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Stock Market: What does the circuit breaker tell us?

On November 12th, 2020 at 12:55, the NSE circuit breaker kicked in as the index went from 33,268.36 to 34,959.39 beyond the set 5% threshold.

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Sulaimon Adedokun resumes as TRANEX Board Chairman  Dangote Cement, Zenith Bank, shares, stocks, ARM's Shares of fortune, Understanding securities lending, nigerian stock exchange, coronavirus, NSE, Bears return ASI down 0.13% as trading volumes plunge, What’s going to happen to Nigeria’s stock market in May?, What’s going to happen to Nigeria’s stock market in May?, Nigerian bourse gains N37. 26 billion, triggered by BUACEMENT, ZENITH

On Monday, October 19th, 1987, the US Dow Jones Industrial Average (DJIA) lost 22% of its market value in one day – a day now referred to as Black Monday,  represents the largest one day fall in the history of the US stock markets. To put this in proper perspective, the largest one day drop in the US stock markets due to COVID-19 shut down occurred on March 16th, 2020 with the DJIA closing 12%.

Why does stock prices fall?

The simplest reason is because demand falls i.e. stocks are placed on OFFER to be sold. Same with rises? Yes, demand for stock rises, thus there is a BID to buy. So, ‘offer’ means prices fall, while ‘bid’ means prices rise.

What caused Black Monday?

No one knows, but it is agreed the selloff started in Asia, then moved to Europe, and finally hit America. This was before the time of fully automated trading systems; so, the order was filled and executed by manually placing with a so-called ‘Specialist’ that guaranteed a market.

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On that Monday, there were more offers for stocks than bids. Traders also tended to move in a trading herd, if broker A offer to sell a stock, Broker B is likely to start to worry and ask questions like ‘why is he selling?’, ‘what does he know?’ However, if Brokers, A, B, C, and D start to sell off huge stock positions, then Broker F will not just worry, he will follow the herd. Why? Well, there is safety in the crowd, so it seems.

Black Monday was preceded by Black Friday on October 16th, where the stock market crashed by 108 points – a record before October 19th, so the market was already ‘on offer’, and traders were already spooked. In effect, the herd was jittery.

The markets opened Monday 19th with more sale orders than buy orders, the markets essentially started to drop, and kept dropping until the DJIA closed at 508 or 22% fall.

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(READ MORE: Seplat announces exchange rate of N385.78/$1 in payment of its interim dividend)

The stock markets are designed to facilitate trade and enable price discovery. The price of a share is discovered by the intersection of demand and supply driven by investors’ estimation of risk, return, and the overall economy. Black Friday, however, was pure naked fear. There was no war, no recession, no terror attacks; just the entire market moving as a herd and selling and pulling down other markets.

In the aftermath of this general fall in the prices of shares across the board, the New York Stock Exchange introduced control measures called ‘circuit breakers‘ that are intended to cut off excessive volatility in trading, if the market rose and fell above or beyond a set benchmark. The idea is to break up the ‘herd’ and allow time for contemplation and research to aid decision making. For instance, for the S&P 500, a circuit breaker may be triggered after a 7% fall and the market temporally closed for 15minutes.

Interestingly, on October 20, the DJIA rose to a then-record 102 points in a day.

The Nigerian stock exchange also has its rules on circuit breakers. According to the NSE, anytime there is a 5% market-wide rise or decline (Extraordinary Market move) in the value of the NSE All-Share Index (ASI), the circuit breaker will halt in all equities listed on the Exchange, for a period of thirty (30) minutes.

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On November 12th, 2020 at 12:55, the NSE circuit breaker kicked in as the index went from 33,268.36 to 34,959.39 beyond the set 5% threshold.

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So, what happened?

There were more bids to buy shares than to sell shares and these bids were across the board, not just in one sector. It does appear in my opinion that investors have started to move money away from low yielding treasury bills and bonds to the equity market.

Is this a one-off purchase? Or an asset allocation rebalancing? Is this a sign of expected higher earnings from Nigerian companies, or just new money causing a minor bubble?

If this is real funds transfer, then the Nigerian stock market is set for positive gains. The Pension scheme alone has N11trillion in assets, with nearly 9% allocated in Treasury bills earning a maximum of 0.30% in stated yields, an even 2% rebalancing away from Treasury Bills to the equity market may be the spark the NSE has been seeking.

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OPEC+ agree to raise oil production

For Nigeria, a combination of both higher oil prices and lower production cuts is needed to fund the country’s 2021 budget.

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OPEC+ 2, Oil production drops, as Nigeria complies with OPEC+ output cuts  

Following yesterday’s meeting, OPEC and other oil-producing nations led by Russia reached a deal to modestly increase production in January amidst a raging second wave of the coronavirus pandemic though with the prospect of vaccines offering some hope.

