SAFARICOM’S TALE; -- WHO SAYS MARKETS ARE EFFICIENT?

It’s rare to see jaws dropping in the combined news rooms at Radio Africa.

Aside from Maina Kageni’s early morning antics maybe…but that’s beside the point.

A certain set of numbers have caused that effect though; -- the first is Safaricom’s share price….and the second, is the slump in the 20-share index at the NSE.

In 1994; -- the Nairobi Stock Exchange’s [then only] 20-share index slammed into the 4500 mark…and the IMF branded it as one of the best performing exchanges in the world, purely on the basis of its returns [over 1505 in Dollar terms at the an exchange rate of 45 shillings to the dollar].

In August 2008 we have the 20-share index slipping to those levels; -- and this is one bear run that has everyone in the market spooked.

The most significant aspect of this perhaps; -- and what is the most visible for the largest cross-section of Kenyans --; is the decline in the value of shares in Safaricom. At the time of its listing; -- it had a market capitalization of 50 billion shillings.

Going by the same formula; -- its worth only about 1.5 million more right now.

So; -- how did we get here?

Well, this is one interesting tale; -- and you need some aids to understand this. The first is found at this link; -- http://www.nse.co.ke/newsite/

Click on the market activity chart there; -- it’s on the bottom right corner. Found it?

Good. Here’s where the horror story starts.

[Dim the lights, drum roll please, and insert the evil laughter here]

As the chart reveals; -- the market’s rise in the wake of the post-poll violence peaked on July 10; -- that’s right that's a month to the day after Safaricom hit the market. Now, after that, things simply went south.

Between July 15-17; -- the 20-share index was below 5060 points, and it plunged from then on all the way to July 25 below 4 970 points. There was a 3 day blip in between; -- and from then on; -- the fall continued; -- faster this time --; to the 4600 level we’re at.

Correction; -- WE WERE at that point on Aug 8.

By August 12; -- the market closed at 4 558.27 points.

The frustration was evident in this extract from Aly Khan Satchu’s daily market brief.
“I am dumbfounded and we are in uncharted territory. The Fundamentals remain compelling and we can expect 1st quarter results imminently. Near term, this is now all about stop loss trading. Who said markets were efficient?”

Okay; -- so that’s the more publicly evident side of the equation.

Kenyans piled in ridiculous amounts of cash to buy shares in Safaricom; -- some of it financed from savings, some of it from what are technically called margin loans.

A margin loan is a technical term in the brokerage industry where a broker loans you cash to buy certain securities; -- usually shares --; and it holds the equity as the collateral.

Despite all sorts of advice, from all sorts of sources; -- Kenyans took these loans. Exactly how much is not clear.

Not that Kenyans would care anyway; -- since for one, “I’ve got a loan to pay back!!!” is a fairly common refrain you’ll hear.

Do the math; -- for a loan of say 100 000 shillings, repayable over 2 years, you’d have secured shares worth say…25 000 shillings, right?

We’re going by the allocation data here, since Kenyans got around 25% of what they applied for.
Now, assuming that you did sell off at the peak of 8 shillings per share, you’d have taken off a capital gain of about 15 000 bob.

So, even with 40 000 bob in hand; -- you’d still have another 60 000 shillings in principal to cover; -- and on top of that, we’re looking at an average cost in fees and interest and so on of about another 20 000; -- all of which goes into a bank’s coffers.

Please note, that this is just plain math; -- the actual figure depends on which bank you took the loan from so we’re looking at an error margin of +/-10 percentage points.

So your cash flow statements look pretty bad; -- and you’re not the only one, bank’s are taking a beating too.

I’m tempted to go into what this horror story looks like from the Bank’s side; -- but that’d makes things a touch too long and more complex.

It’s a bit like Harry Potter really; -- once you get past the 3rd book, its not the sort of thing you’d let your 10-year old [sibling or child] read…and book 7 is the darkest of the lot.

Hang on….J.K.Rowling’s still a billionaire ain’t she?

Why? Because we still bought the books for who again; -- our dear rugrats.

Well, like I said; -- markets aren’t perfect.