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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Why Credit to Prop-up Shares?

Why Credit to Prop-up Shares?

Go down  Message [Page 1 of 1]

1Why Credit to Prop-up Shares? Empty Why Credit to Prop-up Shares? Fri Dec 09, 2011 1:44 pm

Kithsiri

Kithsiri
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Company performs well and share price goes up but the inverse of the argument is not always right.

Therefore why credit is needed to prop up shares when same can be given to company to enhance performances.

Other than government getting money in taxes and a few people get employed, trying to prop up a market on credit has no other plus points.

Market should run on money set aside for investments and credit should be extended to real job creations and R & D projects.

(Correct me if I am wrong; I may be Embarassed ).

2Why Credit to Prop-up Shares? Empty Re: Why Credit to Prop-up Shares? Fri Dec 09, 2011 3:59 pm

Genting


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Kithsiri

The current situation at CSE is bit different from what most of us think.
Till 2010, CSE brokers has been giving credit up to 10 times the value of their assets. During 2010 Sep-Aug this sort of reached the highest level. Then our brilliant/ well educated/ highly experienced SEC, decided to stop giving credit!

I will explain the consequences of those sudden rules by using the following illustration.

The market is like our blood supply system. The heat beating is market transactions and the blood pressure is the market price.
During a normal situation, we can see normal heartbeat and normal blood pressure.
When credit is inject to CSE, market activity increase and market value also increase. This is like injecting more liquids to the blood system. It makes heart beat rate increase and blood pressure increase.
During the time when SEC induces the credit rules, there was lot of credit (excess liquid) in the system. Due the credit rules, this credit (liquid) was suddenly taken out of the system. It’s like cutting a vain and sucking out blood from our blood system. When this is done, what will be the outcome? Other than excess liquid being draining out, some liquid in the system also get drained out (its like HNWIs and funds pulling out). This makes liquidity level dropping below the required level to carry out normal operations/circulation. So heat beat drops and blood pressure drops (low Mkt activity and ASI is RED)

So, to make this normal, excess drained out liquid should be pumped back to the system. In short term, this could be done by injecting some blood (giving credit). In long term, there should be new blood in the system (new funds investing).

So, it is vital to have some credit to stop is blood bath.

3Why Credit to Prop-up Shares? Empty Re: Why Credit to Prop-up Shares? Fri Dec 09, 2011 4:05 pm

sriranga

sriranga
Co-Admin
@Genting wrote:Kithsiri

The current situation at CSE is bit different from what most of us think.
Till 2010, CSE brokers has been giving credit up to 10 times the value of their assets. During 2010 Sep-Aug this sort of reached the highest level. Then our brilliant/ well educated/ highly experienced SEC, decided to stop giving credit!

I will explain the consequences of those sudden rules by using the following illustration.

The market is like our blood supply system. The heat beating is market transactions and the blood pressure is the market price.
During a normal situation, we can see normal heartbeat and normal blood pressure.
When credit is inject to CSE, market activity increase and market value also increase. This is like injecting more liquids to the blood system. It makes heart beat rate increase and blood pressure increase.
During the time when SEC induces the credit rules, there was lot of credit (excess liquid) in the system. Due the credit rules, this credit (liquid) was suddenly taken out of the system. It’s like cutting a vain and sucking out blood from our blood system. When this is done, what will be the outcome? Other than excess liquid being draining out, some liquid in the system also get drained out (its like HNWIs and funds pulling out). This makes liquidity level dropping below the required level to carry out normal operations/circulation. So heat beat drops and blood pressure drops (low Mkt activity and ASI is RED)

So, to make this normal, excess drained out liquid should be pumped back to the system. In short term, this could be done by injecting some blood (giving credit). In long term, there should be new blood in the system (new funds investing).

So, it is vital to have some credit to stop is blood bath.
I like the way how you presented.
Thanks

http://sharemarket-srilanka.blogspot.co.uk/

4Why Credit to Prop-up Shares? Empty Re: Why Credit to Prop-up Shares? Fri Dec 09, 2011 4:22 pm

Appuhamy


Manager - Equity Analytics
Manager - Equity Analytics

Good explanation Kithsiri...

5Why Credit to Prop-up Shares? Empty Re: Why Credit to Prop-up Shares? Fri Dec 09, 2011 4:47 pm

aj


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@Genting wrote:Kithsiri
The current situation at CSE is bit different from what most of us think.
Till 2010, CSE brokers has been giving credit up to 10 times the value of their assets. During 2010 Sep-Aug this sort of reached the highest level.

