Fingers are burning...

Whilst it's sad to read the tales of hardship and heartbreak from people who've suffered losses in the recent falls in the regional stockmarkets, it's even sadder to realise how few of them have learnt from their mistakes. For example articles like this from Reuters ("Saudi stock debacle sparks rare public debate") - full of stories of people who miss the point completely and are looking for someone to point their burnt fingers at. They need to point at themselves otherwise they'll just get stung again in the next 'big thing'.

"In other countries, the state and financial institutions join efforts in times of crises. Why didn't banks give small investors a six-month reprieve on their debts?

"They can afford to do it, they make billions of riyals in profits," said Dahlan.

Well, that's capitalism. If you remove incentives for companies to make money, they'll go somewhere else to make money. And if banks follow Dahlan's suggestion, the shareholders will sell their shares and/or vote out the BOD, and share prices will drop even more.

Anyone buying shares is in no position to criticise these banks - after all, they weren't buying shares out of altruistic motives. Why should they expect anyone else to have a different attitude?

Day Traders Warned!

So here's an interesting story from the Gulf News on Wednesday. Harsh words indeed from the ESCA (Emirates Securities and Commodities Association - the market regulator for DFM and ADSM, commonly referred to as SCA).

Abu Dhabi: A top government official has issued a serious warning to day traders against speculative trading in the UAE stock markets. "Many are practising leveraging, and it seems that everyone is contributing to this problem, and I suggest that brokerage houses assign internal supervisors to ensure that its brokers do not get involved in day-trading activities," Ebrahim Zaabi, Director of Brokers supervision at Esca, told the brokers yesterday.

Not before time I would say, actually it's probably about 12 months overdue at least. There is a difference between day-trading and leveraging which may not be clear from the passage I quoted. It is fair to say that many day-traders do use leveraging. Now there were some punishments listed but will they get that far is an important question.

Further on in the article ...

National Bank of Abu Dhabi (NBAD) hosted a meeting for representatives of the 74 registered brokers in the UAE, as well as representatives of Esca, DFM, and ADSM, to discuss the recent market crashes and the degree brokerage firms are abiding by the codes of ethics of the profession.

It all sounds very friendly and chummy doesn't it?

The recommendations included as well the suggestion of establishing a brokers' association, and issuing a booklet outlining rules and codes of the profession, in addition to limiting the licensing of new brokerage firms or upgrading the requirements.

Good-oh. Well, if the brokerage firms are a problem then good that it's being dealt with. I get a sense from reading the article that there may be some brokers who have set themselves up not necessarily to provide a service, but trade directly on the market themselves.

Surely it's the investors who have to take responsibility for their investment decisions? It may sound harsh but sooner or later the market will sort itself out along with investors/brokers on shaky ground, irrespective of however many meetings and serious warnings there are. As usual though, we'll never learn anyway and all pile in once the markets get all excited again...

Share Buybacks

Big news today for investors was the announcement on share buybacks. Previously companies could only buy them back if the price went below par (or book*) value. So what does that mean and why is it good news? ( DubaiShareTalk topic )

UAE lifts some curbs on share buybacks

Reuters 16 May 2006 Dubai:

The UAE Cabinet has removed some curbs on share buybacks, hoping to encourage companies to add some support to tumbling stock markets.

The official WAM news agency said yesterday the new rules would allow companies to purchase up to 10 per cent of their own stock, but gave few details.

Par value is usually the original price shares are sold for when a company allows the public to buy them (called an IPO - Initial Public Offering). For example, DANA Gas last year went public and their shares were 1 dh each. You could fill in forms at one of several banks, give them money to give to the company, and after a few weeks get shares in your name for 1 dh each. Then wait a bit longer until DANA shares start trading on the stockmarket (ADSM - Abu Dhabi Securities Market as it happens) and you can sell them again (hopefully for a higher price). Or buy more shares from other shareholders if you prefer to increase your holding.

Currently DANA Gas shares are a little over 2 dhs each. They were almost 6 dhs a few months ago. Note that when you buy and sell shares, you're buying from other people or selling to other people. The company is no longer involved in the trading - they already got their money from the IPO.

Usually in the long term, if a company is making money, share prices go up. But sometimes, share prices go down to a level that the company thinks is below what they should be worth. The company may then consider buying the shares on the market especially if the company has a lot of cash not being used. Then, they cancel the shares (or should do). That means that the remaining shareholders - you and I - now own a bigger part of the company than previously even though we still have the same number of shares. For example...

SHUSMA PJSC (not a real company) has issued 100 shares at 1 dh each. You own 25 of them which means you own 25% of the company. SHUSMA has 500 dhs in the bank and the shares are trading at 5 dhs each which SHUSMA thinks is very low. So they decide to buy back 50 shares with half of their money in the bank and cancel them. That means there are only 50 shares outstanding. You still own 25 of them at 5 dhs each but 25 out of 50 shares is now 50% of the company that you own.

Obviously the reality is not quite as dramatic but that's the idea. Note that often a share price will go up a bit if a company does a buyback - for example FGB (First Gulf Bank) shares last week when they annouced they'd buyback 10%.

But back to the significance of the law on buybacks. Some companies shares trading on ADSM and DFM are thought to be good value at present market prices and many of these companies have cash in the bank. So they'd like to buy their own shares back but were prevented because the law said they could only do that if the share price went below par value. This will change after today's announcement (not that the market reacted particularly well - yesterday DFM was down 7%, today was a bit mixed but DFM closed up very slightly at 0.4%).

FGB is a good example here. Currently their price is about 14-15 dhs but par value is 1 dh. Highly unlikely they would ever get to par value. Now with the law change, FGB can buy their own shares and the net result is an increase in shareholder value. We hope.

You may have heard of MSFT - Microsoft? They have been spending $$$ on share buybacks (I think several $billion in the past year).

*Originally I thought I read Par Value which is what I've based the above explanation on. The Reuters report today refers to Book Value. The difference being that total Par Value should reflect the value of the company when it is publicly listed for the first time (not always the case) and Book Value is what each company's share is worth now according to the accountants (which is usually much lower than the actual market price of a share). Eg today: FGB share price is 14 dhs, Par Value is 1 dh, and Book Value is about 7 dhs.

The explanation I gave above is roughly ok but I'll modify it if/when I confirm that the Reuters version is correct.

ShareWadi blog begins...

Wondering a bit what this could be good for - help me out here...

• Random news on UAE markets? But there's a website and discussion forum for that already.
• My own thoughts? How boring for other readers surely?
• My own investment adventures? Maybe, but are you really interested in how much I'm losing :(?
• What if I elaborate on something in the news in more detail for those new to the casino er I mean financial markets?

Your comments would be welcomed :) ...