While corrective forces are at play

ASE downslide eats up savings 

By: Ghaith S.

6-21-2006

 Investors and stockbrokers at Amman Stock Exchange (ASE) attributed the recent decline in stock prices since the beginning of the year to a number of factors.

 “The market was overvalued in 2005 and the reason for that was due to over speculation,” said Saad Khirfan an investor at ASE.

 He added, “The reason for the market decline is the initial public offerings (IPOs) of many new companies which absorbed liquidity from the market, and the payment of dividends in stocks instead of cash by many companies, plus the new decisions by the Jordan Securities Commission (JSC) like the taxes on stock trading profits and the recent decision to limit investors borrowing from brokers.”

 The taxes of stock trading profit has been frozen but it lead to the withdrawal of huge amounts of capital from the market according to Fareed Al-Sayyed, a daily investor at ASE.

 A circular, which was issued by JSC concerning capital adequacy requirements, specifies that all receivables by brokers, as of June 4, 2006, should be settled within a period of one week from the date the debt arises.

 Firms that fail to abide by this law will be subject to legal charges. However, brokers were granted a grace period until the beginning of next year to clear withdrawn accounts before the cash trading regulations are implemented as of Jan.1, 2007.

 This decision has brought massive criticism from both individual investors and brokers, “This decision has lead to the collapse of the market, because the clients have to close their accounts; they do not have liquidity, and they cannot sell, if they sell they lose,” said Ibrahim Al-Daoud, GM of Shareco Brokerage at ASE.

 “The trading volume was around JD100 million per day; because of that decision by the JSC the volume is down to around JD40 million, while prices have fallen 25 - 50 percent,” said Khirfan.

 “Before that decision a broker would wait one or may be two months before the client settles his debited account; there was no limit on such dealings,” he added.

 “The capital adequacy requirements decision has destroyed the market,” said Yusef Abu Hamdeh, an investor at ASE, adding “the market has been working normally for 27 years, in the whole world with no such decision. If this law remains effective I might move my business to Dubai and Saudi Arabia; before this decision was made, companies used to bring foreign investors to invest in ASE, now the opposite is happening.”

 Commenting on JSC’s decision, Samir Zeine, portfolio manager at Eman Financial Investment, a brokerage firm at ASE, told The Star,  “When those regulations where announced the market reacted in a confused way, the reason is that the regulation was not clear for both investors and brokers and how to deal with it…this decision is negative and we ask JSC to cancel it”.

 Talking about the long run he said, “The Jordanian market is promising, we have strong companies that have strong profits, also there is growth in the GDP.”

 The Star tried on four occasions to contact the chairman of JSC for his comments but he was constantly busy.

 As of Thursday a statement issued by JSC states that this decision will be delayed until the beginning of next year.

 “Now with this decision we have two types of accounts –with brokers- cash and margin. Most of the accounts is cash where the investors buys stocks on cash basis, when those new regulations popped up there was crowd psychology, where people went with the wave of selling so the market went down, and when there was no enough buying so the volume went down, where it reached to its lowest level JD33 million last Thursday.” Said Yousef Al-Deesi, senior broker at Al-Watanieh for Financial Services, a brokerage firm at ASE.

According to the regulations at ASE, buying on margin is borrowing money from a broker to purchase stock. You can think of it as a loan from your broker. Margin trading allows you to buy more stock than you’d be able to normally, but of course in return for an extra commission. To trade on margin, you need a margin account. This is different from a regular cash account, in which you trade using the money in the account. You can keep your loan as long as you want, provided you fulfill your obligations. First, when you sell the stock in a margin account, the proceeds go to your broker against the repayment of the loan until it is fully paid. Second, there is also a restriction called the maintenance margin, which is the minimum account balance you must maintain—around 50 percent—before your broker will force you to deposit more funds or sell stock to settle your loan. When this happens, it’s known as a margin call. A cash account is a regular broker account in which the customer is required by regulation to pay for securities within 6 days after a purchase is made.

 The majority of investors at ASE, number wise rather than volume wise, belong to the cash account category. These investors tend to trade in their savings and as such, the new regulations have affected them the most.

 “The capital adequacy requirement is a good decision for the market in general; it has a negative effect now because many investors had already taken a credit line and they have to pay their debts. But by the time when 50 percent of the brokerage firms get certified to do margin trading, the situation will vastly improve. Today we have around 8 brokerage firms certified to do margin trading out from around 60 operating at ASE,” Deesi concluded.