Isn't that the root cause for all the problems we face today? Our brilliant brokers giving excess credit.

6Why Credit to Prop-up Shares? Empty Re: Why Credit to Prop-up Shares? Fri Dec 09, 2011 5:09 pm

hariesha


Vice President - Equity Analytics
Vice President - Equity Analytics
After such a brilliant and simple explanation some people still cannot understand why some sort of credit is required in the market.

To attract new funds (generate new blood) you have to allow some credit (infuse new blood), which will generate some momentum. Earlier people left the market saying it's overvalued. Now prices are absolutely cheap. But people are leaving because it's not sustainable.

I want to add this also. The funds + credit (Blood) in the market last year was sufficient to run the small market (body) prevailed. Our brilliant regulators inflated the market (body) by adding new IPOs and Introductions, while draining liquidity (blood) from the market. Now there are no sufficient funds (blood) in the market to cater this fat body.
Anyhow thanks for Genting, for explaining it in such a nice way.

7Why Credit to Prop-up Shares? Empty Re: Why Credit to Prop-up Shares? Fri Dec 09, 2011 5:15 pm

Rajaraam


Vice President - Equity Analytics
Vice President - Equity Analytics
@Genting wrote:Kithsiri

The current situation at CSE is bit different from what most of us think.
Till 2010, CSE brokers has been giving credit up to 10 times the value of their assets. During 2010 Sep-Aug this sort of reached the highest level. Then our brilliant/ well educated/ highly experienced SEC, decided to stop giving credit!

I will explain the consequences of those sudden rules by using the following illustration.

The market is like our blood supply system. The heat beating is market transactions and the blood pressure is the market price.
During a normal situation, we can see normal heartbeat and normal blood pressure.
When credit is inject to CSE, market activity increase and market value also increase. This is like injecting more liquids to the blood system. It makes heart beat rate increase and blood pressure increase.
During the time when SEC induces the credit rules, there was lot of credit (excess liquid) in the system. Due the credit rules, this credit (liquid) was suddenly taken out of the system. It’s like cutting a vain and sucking out blood from our blood system. When this is done, what will be the outcome? Other than excess liquid being draining out, some liquid in the system also get drained out (its like HNWIs and funds pulling out). This makes liquidity level dropping below the required level to carry out normal operations/circulation. So heat beat drops and blood pressure drops (low Mkt activity and ASI is RED)

So, to make this normal, excess drained out liquid should be pumped back to the system. In short term, this could be done by injecting some blood (giving credit). In long term, there should be new blood in the system (new funds investing).

So, it is vital to have some credit to stop is blood bath.

Genting, you have explained the issue nicely. Daily turnover has become very thin now due to shortage of funds in the system.

8Why Credit to Prop-up Shares? Empty Re: Why Credit to Prop-up Shares? Fri Dec 09, 2011 5:47 pm

Kithsiri

Kithsiri
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Thank Guys (Gals if any) for the responses.

Call me whatever but I am still not convinced to have credit to run the market.

The disposable income has risen lately and mushrooming shopping malls, fast-food outlets etc are good examples.

Why can the market run on those excess fats than on credit?

What more can the authorities do to attract excess fat in to the market?

9Why Credit to Prop-up Shares? Empty Re: Why Credit to Prop-up Shares? Fri Dec 09, 2011 5:49 pm

aj


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@hariesha wrote:After such a brilliant and simple explanation some people still cannot understand why some sort of credit is required in the market.

To attract new funds (generate new blood) you have to allow some credit (infuse new blood), which will generate some momentum. Earlier people left the market saying it's overvalued. Now prices are absolutely cheap. But people are leaving because it's not sustainable.

Who says there's no credit? SEC has allowed brokers to give unlimited credit for T+100000 if they want to with liquid assets. That is in case if market crashes (which hasn't happened in Sri Lanka thanks to the rules) there are assets to pay off the debt.

Now prices are not cheap. Just because the prices has come down doesn't make them cheap. A few are cheap for reasons. Some are fairly valued.

Credit is everywhere. Credit cards bills, housing loans, personal loans, companies take loans. But all those credit are well managed. They are backed by properties, bank savings. There are limits. But it wasn't so for broker credit.

Imagine brokers were issuing credit cards. Then there want be a credit limit. What will be final result?

