The stocks of both companies moved in ways that mirrored their companies’ performances. While Wataniya has shed 63% of its value from late April (the day the stock was reinstated after the company’s announcement of ceasing operation) to date. On the other hand, Jazeera has gained 78% dueing the same period.

By: Rafique Suleman

Trading at KSE is executed by computerized system, called Kuwait Automated Trading System (KATS). The system is thought to be efficient, confidential and fair among traders. Authorized brokers have equal access to the KATS Server, via a KATS workstation in their offices at KSE and necessary information of trading is readily available there. Brokers directly enter orders into its KATS workstation. Investors can place buy/sale orders only through a broker. So far, it is good; however, the issue of the anxiety is how the unfilled long terms orders of a day are treated at KATS and Broker’s System.

Based on the information received from my broker, for a share the long term orders that were received in KATS but could not be filled during a day and its queue, lapse at the end of trading time of the day. Therefore, unfilled long term orders are required to be placed next trading day again in KATS by the broker. Queue of orders for a share is reset, based on the principle of first come first served. As an investor has full option to cancel a order at any time, why the queue should be reset and deprive an investor who has placed a long term order. In other words why cannot the order validity in a broker’s system be transferred in KATS system and maintained as it is till the order is filled or the investor cancels the order.

Broker’s System

Other than the issue of lapse of an unfilled order at the end of trading time, there might be relevant issues at a Broker’s system, as described below. In a broker’s accepted orders for a period of more than a day for a share, for the unfilled quantities, how efficiently a broker’s system places client’s orders the next trading day in KATS prior to start of the trading is an issue that needs attention.

Secondly, if there are unfilled orders of multiple clients for a specific share, the concern is there whether the queue among the clients within broker’s system remains as it was the earlier trading day or there are possibilities of manipulation of the queue. Those, in this form, having direct experience with KATS or trading system of a broker my add more information and/or correct the errors in the information presented herewith on the subject.

Last month, I wrote about how unjustifiably valued new-comer Marakez was (click here to read the article). The company was listed on the Kuwait Stock Exchange at a price of 500 fils, while the stock had a book value of 172 fils. The price allocation meant that the stock was trading at a Price-to-Book ratio of 2.9x versus the industry’s 0.57x.

 A month has passed since the company’s listing, and the performance of the stock has been short of a disaster. The stock fell more than 56%, and has been a constant occupier of the Worst 5 performing stocks on the KSE. The company’s Price-to-Book ratio reached 1.27x vs. the industry’s 0.54x, however, the company is still the most expensive stock in the Real Estate sector.

Is there further downside risk attached to the stock? I guess only time would tell.

Who is “lucky” now Mr. Dashti ?

Gulf Bank has performed magnificently well in 2010, adding 97% to its share price. It has by far exceeded the returns of both the KSE Price index and the banking index. Moreover, it has outperformed all its peers.

Today, Al-Qabas daily newspaper listed some reasons that justify this rally:

1) Although the bank suffered from a massive erosion in book value, it maintained its market share within the banking arena in Kuwait and continued to compete with other banks.

2) Huge growth in the bank’s earnings as in Q1 it recorded a profit of KD 524 thousand, Q2 it recorded a profit of KD1.4 million, and in Q3 it announced a profit of 8.9 million.

3) The bank is tightly held by its insiders who hold 56.7% of the shares.

4) Shareholders who suffered from the bank’s losses and had to recapitalize the bank were buying to average-down their losses.

5) The presence of the KIA as a lead investor.

6) The change in strategy and management and the enforcement of corporate governance. In addition, the cleaning of the balance sheet helped restore investor confidence.

7) The old shareholders are confident in the bank and maintained their ownerships.

Looking at the basic relative valuation, one might assume that the stock might be overbought as it is now trading above peers, with the exception of Boubyan bank. Although they have just cleaned up their balance sheet, the Gulf bank might still be conservative and not reverse provisions in the next few quarters. Still, I do believe that the Gulf bank has hidden value.

Again the difference between the two indices is that the price index gives smaller companies a bigger weight in the index versus the weighted index, which takes into account the market cap of the company. I also included the MSCI Kuwait, which returned 33.4% so far this year. This index takes into account the stock’s market cap as well as liquidity (i.e. what percentage of the share is free floating and not held by cornerstone investors).

The key lesson here is that this year, the price index was dragged down by small cap companies that have been hit badly by the financial crisis and haven’t recovered yet. If you had invested in blue chip stocks (NBK, KFH, Zain, etc.) would would have been better off.

This is a rebased graph that showed how much the markets moved during the summer (June 1^st to date). The top gainer was the Dow Jones index (blue), followed by Saudi’s Tadawul index (Red). The Qatari market (Green) was flat over that period. The DFM (Orange) was the biggest loser, followed by Kuwait SE (Black) then Abu Dhabi (Purple).

Yesterday the Kuwait SE price index reached its five year low of 6,328 points, closing lower than the January ’09 levels of 6,380 points. However, the weighted index was much more merciful as it is still above its one year low of 373 points. This is a classic example that shows how our price index is not a good indicator of our economy as most of the large caps didn’t fall as much and did not have the same fate as some of the small caps.

Below is a chart of the price and weighted index.

In the past year some GCC markets showed some growth and others showed large declines. The Tadawul index increased the most (15%), followed by the Qatari index (11%). The Kuwait SE was the largest decliner, where it decreased 18% in the past year. Both UAE’s markets, DFM and ADX, where very volatile this year due to Dubai Wolrd debt issues, however the ADX managed to maintain its value while the DFM lost 15%.

In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit at zero cost. Wikipedia.

In our GCC markets we have some arbitrage opportunities in some stocks with dual listings. Some might have a marginal profit opportunity; others might almost make you double your investment. Global Investment House, which is listed both in the KSE and the DFM is traded at KD0.058 and KD0.103 respectively, indicating an arbitrage opportunity of almost 77% whereby you can buy Global stock in the KSE and sell it in the DFM. GFH, which is listed in the KSE, DFM and BSE can also provide you with a risk-free return. The difference between GFH’s price in KSE (KD0.039) and DFM (KD 0.040) is 2%, however, in the BSE it’s priced at KD0.108, thus potentially tripling your money.

The graph below shows the mispricing in Global’s stock in the KSE and DFM.

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Zain, the largest compay in market capitalization, has been halted from trading on Sunday following their AGM on Thursday. Trading in the KSE has decreased significantly and reached its lowest levels since the begining of the crisis. Previously I did an anlysis on how will the market be affected if Zain was suspended from trading (click here) and the result of the analysis was that the market as whole will be affected and there will be a sharp decline in value traded. Today I did a similar analysis,where I showed the share of Zain’s value traded out of the value traded of the KSE. We will continue to see low volumes until Zain resumes trading, maybe then we will see some recovery in the market.

*The chart below shows the value traded in the KSE since Jan ‘09

* The bar chart below shows how much Zain contributed in the monthly traded value of the whole market.

* This pie chart shows Zain’s value traded contribution to the whole market from year-to-date.