Based on the agreement, members of the Organization of the Petroleum Exporting Countries along with Russia and other countries will raise production gradually by 500,000 barrels a day over a 3month period starting in January. The increase, though less than 1% of the global oil market, comes amidst a second wave of coronavirus which is currently weighing on demand.

According to reports, the agreement was a compromise between countries that wanted a much larger increase of two million barrels a day, which was previously agreed on, and others that would prefer to maintain current production cuts of c.7.7mbp. The latter are considering the many uncertainties around the pandemic and the possibilities that demand will remain low. That said, the disagreement between both groups suggests that agreed quotas may not be adhered. Looking ahead, we expect the modest increase in OPEC+ production and the prospects of the discovery of effective vaccines to remain positive for oil prices in the short term if production cuts are adhered to. We however expect the rally in oil prices to be capped by subdued growth in the global economy which would continue to limit
the pace of recovery in oil demand.

Coming home to Nigeria, a combination of both higher oil prices and lower production cuts is needed to fund the country’s 2021 budget which is predicated on a production volume of 1.86mpd and oil price of US$40 per barrel. Amidst a recession, the hope of an economic rebound is largely hinged on sustained rebound in crude prices as the country has suffered a significant slump in revenue largely due to weak oil revenue. Furthermore, the economy continues to face severe dollar shortages due to lower oil receipts which continues to pressure the nation’s FX reserves.

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CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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6 Things to consider when looking for suppliers for your business

By putting these 6 things into consideration, you’ll tailor your supplier-selection process to your unique business needs.

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Great suppliers are a fundamental part of your business. They allow you to produce and get your products and services to your customers. But finding reliable suppliers for your business takes real effort. It requires much more than just skimming through a series of price lists. Here are 6 things to consider when looking for suppliers for your business.

1. Your Overall Budget

Your overall budget is one of the most important things to put into consideration when you’re searching for the best suppliers for your business. While you may not know the accurate cost of certain things, you need to have a clear idea of the amount of money you’re able and willing to spend before approaching potential suppliers. And one good way to do that is by researching how much some of the products and materials you need will cost you.

Assuming your business offers HVAC installation, maintenance, and repair services. You’ll need to know the prices of various HVAC parts, including air filters, belts, capacitors, fan motor, and coil condenser cleaners. The best way to do that is to visit the site of HVAC suppliers in your area and see how much they sell these parts. This information will help you create a reasonable budget. If you’d like a suggestion, you can take a look at Cold Air Central for quality HVAC parts and other products.

2. Reliability

Reliability is another important factor to consider when picking suppliers. Reliable suppliers provide quality products and materials in a timely manner. It’s always a good idea to work with reputable and well-established suppliers, as they have adequate resources and resilient systems that enable them to deliver without hiccups. But you can still work with small suppliers, especially if you cultivate a meaningful relationship with them.

3. Stability

When looking for the best suppliers for your business, go for those who are experienced, and have a stellar record of accomplishment. Stability is crucial, particularly if you’re looking for a long-term partnership with a specific supplier or there is only one supplier of a specific product or material that your business requires. You must also ensure the supplier is financially stable before entering any contract with them. A great way to do that is to request the credit history of a potential supplier.

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Another great way of finding out if a prospective supplier is stable is to check out review websites for testimonials from previous clients. You can also visit their official social media pages to see how they engage their followers and how they address complaints. If there are so many negative reviews and comments from customers, there is a high likelihood that they’re not going to be the best option for you.

4. Location

Consider location when searching for competent suppliers. Working with distant suppliers may sometimes result in longer delivery times and additional freight expenses. But if you want something fast, dealing with local suppliers might be a wise decision. That doesn’t mean you should overlook distant suppliers. Be sure to review freight policies of far-off suppliers. You may discover that bulk orders might attract free shipping. Or better yet, you can merge different orders to lower costs.

5. Production Capabilities

Look for suppliers who can produce the items you want. To verify the production capabilities of a potential supplier, you must do more than just speaking to a representative. A good one should consistently supply items that meet your standards.  Visiting the supplier is the only sure way to confirm their production capabilities.

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An in-person visit will give you a chance to audit the quality management system of the factory. If you don’t know what to check for during the visit or you want to do away with the cost of traveling overseas to the factory, working with a third-party can be a great option.

6. Cultural Fit

Check whether the goals and values of a potential supplier are aligned with yours. If they are, then partnering with that supplier would be a great idea. Some of the things that will help you tell whether a potential supplier is a cultural fit include:

  • The type of companies they work with.
  • A detailed quote that meets your specific requirements.
  • Minimum order quality.
  • A deep understanding of your business.

 

Conclusion

By putting these 6 things into consideration, you’ll tailor your supplier-selection process to your unique business needs. That way, you’ll choose the right supplier who will consistently deliver quality products and materials that your business requires. It could also enable you to cultivate long-term mutually beneficial relationships with your suppliers and reduce stress in selecting partners.


