Tuesday, September 2, 2008

Danger Will Robinson, Danger! MSM continues downtrend

Sorry for the lack of posts this week: ah, work.

But here's a couple of nice plots that seem to confirm the earlier warning posts I made after the big drop in the Muscat Stock Market over the past couple of months.

It does seem that the gains posted by the market after the big drop last month are consistent with dead cat bounce. Those gains have now evaporated, and the market is back at or near its new low for 2008. It fell another 2% today.

Its easy to see why the market has dropped when you look at the long term performance. The gain in the market over the past 2 years have, until lately, showed all the characteristics of a speculative, liquidity driven, bubble. (Unless you believe the market was fundamentally undervalued until mid 2006.)

The red 'trend line' I've drawn on the MSM index chart is approximately what the index should be if you assume a 20% year-on-year growth from mid 2006. Even that impressive growth would only suggest a value of 8000 for the MSM. The recent climb to 12,000 represented a 50% pa growth, and was always going to be unsustainable in an economy growing at ~15% based on huge oil price increases and infrastructure investments. Given the continued drops in regional markets, the troubles in the European and USA economies, and the drop in oil price, its hard to imagine the bear market won't continue down. And that will cause problems for many speculative investors.

A big problem is the internal-dependency of the index value itself: as it drops, the losses accelerate, as so much 'profit' is actually based on cross-holdings in other shares. This works fine on the way up, but deepens the impact of the drop on the way down. Expect more exhortions from the Chamber of Commerce soon.

As I said before, if you're in the market, look at the drops as buying opportunities for quality stocks based on trading profits, strong management and solid business models. If you're going to trade, have the strength of discipline to sell on the bounces that will occur on the way down...

And beware looking at P/E ratios and profit reports. They are subject to manipulation.

Example, Oman Fisheries posted a 1.5 million rial profit in 2007-2008, up from a loss of over 450,000 in 2006-2007. Thats good isn't it? But that profit actually came from cashing in investments. They lost 458,000 rials in their core business of, er, trading in fish, and made the money buying and selling shares on ....the MSM! Yet the 8 Directors of Oman Fisheries still felt OK awarding themselves 26,000 rials in payments, on top of the 14,000 they were paid in fees to go to meetings. Hmmm. Nice work if you can get it I guess.

Caveat Emptor...

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