Slipping a Bit Too Much

The Dhaka Stock Exchange continues to slide and slide and this worries me. The market was up and running with great momentum in 2007, but now it is almost coming to a standstill. Standstill may still be an euphemism.

I had predicted this scenario a little while earlier here. But I did not think it would be this bad. What's causing this exodus from the stock market?

Economic reality settling in
We knew the economy was in for a tough time because of the food crisis, arrests and political changes. But it usually takes some time for the economic effect to appear in everyday lives. We should brace ourselves for what we merely heard as rumors as the effects are now in action.

On the right is the DSE Index for the last 30 days. I couldn't find the graph for the last 6 months because it would be too horrific and R rated for the DSE to publish.

Grameenphone's sham IPO
I will discuss why it is a sham a little later (still writing it up). But people are really hoping that they will be getting miracles out of this scenario. GP submitting their proposal to the SEC got the whole market bullish for 1 day. But then it continued to slide. (Maybe because people already figured out it was a sham)

Bank Fixed Deposit Rates
Now bank deposit rates are just shy of 15%. That means without doing anything you are getting 15% on the spot for your money, without any risks or worries. This is creeping out to be a contender for stock investments. The FDR rates will continue to rise as banks are reluctant to give loans and while they still think they are in a liquidity crisis.

Fall of AB Bank Foundation
Documented here. It still turns out they provided a large amount of credit/loan for each stock investment. For some time they got away with it, but then they got fined because they loaned too much. AB Bank Foundation were also involved in getting a piece of the lucrative pie. It turns out that they could also manipulate the stock by mass scale buying and selling. Again, AB Bank may not be much of a bank, but their Foundation beating all foundations out there. So 2008 Foundation of the year goes to AB Bank. A foundation that wasn't a drain to AB Bank, but actually managed to give something in return to AB Bank.

Picture on the right is a little funny. It is the signing ceremony where AB Bank would handle the securities of Trust Bank. Read the sign board in the background ; )

US Economic worries
The largest economic entity is in trouble and you think Bangladesh will be spared? Due to the wonders of globalization, when someone goes down the entire world is in the dumps.

Any time now ....

The stock market is due for a major crash. A $300 million Grameenphone IPO is headed its way and it is going to consume a lot of cash. Kudos to GP for timing this IPO correctly, right in the middle of a liquidity crisis. (I can only speculate about this liquidity crisis, as newspapers seem to run this story every few days).

The last biggest IPO was only for $13 million. Even though 1/2 of the $300 million GP IPO will be in private placement, it still means that the market will suddenly lack $300 million that was floating around. This is so small change my any means.

What will Grameenphone do with $300 million?
With the new precautionary and cost-cutting strategy they are more likely to buy spectrum with it rather than expand manpower. This means $300 million is hooked up in a service that doesn't yield much in terms of cashflow or employment. So more woes to continue for the Dhaka Stock Exchange.

Real Results
Sad thing is, even though the entire market will crash, nobody will recognize it because the GP stock will be more than enough to average out everyone else who sunk. The brokers won't lose money, they make it both ways, but the people who were manipulated to invest into particular stocks will. Watch Boiler Room to find out what currently happens in terms of speculation and manipulation with Bangladeshi brokers.

Grameenphone finally goes public

Grameenphone's new IPO is the talk of town. Its a $300 million IPO, the largest ever for Bangladesh. The foreign press still considers the Bangladeshi stock market to be too small to be considered an 'emerging' market. They prefer the term 'frontier' market.

A $300 million IPO is not small for Bangladesh by any means. To put this into perspective, the record holder was Shahjalal Bank who had an IPO of $13 million (for a 50% stake). GP's IPO is for a 10% stake. Citibank is the manager to this issue, but there are some funny things happening.

A $300 million IPO (for 10%) would value Grameenphone company at $3 billion. Citi Global Markets (a division of Citigroup) did the valuation in early 2007 when it valued Grameenphone at $3.5 billion. Then it was reduced to $3.2 billion. Is it not funny that Citibank is the manager to the issue while its sister concern does the inflated valuation?

Why Inflated?
Citi Global Markets has not noticed that the playing field has drastically changed from early 2007 to July 2008. Grameenphone's slide continues as its profits continue to decline at an alarming rate. (GP keeps blaming it on fines, but we all know VOiP took a major chunk out of its profits). GP was conveniently valuated at its peak, which right now, they are far from it. Citi Global Markets does the valuation, Citibank picks up the check. Get the drift?

AKtel has a new Tk 1 plan where it shows they are about to get serious. And Orascom's Banglalink is no exception. Orascom seems to have more infrastructure set up globally to rival Telenor's expertise

Strategy of the IPO
Chances are the valuation will stay inflated. Telenor is really smart about the IPO. If any outsider gets hold of 10% of the share, they may raise objection at board meetings. It is especially dangerous if the billionaire patriarch of Orascom, Naguib Swariris, decides to swoop into that 10%. Don't get me wrong, anyone will want that scenario but Swariris has more to gain from this and he will do anything to fight for a board seat (kind of like Carl Icahn).

Swariris is very canny about his deals, which he executes with lightening pace. Telenor wants to prevent this sort of situation by placing a staggering $150 million (HALF of the IPO) into private placement. Chances are its being placed with people they know won't sell.

Its a big IPO, but not much when you factor these precendents.

Immediate Results
All the stocks as a result of this news rebounded. The ugly duckling of the Dhaka Stock Exchange, Mutual Funds even rebounded because 10% of the public IPO would be spread into their hands.

In the long term will the stock market continue to grow? YES, there is $8 billion worth of remittance being sent to Bangladesh. And stock market (usually blue chip stocks) are the best place for these investments.