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Food for thought:
About 2 weeks ago, Elon Musk's Tesla revealed they have taken a huge position in Bitcoin and he believe in this cryptocurrency so much so he think it is worth more than cash (I am assuming he is only talking about currencies which are subjected to negative rates). Then, this week he said he feels Bitcoin is a bit on the high side. Few weeks ago, he promoted Dogecoin. Then he said it is best to sell. In 2020, the most watched or followed twitter account was Donald Trump. After Trump was banned, Elon Musk pretty much became the new king of twitter. One was a mad president. Another is a mad richest man in the world. Both are extremely powerful people with great influence.
In the past year, retail investors participation in stock market globally like US, South Korea were at record highs. This is largely due to the prolonged Covid-19 lockdown and flood of liquidity expanding the money supply in the economy (M3).
Locally, in 2020, foreign funds outflow from KLCI ballooned to RM25 billion. On the contrary, Retail investors were net buyers at RM14 billion and local funds at RM11 billion. Hence, it can be concluded it was retail investors who supported KLCI. As a result, Bursa is on track to deliver record profits for FY20/21 due to record high retail participation, so are the IBs and other brokerage firms. Active retail participation is a boon for the stock market. If social media changes the landscape and levels the playing field between retail investors and institutions, it should be welcomed. Of course some level of oversight is a must to prevent abuse however the same can be said towards the conduct of the Foreign IB whose research report was a sales piece to pitch to institutions to capitalise on RSS ban lifting in KLCI to short the 3 glove stocks. If Regulators intend to clamp down on retail investors, equal scrutiny should be accorded to those questionable IB’s analysis.
Irrationality in the stock market swings both ways and over time it will normalise. A fundamentally sound stock will not go down indefinitely. When the buying volume and momentum outweigh selling, the share price goes up and vice-versa. The point to note, however, it is important for funds to come in to support for share price ascension. For glove stocks, it has been punished irrationally and retailers banding together can be seen as a reactionary market forces.
Indeed, the circumstances of GameStop vs Gloves stocks while sharing a common distaste for shorters, the substance is different. Unlike GameStop, the Glove stocks are undervalued, delivering continuous record profits and good dividend yields. The demand won’t disappear overnight just as when I repeatedly said the vaccine announcements won’t eradicate Covid-19 instantly. 3 months since Pfizer / Moderna announcement, globally and Malaysia is in a much worst state than 1 year ago. For those who choose to ignore the supernormal profit of glove stocks, please reassess your valuation model impartially. This is not the same where a company disposes their core business and net a huge windfall, declare one-off dividend and is left without a profitable business the next year. How many times have we seen the glove stocks grow post pandemics (H1N1, SARS)?
I understand valuation is subjective. The argument can go on indefinitely. So let’s leave it as that. I am just a blogger and a retail investor. In my years writing, I have always put the interests of my readers and retail investors close to my heart. It pains me to see many subjected to losses resulting from “pump & dump” operations. This means I would not write on companies or sectors which I deem risky, questionable or fundamentally weak.
I would like to take this opportunity to share my honest view on the “Glove Movement” with retail investors.
1. Do not invest in glove stocks if you don’t believe in the fundamentals and not willing or able to hold for the long term. Only do so if you believe in buying a wonderful company for the long haul.
2. Do not get carried away, caught up in the hype and be emotional. No point using hard earned money to spite anyone, be it IBs or shorters. They don’t care about you, only their books.
3. Do not use margin to invest in stocks, only excess cash. Invest within your means at all times (regulators can clamp down, banks can impose margin caps anytime)
4. Avoid structured warrants, derivative products especially if you have no knowledge.
The stock market will keep evolving with the advancement of technology. Retail investors, looking out for each other may just be a new way forward. I do not know for sure, but this is surely an experience we will all remember.
End Part 2
Dear all, the largest telegram group now consist of over 42,000 members. Since the “Glove Movement” started 4 days ago, it spread like wildfire capturing people’s attention. Notable experts, regulators, pundits, prominent investors have weighed in over the weekend on this phenomenon which was largely inspired by the GameStop rally in Wall Street.
Many were quick to distinguish the GameStop, AMC stocks and the Gloves stocks in Bursa pointing out a short squeeze would not happen in Bursa due to the 4% RSS limit, glove stocks are not oversold up to 140% and robust regulations in Malaysia. I do agree that a short squeeze like GameStop will not happen for the Glove stocks in Bursa.
However, those who assume retail investors are naive and this is just a elaborate ploy of some unscrupulous “Gurus” manipulating social media to start a “pump & dump” operations failed to recognise a crucial underlying issue. Why did GameStop resonate with Malaysia’s investors?
If you look at the largest telegram group, people from all walks of life are there, from VVIPs to students, all banding together for the Glove sector. It was an organic movement with no leaders. Hence, it is not right to brand and undermine those who participated in the group as manipulators.
