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Short Position


Guessing game with the market  

WHERE does the stock market go from here?

That is anyone’s guess but market watchers over time know that the rally that we have seen with Wall Street will eventually come to an end and it has, with the market entering correction mode last week.

Reasons for the pullback are varied. This time around, the feat is that inflation will drive interest rates upwards and that is bad for stocks. Higher interest rates are always bad for stocks but during the dotcom boom when the US Fed raised interest rates, the narrative back then was that higher interest rates was good for the market as it will force companies to innovate, spend more on tech and that will drive earnings and valuations of tech stocks higher. We all know how that ended up.

Inflation is actually positive for stocks. When Venezuela had runaway inflation last year, its stock market rallied like it was bitcoin.

The hard truth, however, is that in today’s world, stock market direction will drive the real economy.

People will say that the market reacts to the real sector six months ahead. During the recent rally on Wall Street, there were numerous articles that articulated why that rally will soon come to an end. It was well argued with facts from some of the leading research houses and that is somehow manifesting itself now.

When stocks start to plummet, companies will start to overreact. Job cuts will be made and that will translate itself into the real world. When companies and employees get cautious, they will clamp back on spending and that’s when the self-fulfilling prophecy of markets will come true.

What happens next on Wall Street and the rest of the global markets that have had a decade-long rally is anyone’s guess. The reality is that nothing will go up forever and eventually reality will set in and investors will take stock of the situation and that is what will determine the direction of any future market.

 

Bonia’s Leap Market plans

BONIA Corp Bhd ’s decision to spin off a subsidiary as a listing for the Leap Market is noteworthy.

On a positive note, it could set a trend of listed companies looking to spin off their young subsidiaries into the Leap market. Apparently, there is no rule against that. Such a trend would give the Leap Market a nice flow of potential listings.

However, it takes a while for Leap Market companies to grow to become qualified for a listing on the Main Market or even the Ace Market. Hence, shareholders of the listed company spinning of its subsidiary need to understand that there is this waiting period.

Two other issues stand out. In Bonia’s case, it is divvying in specie shares in its subsidiary going for the Leap listing, to its shareholders. However, trading on the Leap Market is limited to sophisticated investors, categorised as accredited investors, high-net-worth entities with total net assets exceeding RM10mil, or high-net-worth individuals whose net personal assets exceed RM3mil or a gross annual income exceeding RM300,000.

But it is unlikely that all Bonia minority shareholders fall in that category (or at least want to make such a declaration). Hence it is puzzling how this plan will pan out. Another concern is the lack of trading liquidity on the Leap Market. Are Bonia shareholders about to receive the Leap Market shares of their subsidiary company prepared for that?

Perhaps the rules are being changed to allow everyone to invest in the Leap Market. There are arguments for that. Already, many Malaysians do not shy away from investing in much more high risk assets such as forex products and even Bitcoins. Why stop them from investing in the Leap Market?

 

KFM’s doldrums

Kuantan Flour Mills Bhd ’s (KFM) plans of getting out of its doldrums keep changing.

One wonders how and when it will finally get its act together. The company had fallen into Practice Note 17 (PN17) category back in December 2015.

From then, it has managed to escape getting de-listed by doing the following: it has applied for an extension of time to submit its regulational plan not once but twice. And in both cases, Bursa Malasyia had approved the request of the flour manufacturing and trading company.

Last September KFM submitted a regularisation plan to Bursa Malaysia but has now asked for that plan to be withdrawn. Naturally, KFM has now submitted a third request to Bursa Malaysia for an extension of time for the submission of its regularisation plan.

In between all this, some newsy juice bits have come out.

In December 2016, KFM shares shot up after the company announced that Federal Land Consolidation and Rehabilitation Authority (Felcra) had issued a letter of interest to acquire a stake under a proposed reverse takeover (RTO) exercise. But within days, Felcra withdrew its intention.

In a filing with Bursa Malaysia, KFM said it had received a letter from Felcra which said “after urgent deliberation of our register of interest to explore the possibility of participating in KFM’s equity, we hereby inform that, effective immediately, we are retracting our register of interest and ceasing all exploratory pursuit to participate in KFM’s equity.”

This week, KFM has come up with another plan – it said it has inked a memorandum of understanding (MoU) with Shou Guang Chang Tai Economic And Trade Co Ltd (SGCT) to facilitate an expansion of the group’s starch and premix flour trade in China. Based in Shouguang City, Shandong province, SGCT is principally involved in the trading and retailing of corn, tapioca and food-related products. SGCT has established a stable import and export business with trading partners within China and South-East Asian countries, KFM said.

The MoU could lead to a collaboration between the parties or a direct acquisition of a majority equity interest in SGCT by KFM, the latter said.

It is left to be seen if this will be the way in which KFM gets out of its PN17 doldrums. Meanwhile, KFM remains cash strapped, faces hefty payables and had its latest annual accounts qualified by its external auditors.

 

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