Why I think the Boleh-stock-market rescue are futile
When the world economy go south, cash are king, minus those silly “free to print money” country, e.g. Zimbabwe.
When look at the recent week stock market performance, you will notice EPF and PNB, keep their itchy over various “potential” counter, that hit hard by the global world economy slow down.
The RM5 billlion can do little to reverse the global market sentimental. And the money injected sound fishy. When you check various counter, you will notice PNB fooling around with cash and buying lots of stock to support the market. The good news is, EPF are not very keen on the “opportunities play” by PNB, thus our EPF money are not hurt that bad. The bad news is, PNB – Pemodal Nasional Berhad, are the country national threasury funds that held tons of tax payer money.
In a bear market, injection of fund can be used in many way. But the obvious rescue are always the “leveraging factor”. E.g. if party A buy 1000 stock X for RM1 each, if the stock drop to RM0.80 per pieces, party A can choose to minimise the “paper loses” by buying MORE stock at RM0.80. E.g. buy another 4000 stock X for RM8. By average, the money spend by party A will be
(RM 1000 + RM3200) / 5000 = RM0.84 per stock.
So in paper, without this “leveraging”, party A will lost RM2 in paper. By buying “cheaper” stock in volume, party A can “cut down” the loses by RM0.40 per stock.
However, the leveraging method need tons of cash. During each economy crisis, slowdown, etc bad economy climates, the leveraging method can easily deplete the cash in a blind of eyes.
Just take the above example, if the stock X fell to RM0.50, party A will get “burned” if he failed to leveraging the loses with more cash. Now let’s compare.
i. Party A stop the “bleeding” by selling the stock when the stock X hit RM0.80, and the stock hit RM0.50 in next day.
Profit/Loses = (RM1 x 1000) – (RM0.80 x 1000) = – RM200
ii. Party A leveraging the stock when stock X hit RM8, buy another 4000 stock. And stock hit RM0.50 in next day
Stock cost =( (RM1 x 1000) + (RM0.80 x 4000) ) = RM 4200 (RM0.84 per stock)
Profit/Loses when stock hit RM0.50 = RM4200 – (RM0.50 x 5000) = RM4200 – RM2500 = RM1700
Now compare the stop bleeding method (RM200) vs the leveraging (RM1700), you will learn why many people burn in the market down turn. Don’t ask me why body like PNB with so many “smart” people make the same mistake as typical retail stock buyer.