Why I think the Boleh-stock-market rescue are futile

Posted On 23/10/2008

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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.

One Response to “Why I think the Boleh-stock-market rescue are futile”

  1. Jefus

    Moo_T

    Trouble with some companies they not only go into the red, they also go underground, ….. ie suspended from the board and never to be heard again,…… ( lingering pain and the total loss ).

    Bear markets have a tendency to feed upon itself ( as in bulls but in a more pleasurable manner)

    The falling knife will gladly slice a few fingers off before letting you catch it. Where is the bottom, the present bear has shown many precedents, ( albeit – there are indication of LIBOR thawing away) Confidence has not emerged.

    If no one wants to lend money, small companies will be left without any cash to run day to day activities – and will be forced to close. Exacerbating the problem.

    I share you sentiments exactly, this is fishy. Too fishy for me.

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