10Why Credit to Prop-up Shares? Empty Re: Why Credit to Prop-up Shares? Fri Dec 09, 2011 9:42 pm

wiki


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Nicely explained ...Thanks Genting

@aj
Let me put it this way well monitored credit... Less risk?

11Why Credit to Prop-up Shares? Empty Re: Why Credit to Prop-up Shares? Sat Dec 10, 2011 7:30 am

Genting


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@Kithsiri wrote:Thank Guys (Gals if any) for the responses.

Call me whatever but I am still not convinced to have credit to run the market.

The disposable income has risen lately and mushrooming shopping malls, fast-food outlets etc are good examples.

Why can the market run on those excess fats than on credit?

What more can the authorities do to attract excess fat in to the market?



If we didn't have that bull run from 2009-2010 and IPOs, we
should be finely surviving. The bull run was like the system becoming swollen
due to excess credit, and there is no fat build up. As hariesha said, IPOs are
like putting new organ's to the system. These organs absorb some amount of
blood from the system.

There is a disease in the system called T+5, which causes abnormal
transactions. This makes blood drain out from the system, before becoming them deposit as Fat.

So, right now, we got a system with lot of organs, not built up fat, and
liquids being excessively drained out. Then, the system has become very fragile
and weak. Another few global turmoils can easily put the system to grave.

When it comes to that point, only loved ones want the system up and running.
Others just ignore this dying system.

So, to summarize,
our friendly brokers gave lot of liquids to the system during 2009-2010, (SEC
was sleeping at that time)
during the bull run system couldn't store fat
so many new organs have been put in to the system, making system bulky,
requiring lot of blood
liquid is excessively drained out
T+5 rule always drains out blood every day






system is weak and fragile.

So, will new investors come to invest in this dying, sick system?

12Why Credit to Prop-up Shares? Empty Re: Why Credit to Prop-up Shares? Sat Dec 10, 2011 9:24 am

aj


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@wiki wrote:Nicely explained ...Thanks Genting

@aj
Let me put it this way well monitored credit... Less risk?

Well managed credit less risk.

When a bank gives housing loan they can value the property and if the debt is not paid they can sell the property and recover the money. (Remember in USA 2008 what happened was USA banks didn't value the property or calculate the risk of the debtor, they went on giving credit like our brokers)

In CSE now brokers can give credit for months or years as long as they are supported by liquid assets which is how it is supposed to be, the right way to do it. Then if the market tumbles down you always have money to pay the debts. It won't go on a cycle taking everything down.

13Why Credit to Prop-up Shares? Empty Re: Why Credit to Prop-up Shares? Sat Dec 10, 2011 11:12 am

sas

sas
Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
nice thread Very Happy , Thanks Genting for popping out this. I guess we are talking about HUMAN body (not other animal), yes its good to compare human body with market, which is most complex, highly sensitive & always trying to survive in longer period (so of-course should maintain with good health condition).

@Genting wrote:
@Kithsiri wrote:
Why can the market run on those excess fats than on credit?
What more can the authorities do to attract excess fat in to the market?

during the bull run system couldn't store fat
I think its better if we use 'Glycogen' instead of 'FAT'
Glycogen-polysaccharide, stored with water, supplies energy during heavy work.
FAT-mostly insoluble in water, good energy storage (but excess FAT is not good)

I like to consider excess FAT as 'bubble formed shares'. Our body is very much greedy to burnout excessive FAT,
for me our cse is 'teenager with lots of excessive FAT'. Hard & continues workout is needed for longterm survival.
we exercise to get rid of our big stomach, but it gets reduced only after consuming lots of glucose & glycogen >>> so your stomach gets flatten only after decaying your face, ass, chest, thighs...etc. (I know, I know you can do certain surgeries(regulations) to get rid of FAT too, but it costs much Very Happy)

Introduction of new blood(credit), organs(IPOs), transplants(Introductions)...should be done with great care, even for a healthy body. So it is very much needed to convince(investor confidence) our body that we are doing everything to maintain our body,
wiki & aj wrote:
Well managed credit less risk.
Agree with you too wiki & aj, but the latest trend is to "make our body to maintain itself" by tissue culturing, gene therapy,...etc

14Why Credit to Prop-up Shares? Empty Re: Why Credit to Prop-up Shares? Sat Dec 10, 2011 2:39 pm

Kithsiri

Kithsiri
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
I think the disease is not T+5 but the indiscriminate granting of credit.

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