these guys will pick select stocks, hype them, speculate on them, cause artificial shortage them sell them to fund managers and make their money. Unfortunately most fund managers are gullible and do not bother to research on fundamentals. Some pension trustees also push their fund managers to act with the crowd and rush to buy stocks which are openly over priced.

Problem is, the regulators sleep on the same bed with the perpetrators. All one can do therefore is to be extra vigilant