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Monday, August 16, 2010

‘Chaotic’ 10% price limit on Colombo stocks to end?

By Elmo Leonard
(Original source - http://www.lakbimanews.lk/news/laknew5.htm)

The two-week-running 10 percent per day maximum and minimum price limit on all stocks traded in the Colombo Stock Exchange (CSE) is expected to end this week. The Securities and Exchange Commission (SEC) Sri Lanka directive to halt the trading of Dankotuwa Porcelain, Blue Diamond Jewellery, Environmental Resources Investment and Touchwood shares caused the market’s dramatic drop during the past two weeks, daily traders said. Finding fertile ground, the media accuse the SEC of provoking the collapse of the Colombo stock market. The media also accused CSE of shutting them out of the trading floor.
Commenting, SEC Director Surveillance, Chandu Epitawala said the limit could be broadened, mid or at the end of this week. Asked, whether the band would be extended to 25 percent both ways, Epitawela, said, he could not specify. SEC was looking into all aspects of wide price fluctuations during the past two weeks, he assured.

Unrealistically overpriced

There were wide accusations of stocks other than the four suspended, being unrealistically over-priced and driven by vested interests, being overlooked by SEC. As a regulator, SEC cannot comment on individual stocks or valuation, Epitiwala said.

The public or investor has a right to inform “errors” to the director of corporate affairs of SEC, Epitiwala said. Did he mean, also, disparity, in corporate reports? SEC is committed to ensure complete disclosure and transparency, to the best interest of the investor public. We are government employees, prohibited from trading and don’t back the stocks of any company, Epitiwala said.

Daily trader on the CSE floor, PS Jayawickrema said that while the limit could prevent a trader becoming a millionaire in a day, it could check a person losing a million in a day, too. Other traders we met on the floor were trading with borrowed money; they were looking out for quick returns and made the most noise.
Perera said that with the war over and dormant economic sectors such as tourism, fisheries and agriculture generating money, while bank interest rates are down, people with money in hand, turned to the stock market. Perera said that SEC should accommodate the need of people to trade in the stock market.

Sarath Rajapakse, director, Capital Trust Securities said that the stock market is always right and functions to the wishes of the large number of buyers and sellers.

Rajapakse said that the market has the power of numbers; one or two can be fooled, but not all the people all the time. “You must respect the intelligence of the market” he said.
There are manipulators and persons with vested interests and SEC has the right to punish them if found guilty, he said.

Rajapakse explained that corporates could show that their accounts are fundamentally strong. Jayawickrema pointed out that Golden Key, Pramuka Bank and Enron Inc (USA) had shown strong fundamentals. Rajapaksa said that top financial experts and the academia no longer consider any company as fundamentally strong, as creative accounts could be shown.

Behavioral finance

The actual accounts would be in the hands of the board of directors. But, there was no legal way of finding these. Audits had to provide space for companies when presenting their reports -- for, there must be no room for competitors and enemies of the company to know about it. Rajapakse explained behavioral finance, which allows buyers to identify strong stocks, details that are too technical.

Management consultant and lawyer M Thiyagaraja said that buyers and sellers in the stock market must be alert to the Latin legal phrase caveat emptor “buyers beware.” In India, brokers do not recommend stocks and when requested, direct clients to their research division. In Sri Lanka most brokers call clients and tell them when to buy and sell stocks.

When buying shares, Thiyagaraja advised: to look at the book value of the company; acceptability of the company to the consumer; consider the brand name; earnings per share; future prospects; past dividends paid; rights issues given and the the price of the stock, divided by the earnings ratio.

source - http://www.lakbimanews.lk