What goes up must come down

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Shamsul Huq Zahid
Nothing, seemingly, has been able to deter the upbeat investors from speculative buying of stocks for the last few months.
Investors, who are at the moment gripped by herd-mentality, are shrugging off all the good advices from market pundits and not taking into cognisance the gross mismatch between stock prices and the prevailing economic realities.
The investors are so much engrossed in speculative trading that they do not have time even to take notice of the debilitating effect of natural disasters, such as floods and cyclonic storms, on the economy.
When the market opened last Sunday, a couple of days after the strike by the power-packed cyclonic storm, Sidr, in the coastal districts, the bullish trend continued on the bourses. The DSI general index was up by more than 35 points on the day. Next day, it recorded another 45-point rise.
The developments must have unnerved the capital market regulator-the Securities and Exchange Commission (SEC), which, to be honest, is going through a difficult time. The Commission still haunted by the spectre of the 1996 stock bubble burst can neither allow the re-enactment of the same episode nor can it take the blame for doing nothing to protect thousands of small investors who are very much prone to burning their fingers.
Yet the SEC until now has used a few soft options under its command to discourage small investors from becoming too adventurous. But the options has failed to produce the desired results in a market which is, apparently, is dominated by rumours of all sorts. The company fundamentals, price-earning ratio, net asset value etc., are not anymore taken into account by most investors, who tend to make their own calculations based on speculations about dividend stocks, right shares and paid-up capital enhancement.
For instance, the news that the vice-chairman of a group of listed companies, who is now in jail on a number of criminal charges, has been acquitted in a case immediately resulted in the hike in the stock prices of the companies concerned. The investors did not feel it necessary to take into consideration that the businessman concerned is yet to face trial in some other cases and, according to media reports, the group is in deep financial trouble.
Out of the feeling-and rightly so-that the things are going too far and the market is increasingly becoming 'risky' for retail investors, the SEC Monday last used another soft option. It ordered suspension of fresh portfolio lending to investors by the merchant banks and brokerage houses which have been doing brisk business in recent months. There was an immediate impact on stock prices next day (Tuesday). Compared to the previous day's DSI General Index of 3100 points, the trading began at 2980 and shed another 40 points within a couple of hours. However, there was a reversal in the trend and at the end of the day's trading at 2 pm the index stood at 3016 points. Much to the frustration of investors, 182 issues declined and only 15 advanced on the day.
It is most likely that that the initial shock over, major players who have pumped a substantial amount of 'undisclosed' money into the market would stick to their guns and the bull would again start roaming in the market, unbridled.
Besides, no estimate is available on the share of the loan made extended by the merchant banks and brokerage houses to investors in the total daily turnover of bourses. Given the size of the daily trading volume, the loan fund is unlikely to be that big.

Merchant banks, for obvious reasons, are aggrieved by the latest SEC decision. They have accused the SEC of being unfair to small investors. The bankers argue that the SEC would not have to impose restrictions on lending by merchant banks had it facilitated the listing of quality shares.
But such argument does not hold much water because of the fact despite listing a good number of new issues with the bourses in the recent past, the prices of quality old stocks are still going up.
What is most worrying is the level of over-pricing of some shares. For instance, the share price of a bank that has been paying a cash dividend between 20 to 25 per cent a year since its going public has soared to Tk. 6000. The share price of an oil marketing company having a face value of Tk. 10 each is being quoted at about Tk 1500.
There is no denying the high demand for good shares is bound to push up their prices. But there should to be a limit to the hike in the prices of any stock since the investors, at some stage, are supposed to exercise restraint in an over-heated market.
The behind-the-scene players, if there is any, are using their cards very skillfully to make their fortunes at the cost of unsuspecting small investors. The scenario in the current bull market is different from that of 1996 when prices of all shares, including the junk ones, recorded abnormal rise. But this time the abnormal hike has remained confined to some selected high-profile shares so that ignorant small investors could be duped well. But the investors of all hues do need recall a one-line sentence that some brokerage houses used to display during their bad times in 1997 and onward. The sentence read like this: What goes up must come down and what goes down must come up.