 

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Rachel Eleza, Growth Marketing Director at UpSuite and a part-time writer.

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Analysis: Nigeria needs an austerity diet

Why the Nigerian government needs to implement on Austerity Measures

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Analysis: Nigeria needs an austerity diet

Something strange happens on Saturday mornings on Bourdillion Road, Ikoyi, the UNILAG campus in Akoka, and Bode Thomas in Surulere is not exempted from this phenomenon.

If you look intently, you may observe it like David Attenborough filming the life of a baby elephant. Scores of differently sized people get on the road, some in lycra, some in garish pink, some in shorts, some on bicycles, and some with fanny packs.

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What are these people doing on the road? What do they want? Why would anyone wear reflective visors, 6 armbands, and ill-fitted long socks? It’s weight loss time, yeah! Excessive sugar is bad — it’s the work of the devil!

Chocolates, biscuits, and weight gain

You know deep down you shouldn’t eat these incredibly sweet things, but when you are down and tired, you can’t resist — it improves your mood. The World seems like a sweeter place suddenly, you smile a little bit, and you forget the problem.

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READ: Nigeria’s total debt to hit N33 trillion – Senate

However, you get another urge for more sugar and eat again. Your problem is still not gone, but you feel alright. With time, you realize that you have gained weight and must face the hard truth — cut down on sugar or choke on it.

If you choose the latter, five years down the line, your weight has grown from 75kilos to 225kilos — an additional problem to your worries. A person weighing 225kilos is super morbidly obese and may have many health problems.

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The Nigerian government is in a similar situation, it has a weight problem, a large debt load attached to it that it simply can’t afford or ignore any further. It’s time to hit the road, change its diet, and consult with the doctor. In orthodox economics, countries getting on a diet and hitting the gym is called Austerity. Austerity is never a popular route for governments.

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In Fela’s classic, Teacher don’t teach me nonsense, he lamented about the pain of austerity and included it alongside other pains felt by the citizenry some 30 years ago. Whether we like it or not, government finances must be put on a diet; at best, a delay can ensue.

The longer the delay, the fatter the debt pile gets, and many more problems will emerge. People will feel even more pain without austerity. Austerity is not unique to developing countries, it is important to mention that in 2010, post the global financial crisis, the UK’s Chancellor of the Exchequer, George Osborne, introduced austerity measures on government finances to enable its future sustainability. This after all is an economically developed country mindful of its finances. If the UK government can do it, why not Nigeria? Could it be the do-it-yourself economic ideas?

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What does austerity diet involve?

A significant cut in government spending and largesse. It entails saying goodbye to the sweet-looking jeeps and furniture, the not so large civil service a.k.a government jobs, and to an ever-increasing attempt at collecting more taxes from poor Nigerians.

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Recall, more than half of Nigeria’s population is living below the bread line. It’s unclear from whom any tax increase will emerge. There is debate amongst orthodox economists about the timing of austerity diets — should it be during a crisis or during boom times? There is no clear-cut answer, but it’s easier to take the pain in a growing economy than one undergoing strain.

READ: Nigerian retail industry can’t grow without proper franchise system – CIG boss

It is sometimes possible to escape the diet. Some patients go for bariatric surgery and extensive liposuction and this helps them cut down in a very short space of time, without the attendant pain via the organic process. Nigeria did this in 2005 by securing debt forgiveness from the G8 countries to the tune of thirty billion dollars. Interestingly, this is roughly what Nigeria owes today.

Borrowing into unsustainable debts

It is unlikely anyone will cancel Nigeria’s debt again. So, why does the government keep borrowing when it’s apparent the country can’t afford it?

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Well, if one keeps getting cheap biscuits and chocolates, then it’s easy to eat more. Reviewing the basic debt stats can be deceptive without a good enough grasp of the stats for sustainable and non-explosive debt.

In my last article, I discussed how DIY economics or homegrown economic ideas have done damage to price stability in Nigeria. Without a critical review of how best to adjust an explosive debt path, countries are bound to stay the destructive course. Considering indicators used by George Osborne as a benchmark for Nigeria, Nigeria is on an explosive and unsustainable borrowing path.

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There is absolutely nothing wrong with leverage or borrowing. In many instances, especially with businesses and corporates, it helps them achieve their financial goals. However, there is a proverb from the South Western part of Nigeria that translates to, “one ought not to live an extravagant life, whilst in debt”.

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The statistics show that Nigeria continues to borrow extravagantly, without the impact being felt on the streets.

READ: 9 Brilliant ideas to pay off debt fast in 2021

What is the near term solution?

A selective increase in government revenue may be the way. Tax increase is highly unpopular but selective taxes on businesses that have benefitted from historical tax cuts and waivers may be the place to start.


This article was contributed by Dayo Oduwole. You can contact Dayo via his email, [email protected], or tweet at him @TheRealOladayo

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