Monday, May 01, 2006

What is Wrong with the Stock Market?

What is Wrong with the Stock Market?
Dr. Khaled Batarfi

John D. Rockefeller was once asked why he decided to sell all his stocks just months before the 1929 Wall Street Crash. He explained: One morning, I was on the way to my office and stopped to have my shoes polished. The guy asked my advice about the shares he bought. If people with this kind of talent were now playing the market, I knew there was something wrong.

The limousine driver who took me home from Jeddah airport announced happily that this was his last trip. He was retiring. The young, high school graduate, explained to me that he was now a good broker. For months now, he sits on the computer at home, buying and selling in the stock market. Starting with a few thousands, he is now making more than he gets from his limousine, without the headache. Like Rockefeller, I knew then there was something wrong. But unlike Rockefeller, I haven’t sold my stocks. I am stuck with it now. In fact, we should have seen it coming long time ago. There are lots of things that have been wrong, persistently.

Let’s start with the imbalance of liquidity and availability. While the first is increasing, reaching historical heights of over half a trillion riyals in private accounts alone, few shares and investment avenues are available. For some reason, giant companies, like petrochemical SABIC, petroleum ARAMCO, telecom STC, Saudi Arabian Airlines, Saudi Arabia’s biggest banks Al-Ahli and Samba, among others, are mostly or completely in government hands. Take SABIC for example. When it was partially privatized (30 percent) the promise was more percentage to follow. This was some 20 years ago, and until now there is not even a hint of what to expect. Therefore, lots of money is chasing few shares and investment opportunities. The bubble market was a sure result. Bursting was a question of when not if.

Another “wrong” is the absence of transparency. The overseers of the stock market are not talking. The overseers of the whole economy are not talking either. The movers and shakers, nicknamed hamoors after the big fish, are hardly known. The media has no clue. And only the hamoor-connected analysts are talking to the masses. Of course, their advice is self-serving, leading buyers toward one company’s stock or another.

Three million Saudis, out of 13 million, went wild in the wild market. Few have any clue. They buy and sell on rumors and instinct, with little or no idea about the solidity of the company they buy in. Therefore, bankrupt and small-time businesses’ shares are sold at higher rates than that of market leaders. Bisha’s shares, the small agricultural company with a few thousands date trees, reached over SR2,400, much higher than SABIC’s SR1,800. Why? Because a few “hamoors,” who own most of the shares, artificially inflated them. When the time was right, they sold all, and let the price fall to the range of a few hundred.

What was the penalty, if any? Only a few people were punished. Their identities were not revealed. And the punishment didn’t include imprisonment. Their response? Driving the market from around the point of 21,000 to bellow 13,000! The government response? In the first interview ever with Jammaz Al-Suhaimi, chairman of the Capital Market Authority, we were told that 50 percent of the liquidity was invested in the weak companies and that this has to be corrected. What is new in the most important matter of transparency and strong rules against cheaters? Nothing. Business will continue to run as usual.

The huge drop goes against market fundamentals. Corporations are making tons of profits. Banks are doubling their earnings. Business thrives and projects are plenty. In short, we have no shortage of good news.

I would understand that weak companies are losing much of their inflated values — this is called correction. But the big question is: Why every company, good and bad, beautiful and ugly, rich and poor is losing, too? And if the hamoors are doing it, and we already know them by name and address, why can’t we “correct” them, as well? The banks are now turning down loan requests to invest in the stock market. This takes out much of the liquidity. Can’t we do something about that?

I don’t know how much “correction” we need, and what we can do without interfering too much in a free market phenomenon, but what worries me is that no one else seems to know. And if those who are supposed to know are not telling or doing something about it, then we all should worry. At stake here is not only the state of a trillion-riyal market, but the economy train this engine is driving. Crash seems to be the one conclusion I can see.

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