In my humble view, the common denominator is that retail investors share a strong distaste towards the short selling facilitated by some IB towards the Glove stocks. To be fair, whether Permitted Short Selling, RSS or IDSS are actually healthy for a vibrant stock market. It’s like your gastro system which flush out the bad elements to ensure your body is healthy. However, too much, too sudden or extreme cases, it cause a severe reaction. In this case, the short selling was not conducted towards a struggling company with weak fundamentals. It was towards fundamentally sound glove companies. Shorting selling by right, should be directed towards a overvalued or fraudulent companies like Luckin Coffee, Wirecard AG.
Retail investors have found the glove stocks easy to understand, relatable and a story of entrepreneurship. Many view them as underdogs who succeed in the midsts of this economic debilitating global pandemic after years of hard work. To some, they feel a huge sense of pride to know Malaysian gloves are protecting the global population. I have not seen such unity in our increasingly fractured country since national badminton heroes competed for 4 gold medals in 2016 Olympics. Yesterday, the Government announced Malaysia recorded the largest trade surplus for December in 23 years. The Glove sector played a huge role there. In addition, even Bursa’s Chairman acknowledged if not for the 3 healthcare counters IHH, Hartalega & Top Glove, KLCI would have fallen 11% in 2020. Indeed, KLCI is one of the poorer performer in the region since 2021. This coincided with the massive selloff of glove stocks for the past 2-3 months. How did this happen?
Sure, it started with the vaccine announcement in November 2020 which led to premature optimism by the investment fraternity on economic recovery and reopening spurring profit taking. This was further exacerbated by the Foreign IB’s research report which led to facilitation of massive short selling exercise at the start of the year. Citing The Edge, in the first trading week of the new year, there were 196.19 million shares worth RM1.09 billion shorted during that week. An old timer in the investing fraternity said he has never seen such weight of money being put on the table before this on Bursa. The short selling volume accounted for 56% of the week’s total volume. It did not end there and today Top Glove, Kossan & Hartalega are the 3 most shorted stocks in Bursa. Coincidently, these 3 stocks were sell calls with ludicrous TP in the Foreign IB’s report. Therefore, it would appear the Glove Movement in Malaysia is not about manipulating the market but a reactionary force.
End Part 1
Most by now would have heard about the parabolic rally of GameStop of 1600% since 12th Jan 21. Some are calling it a mania, some argue it’s the sign of a bubble, some say it’s due to the Fed’s liquidity. The fact of the matter it was a case of short selling went awry due to organised retailers fighting back, over-selling by shortsellers who couldn’t get enough stocks from the market to cover their position and prominent names lending weight during the height of the frenzy. It became a movement and sparked unprecedented wave of reactions in the investment community. Now, what has this got anything to do with us back home in Bursa?
The top 3 most shorted stocks in Bursa since the lifting of RSS in 2021 would be Top Glove, Kossan, Hartalega. RSS known as Regulated Short Selling require approval from the exchange. Primarily, large funds / institutions are involved in RSS who take a view to short the stocks in return for profits. In order to execute RSS, they need to have in hand or access to large amount of quantity of stocks they plan to short. This was why, we saw EPF ceased to become substantial shareholder of Top Glove on 8th Jan 21 when it lend its shares for short selling (SBL). Recently, EPF recalled closed to 55 million shares and became substantial shareholder again.
When a Foreign IB research came out with an outlandish sell report in December 2020, I was perplexed by the entire premise and analysis of the report. I have never came across a report like that. What bewildered me wasn’t the questionable analysis but WHY would a sell side initiate the first report on the glove sector as a strong sell with ludicrously low target price across the board. I spoke to analysts and those in the industry, where they too were surprised. As Bursa is generally a long market, sell side rarely initiate with a strong sell for new coverage. Come January 2021, it became clear what the true purpose of the report. It was to facilitate short selling of these 3 stocks in Bursa immediately upon lifting of RSS where funds can execute short selling through this Foreign IB. This Foreign IB would make huge fees from the execution of RSS for their clients.
After doing some channel checks, it turns out this Foreign IB in fact made a huge profit in 2020 facilitating foreign fund flows into our Glove sector during the rally in 2020. Now, this Foreign IB is simply doing the opposite. This was why, the Foreign IB research produced 4 reports during January month reiterating the sell call, when the glove sector sustained and at one point rallied back due increased in Dividend payout ratio by Top Glove, Share Buy Back by Kossan and Major shareholder buy back with own funds by Hartalega.
Of course, we have all witnessed Hartalega’s record shattering results recently to know well enough that the glove sector is not only doing well, its strong earnings are sustainable even with the vaccines announcement since Nov 2020. Hartalega at USD 55 per carton could deliver record earnings, what more other glove makers who have much higher ASP.
The issue at hand is the earnings visibility, strong fundamentals and sustainability of ASP due to demand far exceeding supply due to a structural step up in demand, heightened hygiene awareness and large healthcare budget allocations by government all around the world. Based on these reasons, it is clear that the institutions and market participants took profit too soon expecting a speedy recovery of economy due to vaccine without considering the possibility of even a MCO 2.0. The short selling via RSS by funds further exacerbated the irrationality of valuation towards the glove sector.
I am a believer of fundamentals and think the glove stocks are undervalued by all metrics regardless of what is being misrepresented by some to mislead investors. These are wonderful Malaysian companies that have stood the test of times and are now world leaders. To invest or otherwise, that’s a decision only you can make.