Saturday, June 22, 2013

WTF Closing Was That??!!

The sharp divergence in nearly 10 stocks at market close on Friday had everyone cursing, bitching ... cause most did not profit from the trades. There are a few clarifications that are needed. What happened? Were they mistakes? Here is my view:

a) Were they mistakes?
No. They looked to be real trades.

b) Obviously some fund was selling, why the rush and the size?
Funnily, none of the stocks had a grave impact on the KLCI, but they were high dividend yielding stocks. Hence one can infer from that that it was probably a big carry trade fund unwinding. It is not likely to be an indexed fund unwinding as none of them really matched the real index in any way. In fact weighted heavily on plantations as well.

Carry trades have been rampant over the past couple of years as big hedge funds could realistically borrow large sums at near 0%, provided it is in yen or USD. When Abenomics got rolling, a lot of the yen carry trade switched over to USD carry trades. When you are borrowing near zero, you want that 3%-5% dividend yield and lock in that spread. The bumper will be the capital appreciation, but usually they will also hedge the share price going in and out. 

Hedging means if I want to lock in a 4.5% dividend yield for JCY at 90 sen, I will enter into a similar contract for JCY to exit at same price. Hence when I exit, even though JCY was at 66 sen, I can still go out and lock in my dividend yield.

The other portion of the hedging has to be the currency, as you want them to be stable and not move against you, i.e. ringgit weakens substantially against USD thus making your dividend in USD a lot less, thus reducing your real yield. However, there are no perfectly hedged trades in reality, you are still vulnerable to certain fallouts and black swans. Plus to be fully hedge will often more than eats into your real arbitrage gains in the end.

c) So who benefited?
Those people who queued ... it does not look like any funds were involved in the buying. You can judge by the size and price done. They were not married deals per se, you want to sell 2 million, the system will calculate and add all the buyers lined up to make up 2 million and done at the lowest price. Same for the other side.

d) Shouldn't the fund have waited?
There are many reasons why the fund unwound. It could be because of the "rising interest rates" scenario owing to Bernanke's policy speeches. That may have caused the banks to tell these carry trades funds that they had to stop or face much higher interest rates in the coming months, or even that the banks are refusing to fund these carry trades with 'immediate effect' as the risk profile of supporting these trades have become untenable. 

Judging from the selling, it looks like a program trade and not done manually. The disparity between losses and market prices may seemed to be big but the fact of the matter was that it could be the carry trade may be USD800mn in size, and they have locked in their gains, thus to unwind a smallish RM40m would not matter much to the fund.

Technically, they would have had a better price if they packaged the whole thing and asked for a total bid from a big broking desk. Most would have no problem taking the whole shebang on for a 10%-15% discount. Sigh ... the perils of computerised trading. Someone should have over-ridden the program instruction.

e) Unwinding by a carry trade may explain the losers, but what about The Star and JCY surges?
This one is harder to explain. It could be short covering, i.e. a hedge fund borrows the stock to short, for various reasons ... hedging other long positions or you do not like these companies, and there are plenty of good reasons to NOT like JCY and The Star. JCY - haphazard earnings; The Star - may be a casualty of the recent elections. Sometimes a big carry trade fund may be practicing Multi-Strategy, i.e. locking in good dividend yield spreads between borrowing cost; and long/short strategy for some other stocks (e.g. in this case shorting JCY and The Star and going long Flextronics and SPH). Its just speculation on my part, but if a big fund is unwinding its carry trade, it may very well involve longs/shorts covering as well.

f) So who was the client and does the fund have more stocks to throw?
This is guess work at best. It is rumoured to be Bank of New York Mellon. Some smarter pundits went to check further what other Malaysian stocks BNY Mellon has. This is not to say they will also dump other shares in their fund. But they DO have other Malaysian stocks in their portfolio. I do not think its fair to reveal what are the counters as that may trigger an irrational reaction by local players. Do I have the list, yes I do. It is relatively easy to do a bit of research to get their holdings, but I certainly do not think its fair or wise to put them up.

This would not be the first but is significant as it is sizable and the drop in some of these share prices have been very significant. Malaysia is not the only market to experience this. Same can be seen in Singapore and HK as well, but it looks bad when some of these counters are not as liquid.

Well, I guess many people will start putting in big buy orders at very low prices or sell prices at very high prices in case these events happen again. They will happen again but only during these times when there are reasons for the carry trades to unwind.

So, I do not think its rebalancing (as was reported in the papers) because rebalancing usually involved largely indexed stocks. If all the 10 stocks were to be indexed stock, you will see the KLCI gaping down by 40-60 points. Hence it is more likely to be a carry trade fund unwinding arbitrage dividend yield plays.

What will happen on Monday, back to normal prices. You will not get to buy or sell at those prices for TDM, Coastal, BToto, Star, Batu Kawan, HS Plantation, JCY, CBIP .... but more people will queue like nobody's business at very high and very low prices.