MARKET SITUATION FOR LAST WEEK

For the week ended September 12, 2008, the NSE index declined 878 or 1.8% to 48,738, representing a 17,633 or 26.6% decline relative to its 52 week high of 66,371; maintaining the market in a bear state. However, it should be noted that the decline in the NSE index would have been more severe if the new NSE regulation which mandates that only a one percent maximum downward limit on daily price movement would be allowed, while the current five per cent limit on upward movement is retained.
Since the market began its downtrend in the middle of March 2008, there has been three attempts at recovery. These brief recoveries were spurred by some new polices or policy changes by the government and market regulators. Some of the policy changes that have been implemented to turn the market around are:

1. Posting the uniform fiscal year-end deadline for commercial banks from December 31, 2008 to December 31, 2009.

2. Suspension of the N 1 billion capitalization for Stock brokerage firms

3. Issuance of an exemption to the provisions of the relevant sections of CAMA, to permit quoted companies to buy back up to 20 per cent of their shares to curb the spate of bearish trading in the market by the office of the Attorney General of the Federation

4. Policy reversal to allow commercial banks to continue extending margin loans to inventors

5. Reduction of the NSE fees by 50 percent effective September 8, 2008.

6. Allowance of one percent maximum downward limit on daily price movement , while retaining the current five per cent limit on upward movement

The regulators and the government should get some kudos for all the efforts they have put forward so far to turn the market around. I believe it is time to give this market the shock treatment that it truly needs.

For example, the NSE’s new policy of one percent maximum downward limit on daily price movement, while the five per cent limit on upward movement is retained is very wrong. This policy has an upward bias and in the long run negates what the NSE is trying to achieve, which is to prevent the continued decline of the capital market.

With this new policy of one percent downward price movement limit, it will take longer for the market to complete its current downtrend, because the policy will never completely allow stock prices to truly bottom out. For the markets to truly correct, sellers in the market must be completely washed out.

Although this may sound callous, studies have shown that until most traders (or gamblers) not investors throw in their towels saying that they can’t take the beating any more, the market downtrend will continue.

The truth of the matter is that some investors in the Nigerian stock market for the 4 years prior to March 2008 saw the NSE as a casino that paid out large sums of money. As a result, some of these investors invested heavily in the market by buying every secondary or initial public offering and throwing caution to the wind with some of their speculative trades. Some of these investors were caught in the downtrend and are still waiting in the winds to sell their shares. Since the Nigeria bull market had a prolonged run ( approximately 4 years), it is safe to believe that there are many speculators in this category and significant up trend will be sold into.

Some of the recent government/NSE policies that I believe will help the market turnaround are:

1) The postponement of the uniform fiscal year-end deadline for commercial banks from December 31, 2008 to December 31, 2009;

2) The possible issuance of an exemption to the provisions of the relevant sections of CAMA, to permit quoted companies to buy back up to 20 per cent of their shares to curb the spate of bearish trading in the market;

3) The policy reversal to allow commercial banks to continue to extend margin loans to inventors; and

4) The 50% reduction in NSE fees.

I believe allowing stock prices to decline only by one percent, while allowing the prices to increase by 5% daily is the worst policy. As noted in the schedule below, a N10.00k stock which gained 5% daily in five consecutive days will take 18 days to lose the same points it gained in five days.

One of the reason that I believe that this is a wrong policy is that the banks and institutional traders might be favored in this policy. While the large and institutional traders might be able to sell easily in an uptrend, retail investors might not be able to do so. Additionally, the commercial banks might use the uptrend in a bear rally to sell the shares of customers who are unable to satisfy their margin requirements.

My recommendations:

· Scrap the current policy of one percent daily allowable decline, while the 5% allowable increase is still in effect. This policy has an upward bias and will result in traders selling into the upward trend.

· Reinstate the former policy of the 5% upward limit and a 5% downward limit. This will allow the market to get to the bottom faster.

· Remove all artificial stop gap measures and let prices float freely with one caviar, introduce simple option strategy and shorting selling to enable investors hedge their positions. The current policies will discourage foreign investors from investing in the NSE, because it breaks all the rules of an “efficient market”. My stance might seem controversial to many investors, but I believe that in the long run it will be good for the market. The current policy strikes me as stock price manipulation.