Commentary on December 2006 Stock Crash

Posted on 01.04.07 by Tanveer Sultan @ 4:42 pm    

In the past two years we have seen some tremendous highs and lows in the stock market. Yet again we witness a major decline in the index. It all started in mid-December 2006, the causes being:

• Oil and Gas Development Corporation (OGDC) listing and undervalued sale of Global Deposit Receipts (GDRs);
• Selling in the banking sector due to acquisitions, and;
• Primarily, suspension of Callmate (CTTL) shares’ trading and the six times its pad up capital stuck in the continuous finance (CFS) and Badla market.

In late November and early December OGDC shares were to be listed on GDR. Owing to the news the share traded strongly, somewhere over Rs. 140/-. It was expected that the listing prices would be near US$ 2.5 (approximately Rs. 150 but it actually got listed at US$ 1.89 (approximately Rs. 115). On this news the share started losing its strength and showed a major decline in its price, which came down to Rs. 125, losing Rs. 15 in five days. It was already 20 percent down. As OGDC is one of the main drivers of the index, its losing its price affected the market negatively. Moreover, Government also announced that gas prices will also be reduced. Though it was good news in general, mainly for the cement and fertilizer sector, but the oil and gas sector showed a negative impact, affecting the overall market.

On the other hand, the banking sector was performing well on the news of mergers and foreign direct investments (FDIs). PICIC reaching Rs. 76, Bank AlFalah Rs. 54, Allied Bank Rs. 114, NIB Rs. 29.85 and National Bank Rs. 260. There came some directions from State Bank of Pakistan (SBP):

• Increase in deposit rates (i.e. banks should increase profits for account holders), and;
• Increase in interest rates going up to Karachi Interbank Offer Rate (KIBOR) + 4.5.

Here, banks started a decline in stock market prices. In just six days PICIC lost Rs. 10, Bank AlFalah Rs. 5, NIB Rs. 3; the giants, National Bank lost Rs. 25 and MCB Bank Rs. 20. As banking sector shares the major part in KSE 30 Index, so it came down rapidly, affecting the overall confidence negatively.

The main reason for the crash was some abnormal performance of CTTL. The company’s directors decided to replace the auditors, canceling their retainer with A. F. Ferguson and Company. On this news, the share started gaining points and was on the upper locks. There was some massive buying in the stocks from one house. Stock prices started to boost with an appreciation of five percent daily. The prices within a few days reached to the level of Rs, 88 from below Rs. 50. The market witnessed buyers of more than a million shares daily on the upper lock, while one day it even showed buyers for ten million shares. The company announced 30 percent bonus and 20 percent dividend with earnings per share of above Rs. 10. This also accelerated the prices and they crossed Rs. 100.

The stock, after reaching Rs. 95, started to trade very differently. The share prices were on the upper locks and lower locks within few minutes, hence, the stock making the high of Rs. 103.40 lost its momentum. Now the prices were on the lower locks, losing 15 percent in three days, showing Rs. 86.75. Here falls the bomb: KSE management announced that trading of CTTL will be suspended for 60 days to safeguard the interests of the shareholders. The reason put forward was that the company did not comply with the rules of Securities and Exchange Commission of Pakistan (SECP) in declaring dividend and bonus. This announcement created a panic in the market. Firstly: the market was already on the lower lock, with more than three million sellers; secondly: stockholders expectations that there would be buying on some level also vanished, hence exit was impossible, and thirdly, and most importantly: more than 30 million shares were in CFS, showing an overbought position. The suspension meant that all these shares will now be turned into deliveries, so the major holders had to sell other stocks to meet the financial requirements.

This brought an overall decline in the market. The index started falling up to 600 points, even breaking 10,000 points, going down to 9,875. New gas discovery gave strength to OGDC, which created a support for the index, but selling in NBP and MCB Bank was still there, which made the index even break the 9,900 mark.

Other reasons playing their roles were:
1. Selling in cement sector due to decrease in demand and prices of cement;
2. Last week for the future contracts. People had to sell future contracts, and;
3. Speculators taking advantage by selling shares blankly or short-selling.

Hence, we can conclude the reasons for the crash in points below:

• Suspension of CTTL shares trading for 60 days;
• Selling of banking sector, mainly in NBP;
• GDR prices of OGDC undervalued and below expectations;
• Selling in cement sector;
• Last week of future contracts;
• News that gas prices will be brought down, and;
• Expectations that oil prices in the country will also be reduced.