Credibility Gap II

I've released a media statement last Thursday, essentially blaming the Prime Minister, Datuk Seri Abdullah Ahmad Badawi, not for the fall in the stock market, but for causing thousands of retail investors to be 'burnt' during the Chinese New Year period. You can check out my statement here, or as reported in Malaysiakini here or Oriental Daily here.

The Prime Minister, Datuk Seri Abdullah Ahmad Badawi made a bold prediction that the Kuala Lumpur Composite Index (KLCI) might hit record highs of 1,350 points and strongly encouraged Malaysian retail investors to “push hard” to achieve it on the 2nd day of the Chinese New Year.

...with the confidence and encouragement publicly expressed by the Prime Minister himself, the “retail participation was back in earnest” from the first day of trading after the Chinese New Year break.

...the KLCI rose 1.3 percent to 1,278.22 points on a record high volume of 4.7 billion shares traded. The volume was [a whopping] 32.8% higher than the previous high of 3.54 billion shares recorded only the week before. The transaction volume hit another record of 4.78 billion shares on Thursday.

The Star reported that “penny stocks and low-priced warrants saw brisk trading – an indication of retail participation – with the top 10 most active counters clocking a combined volume of more than one billion shares”.

The rest, we know is history. Within 3 days, retail investors who participated in earnest, particularly those with margin accounts or those speculating on contra gains, were forced to sell their stocks with huge losses - contributing to a RM100 billion loss in market capitalisation last week.

What was however more interesting is the continued attempts by the Prime Minister to shore up confidence in the market, and his continued failure to do so.

After 2 days of record-breaking fall for the KLCI of more than 6% on Tuesday and Wednesday last week, government officials rushed to make statements to "calm" investor fears with regards to the stock market.

"Malaysia’s economy remains robust and there is no cause for anyone to worry about the dip in the KL Composite Index," said Second Finance Minister Tan Sri Nor Mohamed Yakcob on Wednesday. As a result, the market responded by dropping another 16.23 points (1.37%) on Thursday.

And on Thursday, the Prime Minister himself asked Malaysians to "have faith in the KLSE".

Malaysians should have confidence and be prepared to invest in the KLSE to attract bigger foreign participation.

"When Malaysians show their confidence and their preparedness to invest in their own stock market or in their own country, this will give a signal to investors to come in bigger numbers to Malaysia."

I won't dwell into such skewed rationale for investing in our stock market here. What is of note is that the investors responded to his statement with continued selling, causing the KLCI to drop by another 17.05 points (1.46%) on Friday.

This morning as at 9.25am, the KLCI is down 29.7 points.

There is hence a strong case for our Prime Minister to stop giving comments on the Malaysian stock market for the more he talks about it, the worse it appears to be.

To quote OSK Securities research chief Kenny Yee, “our only concern is that the sharp fall would have an effect on retail investors. Some of them entered the market just last week and it is not good to be hit like this.”

In Pak Lah's eagerness to convince the electorate that the economy is extremely rosy in a pre-election year, he has gone overboard causing untold damage to the average investors who are already hit by significantly higher cost of living such as up to 60% rise in toll rates.

Is this a case of the Prime Minister losing all credibility with the retail investors? Did he almost single-handed caused these investors to lose total confidence in the local stock market?